Greedy Government Interests

It’s an election year and we are being treated to the Democrats solutions to all problems – higher taxes.

Of course, raising taxes is never popular but the Democrats are trotting out their favorite ruse. We need to raise taxes, they claim, but we are only going to raise the taxes on the rich and on greedy corporations.

Let’s look at the idea of collecting more income tax revenue from wealthy individuals. We’ll deal with greedy corporations in a future post.

According to Democrats, rich people do not pay their fair share of the tax burden. The evil George W. Bush cut taxes for his wealthy friends. This, according to their view of the world, has caused a whole host of societal ills like higher budget deficits, fewer jobs, global warming, rising gasoline prices and Miley Cyrus going berserk and exposing her bare back to Vanity Fair photographers.

If we are going to raise taxes on the wealthy to a “fair” level, then it seems to me that we need to answer four questions: (1) What level of income makes one rich? (2) How much of the tax burden do these rich people currently pay? (3) What share of the taxes should the wealthy pay? (4) What system of values or ethics or morality is used to determine the “fair” tax burden to impose on these individuals?

Let’s assume that we define the wealthy as those who are in the top 10% of wage earners in the country. Let’s raise their taxes. These fortunate individuals can afford to pay more. We would only be raising taxes on 1 in every 10 Americans.

Regarding Question No. 1 then, exactly how much money do you have to earn each year to be in the top 10%? What is your guess? Is it $250,000 a year? Or, is it $500,000? Perhaps it takes a cool million to be in the top ten percent. Please stop reading right now and make your guess.

Thinking …

Thinking …

Guessing …

Okay, time’s up. Here is the answer: In 2005 (latest year for which we have data), anyone with a household income in excess $103,912 was in the top 10% of wage earners.

Please understand that this figure is HOUSEHOLD income! The majority of households in this top 10% are two income households. So, a school teacher married to civil engineer probably has income in excess of this level as does a policeman with a significant other who is a mid-level employee at a small business.

Are these people “rich”? If you are a college student, an income slightly over $100k per year probably sounds like a boat load of money. But if you are a married couple with two kids, you probably wonder how you’ll make ends meet on this amount. You probably do not think of yourself as rich and yet suddenly you find yourself being demonized as a rich American who is not paying enough in taxes.

Let’s take a look at Question No. 2. How much of the current income tax burden is paid by this “wealthy” minority?

In 2005, the IRS collected $935 billion in personal income taxes and the top 10% of household wage earners paid $657 billion of this amount. That’s right. The top ten percent paid 70.3% of all the personal income taxes collected by the federal government!

Just for the record, let’s look at some different income brackets and the amount of income tax paid by these brackets:

The top 1% ($365k or more household income) pay 39.4% of all income taxes
The top 5% ($145k or more household income) pay 59.7% of all income taxes
The top 10% ($104 or more household income) pay 70.3% of all income taxes
The top 25% ($62k or more household income) pay 86.0% of all income taxes

(Note: In case you are wondering, you are in the bottom 50% of wage earners if your household income is less that $31,000 per year. This group paid only 3.1% of all the personal incomes taxes collected in 2005.)

In essence, the United States federal government operates on the 80/20 rule. You’re familiar with the 80/20 rule, aren’t you? In churches, 80% of the giving is done by 20% of the people. In a business, 80% of the sales are made by 20% of the sales force.

It looks like the United States is pretty much run on the same principle. About 20% of the households in the country are paying 80% of the personal income taxes. Apparently, the left in this country does not think that this is enough.

This leads us directly to Questions No 3 and 4. If these rich American households are not paying enough, how much should they be paying? And what is the basis for deciding the “fair” amount? I’ve never heard a Democrat answer these questions.

The current Democrat candidates for president are quite vague on all these questions. Their web sites speak in generalities. Both candidates are in favor of lower taxes for low and middle income Americans and both agree that the wealthiest Americans need to pay more. Predictably, they do not define these income categories. They are intentionally vague.

There are so many more aspects of this issue to be explored but you don’t have unlimited reading time and I don’t have unlimited writing time. So let’s just look at one more facet to the tax question (but someone remind me someday to explain why Warren Buffet’s claim that his secretary pays a higher tax rate than he does is totally misleading and brazenly disingenuous).

More important than the question of how the tax burden is distributed, is the larger question of the overall tax burden itself and the danger imposed on society by the government that collects it.

Total tax revenue collected in 2005 by federal, state and local governments was $3.25 trillion. The GDP was only $12.4 trillion in 2005 and this means the tax burden was around 26% of GDP. This is alarming.

Even more alarming is the comparison of taxes paid by individuals verses the income available for the payment of those taxes. From the $3.25 trillion in taxes collected in 2005, subtract about $0.25 trillion that was collected from corporations. A small portion of the remaining $3.0 trillion was property tax paid by corporations. I can’t tell you the exact amount, but the total property tax burden nationwide in 2005 for all properties was only $0.3 trillion – let’s guess that half of this amount was derived from residential property owned by individuals. This means that $2.85 trillion in taxes were paid by individuals in 2005.

Total personal income in 2005 was only $7.5 trillion. A whopping 38% of every dollar earned by individuals in this country goes to pay some kind of tax.

And – governments want more! This is the truly instructive and frightening reality in the whole tax debate.

Think about this with me for a minute. Can you think of any individual or family or business or church or non-profit organization or school that does not need more money? All of these entities have things that they are not doing because of their limited supply of money. They cannot print money and they cannot demand that their employers and patrons pay them more. As a result, they budget and prioritize.

But the government is unique. It alone can legally take money by force. And one of its tactics for doing so is to make you afraid of all the other entities mentioned above who cannot force you to give them money.

Politicians, especially those on the left side of the political spectrum, frequently demonize the rich. They have spoken so frequently about “greedy corporate interests” that the phrase now seems redundant to many people. But Oprah and Exxon cannot take away my money at the point of a gun the way the government can.

Do not let populist politicians entice you with their invitations to envy and fear and hatred. Rather, be on guard against greedy government interests run by manipulative politicians that suck up $4 out of every $10 earned by hard working Americans and then tell you that they need more money so that they can solve every problem – providing you with a utopian world of universal health care, cheap gas and a fully clothed Miley Cyrus.