The Debate on Wealth Taxes and Fair Distribution: Revisiting the 'Rich's Fair Share of Federal Income Taxes'

The concept of the 'rich's fair share' in federal income taxes has been a contentious issue for decades. Proponents argue that a flat tax would be fair and generate more revenue for the government. However, the reality is more complex.

The False Premise of the 'Fair Share' Argument

The idea that the 'fair share' of federal income taxes is based on a proportional income distribution is deeply flawed. In many countries, including Sweden and the UK, the notion that the rich should pay as much as the poor is widely held. However, this premise does not hold up under scrutiny.

In Sweden and the UK, income taxes are set to meet government spending needs rather than apportioned based on income levels. The Swedish model, for example, sees both the right and left agree that the rich should pay more. But this is not based on a proportional share of income but on the overall need for government services.

The Elasticity of Taxation

Setting the right tax rate is a delicate balancing act. If taxes are too high, affluent individuals may find ways to avoid them or emigrate. Lowering taxes can increase revenue, but it also means essential public spending is underfunded.

For instance, in the UK, the government lowered the top tax bracket from 50% to 45%, which increased revenue. This was a successful tweak, but it shows the volatility of tax policy. Dogmatic adherence to certain ideologies can reverse such positive changes with harmful consequences.

The Historical Context

The United States experienced its fastest rates of income growth, life expectancy improvement, and income equity in the third quarter of the 20th century during a time when federal income taxes were as high as 90% for certain types of income. This historical data challenges the notion that higher taxes always stifle economic growth.

Equitable Treatment of Deferred Income

In the US, seniors are required to pay a Required Minimum Distribution (RMD) on their deferred income from 401Ks and IRAs to ensure that they recognize and pay taxes on it. This equitable treatment is not shared by the wealthy, who often defer income without requirements to pay taxes on it. RMDs should be applied to all wealthy individuals to level the playing field.

Eliminating Entitlements and Rethinking Tax Policy

To truly achieve fairness in tax policy, two key steps are necessary: eliminating entitlements and ensuring everyone pays their fair share based on the same rules. Currently, the bottom half of wage earners essentially pay no taxes, as all tax payments are refunded.

Eighty percent of taxpayers receive some kind of refund, meaning the top 20% of earners shoulder the major burden. By eliminating entitlements, the wealthy could contribute a higher percentage of the federal budget, potentially reducing their overall tax obligations.

Conclusion

The debate over the 'rich's fair share' of federal income taxes is a complex issue that requires a nuanced understanding of tax policy. By reevaluating our approach to taxation, we can foster a more equitable and fiscally responsible society.