How do you cut taxes for people that pay no taxes? Never fear, I’m sure that the politicians will find a way to do that. There is more than one way to buy votes.

Never mind what the actual tax rates are. Let’s focus on what people actually pay in taxes. Half of this nation’s ‘taxpayers’ pay almost nothing in federal income taxes. In 2006 the bottom 50% of American taxpayers contributed only 2.9% of federal income tax revenues.

As noted by the WSJ Editors, Washington is getting set to raise taxes on “the rich” big time next year while “cut[ting] taxes for those at the bottom.” But when those at the bottom already pay almost nothing, what’s left to cut? It’s difficult to see how the top 50% can afford to pay much more than they are already paying. Apparently politicians think that there is no limit to how much can be extracted from these people. They are assumed to be like the rich uncle that has bottomless pockets.

The common refrain is that “the rich can afford to pay more.” It turns out that, thanks to the 2003 Bush “tax cuts,” they already do. In 2006 the top 1% of American earners earned 22% of total income but paid 40% of federal income taxes. The next 4% of earners paid 20%. The next 20% paid 26%. The next25% paid 11%. As stated above, the sum of those that earned less than the median paid less than 3%. For nearly half of Americans government is seemingly free of cost to them.

While the Bush tax cuts spurred economic growth, they also shifted a greater burden of taxes to top earners than at any other time in American history. In fact, the rich paid a much smaller share back in the days when the tax rates were far more progressive. WSJ Editors say that this is “[b]ecause they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.”

It’s no longer a theory. The way to effectively extract more taxes from the rich is with lower tax rates.

Another common refrain is that “the rich” should pay a greater portion of their income in taxes because they consume a greater portion of government services. It’s difficult to see how this can be said with a straight face. Even if this could be proven, the benefit differential would not be 11-to-0 or 40-to-0.

We have become a country where half of the people “pay to support the other half.” But this creates a problem. Those that pay little or nothing for government services have little incentive to seek to hold the line on the growth of the same. Indeed, they have an incentive to seek ever increasing levels of such services.

Somehow this is rarely seen by the beneficiaries and their promoters as voting themselves benefits from others’ pocketbooks. Even when this is recognized, the assumption is that “the rich” should pay for these services because they are undeserving of their wealth. The line is that they earned it immorally on the backs of the poor.

Those that actually pay federal income taxes may be more disposed to oppose government expansion. But their ability to do so decreases as their number decreases. While slightly more than 50% of American earners pay taxes today, what will happen when only 40% pay — when 60% rely on the minority to fund the government benefits they enjoy?

What makes us think that our wealthier neighbors are going to continue to be disposed to pay for continually increasing benefits for the rest of us? Would they acquiesce simply because they are outnumbered? How is this different from mob rule?

Oliver Wendell Holmes is said to have stated, “Taxes are the price we pay for a civilized society.” A commenter on this post countered that taxes “are the price we pay to otherwise go about the business of civilization, our ability to do so being directly proportionate to how much is stolen from us.” In this view, the rich that increasingly bear the cost of federal programs would do so only because it would be less costly than what would happen to them should they refuse this burden. But that does not make it morally proper.

Few people gleefully pay taxes. Most people try their best to minimize their tax burden when preparing their tax forms. Some do so legally. Some, not so much. But if we ultimately pay no federal taxes, why should we have any say in how great the tax burden should be or how tax revenues collected should be spent?

I appreciate the fact that the Bush tax cuts spurred economic growth, even if other policies eventually ruined that run. But I believe that the resulting ultra progressive income tax payment system is unhealthy. Everyone should help bear the burden of the government that is of, by, and for them. They would then have more incentive to be vigilant in preventing government sprawl, overspending, and corruption.

In reality, those that directly pay no federal taxes indirectly pay them through increased prices and stifled innovation. We all pay for the cost of government. But when we pay indirectly the costs are disguised and hidden. Some sage once said, “There ain’t no free lunch.” Full transparency in government funding would be painful, but worthwhile.

Most people I talk with about taxes almost immediately agree with the concept of a flat tax. But when I start throwing out some of the issues involved, their views quickly become more nuanced. In reality, almost all of them favor some kind of progressive rate, even if it’s only a mildly progressive rate. Regardless of the rate methodology, we would all be better served if everyone paid something to help fund government.
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