With a billionaire for president and major tax reform underway, Americans are divided about whether the wealthy bear their “fair share” of the tax burden. Are soak-the-rich taxes necessary to keep the nation afloat?
Soak-the-rich taxes, defined
“A soak-the-rich tax is any tax that charges more for higher incomes,” says Arvin Vohra, author, educator, and current vice-chairman of the Libertarian National Committee. That would include progressive taxes like the federal income tax, whose series of tax brackets take a bigger cut of higher income.
But Vohra’s definition of soak-the-rich schemes goes even further. “Any tax that redistributes wealth at all is similarly a soak-the-rich tax. Any form of progressive taxation or flat tax is a soak-the-rich tax, as it demands that some citizens pay more money than others for the same thing.” Many economists would object to Vohra’s view on flat taxes, arguing that asking everyone to pay the same tax rate – which is the definition of a flat tax – imposes a greater hardship on lower income households.
Pro: The rich owe it to society
“For a society to thrive, there must be balance. Without it, societies are doomed,” warns author Lisa Orban. “Greed cannot be put before the common good if we are to continue as a functioning society.”
Orban believes that as more of the burden of support falls on the poor and middle class, the more our infrastructure will fall into disrepair – funding continues to dwindle as incomes get squeezed into smaller and smaller amounts.
“When the people cannot spend, as each month the rise in costs outstrips their income, it has a negative effect in our communities and ultimately in our country,” she says. “To ask those who have benefited most from our societies to help pay to keep them functional is not unreasonable.”
Orban’s perspective is that we have all spent our hard-earned money, in the form of taxes, so that those who are successful could build their companies and make their profits. “It is time for them to pay us back, in the form of taxes, for the money we have invested in them to enable them to succeed.”
Her proposal? “Let’s return to a variable [top] tax rate of 92 percent on the elite rich, and reduce that rate as they invest in their workers and companies,” she says. “Encourage them through taxation to not just hoard away their cash but to use it to benefit all of society. Ultimately it will help them as well.”
Moreover, there’s more than just social theory to back up the proposition that the rich should pay more in taxes. A study by economists Peter Diamond, professor emeritus of economics at Massachusetts Institute of Technology, and Emmanuel Saez, professor of economics at the University of California, Berkeley, examined the impact of higher taxes on the wealthy and suggested the viability of a top marginal federal income tax rate of 76 percent (it’s currently 39.6 percent).
Con: The wealthy already pay their fair share
Roger Austin, of Austin’s Political Consulting in Gainesville, Florida, says that most people believe “the BS tossed out by politicians and the media” that the rich do not pay their fair share, despite evidence to the contrary, like IRS statistics and even the 1040 tax charts themselves.
And while South Carolina CPA Robert Riordan says that the wealthy should pay their fair share, he quickly adds that they already do. “The top two percent pay half of the taxes being paid,” he says. “The top 20 percent pays 20 percent more.” Meanwhile, almost half the households in the United States (about 45 percent) pay no taxes at all.
“The facts belie the political rhetoric and show biz,” Austin says. “The politicians and many in the media are being dishonest, intellectually lazy, and entirely disingenuous when they suggest that the rich do not pay their fair share.”
The big question is: what does “fair share” mean? Currently, explains Austin, most people earning less than $25,000/year pay very little tax, around 15 percent. Those earning below $100,000/year (“which certainly is not rich”) pay about 28 percent.
“After that, you get to higher income levels, and somewhere near $400,000/year you hit the top bracket of 39.6 percent,” says Austin. “A few hundred-thousand dollars later and you start to lose the deductions that everyone gets, which effectively raises your tax rate to 45.6 percent.”
That is progressive taxation – the more you make, the more you pay. Compare that to a flat tax, where everyone pays the same income tax rate. “Let’s say, just for easy calculation, the flat tax rate was 20 percent,” says Austin. “The $10,000/year, $100,000/year, and $1,000,0000/year earner would pay $2,000, $20,000, and $200,000, respectively.”
That is markedly different from the current income tax. “In real life, those earners pay $0, $28,000, and $396,000, respectively,” according to Austin. “There are deductions and things like that, but the simple fact of life is that the more you make, the more you pay and the higher percentage you pay.”
Austin argues that the median family income is around $50,00 to $60,000 a year. These families likely pay less than $10,000 in taxes. If 100 million families pay $10,000 each in a given year, that’s $1 trillion. The federal government’s budget is nearly $4 trillion.
“Where does that money come from?” asks Austin. “Not [from]the poor, not the unemployed, not my dad who is retired, not even from the average dude who makes $50-60,000/year.”