Taxes and Fairness? Another Take [Reader Post]

anticsrocks’ post about “fairness and taxes” really hit home. He made some very good points about this country’s tax burden and what Obama says. So I thought I would (presumptively) venture into the fairness and taxes foray and see if I can offer additions to anticsrocks’ excellent post.

The late (and IMHO great) Paul Harvey said it best: “Corporations don’t pay taxes.” By that, he went on to explain, he meant that higher tax costs are passed on to consumers. So, with that in mind, let’s look at what Obama and Democrats proposes as “fair” with respect to taxes. Let’s also examine fairness and how higher taxes effect jobs and the economy.

Fairness?

Dr. Thomas Sowell, in February of 2010, wrote a four-part essay entitled “The Fallacy of Fairness.” In his essay he made some very good points. I would like to share some of those points.

In part 1, he starts, “If there is ever a contest to pick which word has done the most damage to people’s thinking, and to actions to carry out that thinking, my nomination would be the word “fair.” It is a word thrown around by far more people than have ever bothered to even try to define it. This mushy vagueness may be a big handicap in logic but it is a big advantage in politics. All sorts of people, with very different notions about what is or is not fair, can be mobilized behind this nice-sounding word, in utter disregard of the fact that they mean very different things when they use that word.”

He continues in part 2, “A recent flap in a Berkeley high school reveals what a farce “fairness” can be. Because this is ultra-liberal Berkeley, perhaps we should not be surprised that a proposal has been made to eliminate four jobs as science teachers and use the money saved for programs to help low achievers. In Berkeley black and Latino students are not performing as well as Asian and white students. According to the principal, “Our community at Berkeley High School has failed the African-Americans.” Therefore “We need to bring everybody up – that’s what this plan is about.” Surely no one seriously believes that you will “bring everybody up” by eliminating science teachers. This is a proposal to redistribute money from science to social work, by providing every student with advisors on note-taking, time management and other learning skills. The point is to close educational gaps among groups, or at least go on record as trying. As with most equalization crusades, whether in education or in the economy, it is about equalizing downward, by lowering those at the top. “Fairness” strikes again!”

In part 3, he says, “Most of us want to be fair, in the sense of treating everyone equally. We want laws to be applied the same to everyone. We want educational, economic or other criteria for rewards to be the same as well. But this concept of fairness is not only different from prevailing ideas of fairness among many of the intelligentsia, it contradicts their idea of fairness. Society may lavish thousands of dollars per year on schooling for a youngster who does not bother to study, and yet when he or she emerges as a semi-literate adult, it is considered to be society’s fault if such youngsters cannot get the same kinds of jobs and incomes as other youngsters who studied conscientiously during their years in school.”

He makes a very strong point by saying, “Disregarding criteria in the interest of “fairness” – in the sense of outcomes independent of inputs – adds to the handicaps of those who already have other handicaps, by lying to them about the reasons for their situation and the things they need to do to make their situation better.”

Dr. Sowell concludes in part 4 by stating, “Fairness as equal treatment does not produce fairness as equal outcomes. The confusion between the two meanings of the same word has created enormous mischief, much of it at the expense of lagging groups, who have been distracted from the things that would enable them to catch up. And whole societies have been kept in a turmoil pursing a will o’ the wisp in the name of “fairness.”

We have from Dr. Sowell a good discussion of “fairness.” Now let’s turn our attention to Obama’s definition of “fairness” and consequences for the tax code and the economy.

Obama’s View of Fairness, Taxes, and the Economy

In his article at The Weekly Standard, Arthur C. Brooks says, “According to New York Times columnist Paul Krugman, the “angry rich,” as Krugman calls them, are “wallowing in self-pity and self-righteousness.” The president talks in moral terms about the need to raise taxes. It is, he claims, a matter of basic fairness. Obama says, “There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires.” Brooks then continues, “For the administration, it’s not about the money – as we have heard again and again, it’s about “fairness.” The president believes that we will be a better nation if we redistribute more money from those who have more to those who have less.”

For more on Obama’s definition of “fairness” and economic consequences, we turn to Ralph R. Reiland‘s article. Says J.D. Foster, Ph.D., a senior fellow in fiscal policy economics at the Heritage Foundation, “Obama is willing to trade losses in jobs and wages to advance his political ideology for tax fairness. The President is intentionally sacrificing jobs in the pursuit of his own notions of fairness with little or no hope of increasing revenues in the process.” Says Reiland, “The “intentionally” part is open to debate, but it’s fairly certain that Obama puts wealth redistribution, income leveling, and fairness on the front burner, ahead of economic growth, job creation and economic liberty in his list of priorities.”

Continues Reiland, “A key objective in his economic program, as candidate Obama explained to Joe the Plumber, Joe Wurzelbacher, is the redistribution of income and wealth, by way of higher taxes on “the rich.” “I think when you spread the wealth around, it’s good for everybody,” Obama told Wurzelbacher.”

Reiland concludes, “Here, for example, is the exchange between candidate Obama and moderator Charlie Gibson during a presidential debate regarding Obama’s proposal to increase the tax on capital gains from 15 percent to 28 percent. “In each instance when the rate dropped, revenues from the tax increased – the government took in more money,” said Gibson. “And in the 1980s when the tax was increased to 28 percent, the revenues went down. So why raise it at all, given the fact that 100 million people in this country own stock and would be affected?” Replied Obama, “Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.”

Obama’s goal appears to be a soaking of “the rich” in the pursuit of what he defines as “fairness.”

Tax Code Purposes and Fairness?

As this article byJoseph J. Minarik states, there are four primary objectives of our tax code. They are:

1. Simplicity: Simplicity means that compliance by the taxpayer and enforcement by the revenue authorities should be as easy as possible.
2. Efficiency: Efficiency means that taxation interferes as little as possible in the choices people make in the private marketplace.
3. Revenue Sufficiency: Revenue sufficiency might seem a fairly obvious criterion of tax policy. Yet the federal government’s budget has gone from enormous deficit to large surplus, and back again, in just ten years. Part of the reason for the deficit is that revenue sufficiency may conflict with efficiency and fairness.
4. Fairness: Fairness requires that equally situated taxpayers pay equal taxes (“horizontal equity”) and that better-off taxpayers pay more tax (“vertical equity”). Although these objectives seem clear enough, fairness is very much in the eye of the beholder. Most people believe that fairness dictates that taxes be “progressive,” meaning that higher-income taxpayers pay not only more, but also proportionately more. However, a significant minority takes the position that tax rates should be flat, with everyone paying the same proportion of their taxable income. Moreover, the idea of vertical equity (i.e., the “proper” amount of progressivity) often directly contradicts another notion of fairness, the “benefit principle.” According to this principle, those who benefit more from the operations of government should pay more tax.

That brings us to Rep. Jan Schakowsky’s (D-Ill.) “Fairness In Taxation Act.” Rep. Schakowsky introduced legislation today that would add fairness to the nation’s tax system by ensuring that millionaires and billionaires pay their fair share. Schakowsky says the Fairness in Taxation Act, with more than a dozen co-sponsors, is: about fairness. The bill enacts new tax brackets for income starting at $1 million and ends with a $1 billion bracket. “This isn’t about punishment or revenge. It’s about fairness,” Schakowsky said. “It’s about avoiding budget cuts that harm middle class families and those who aspire to it. The bill also would tax capital gains and dividend income as ordinary income for those taxpayers with income above $1 million. If enacted in 2011, the bill would raise an estimated $78.9 billion in its first year, according to Citizens for Tax Justice.

The Fairness in Taxation Act would add new tax brackets for income starting at $1 million and ends with a $1 billion bracket. The new brackets would be:

• $1 – $10 million: 45%
• $10 – $20 million: 46%
• $20 – $100 million: 47%
• $100 million – $1 billion: 48%
• $1 billion and over: 49%

Tax Effects on Jobs

Rep. Peter Roskam, (R-IL) at The Daily Caller. says, “The path to economic recovery, debt reduction, and job creation is not through tax increases, however, but through cutting spending and reforming our onerous tax code – the single greatest thing we can do to give job-creators more confidence in their futures.”

In an article by William Beach , Rea Hederman, Jr. , John Ligon , Guinevere Nell and Karen Campbell, Ph.D., at The Heritage Foundation, say, President Obama has advanced a tax plan that reverses this tax policy. Rather than continuing the pattern of tax reduction and reform, the President and his supporters in Congress and elsewhere are calling for tax increases, primarily on upper-income taxpayers and businesses. Many of these individuals are small-business owners, the primary job creators. Enacting this tax plan would have serious, adverse consequences for economic activity, and sharply lower the rate of economic growth.

The effects of a lower rate of economic growth include:

• Slower economic growth: Inflation-adjusted gross domestic product (GDP) would fall by a total of $1.1 trillion between FY 2011 and FY 2020. GDP in 2018 would fall by $145 billion alone. The growth rate of the economy would be slower for the entire 10-year period.
• Fewer jobs: Slower economic growth would result in less job creation. Employment would fall by an average of 693,000 per year over this period 238,000 fewer jobs in the critical economic recovery year of 2011; In one year alone, 2016, job losses top 876,000.
• More unemployed Americans: Slower growth in employment translates to a higher unemployment rate, which would rise more each year during the 10-year period than it would without the Obama tax hikes.

The economic harm is significant and widespread. Individuals and households throughout the income distribution will bear the brunt of the economic slowdown, resulting in fewer employment opportunities, lower wages, lost consumption, and lower savings. Congress needs to understand that it will raise additional revenues on the backs of those citizens it often works to help through income redistribution programs.

Donald Lambro, at TownHall, says, “Prescribing tax hikes of that size, of any size, in this painfully slow-paced economy would be the medical equivalent of bleeding a bedridden patient suffering from acute anemia. What American businesses need most right now is an economy-wide transfusion of fresh capital investment via tax-rate cuts offset by major spending cuts.”

Katie Pavlich, at TownHall, says, “Las Vegas’ Wynn CEO Steve Wynn, who said President Obama and his “weird” political philosophy are “the greatest wet blanket to business, and progress and job creation in my lifetime,” the co-founder of Home Depot Bernie Marcus took direct shots at the Obama Administration during an interview with Investors Business Daily, backing up Wynn’s claim that business is terrified of the administration and smothering regulations in an extremely volatile and uncertain economic environment. Keep in mind, Marcus co-founded Home Depot in 1978 during the Carter Administration, which gives you an idea of how bad things really are in 2011 under Obama and says he wouldn’t have been able to develop his successful company today because of heavy government regulation.”

Where are we?

We see that Obama wants to raise taxes out of (what he calls) fairness. We see what Obama and the Democrats (like Rep. Schakowsky) propose to do to the tax codes. We also see the effects of higher taxes on the economy and on jobs.

But that’s just my opinion.