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What is a fair tax?

Many argue that our $16 trillion federal debt was caused by two unfunded wars, the bailout of a corrupt and poorly managed banking system, avoiding a depression and general government overspending. However, unfair changes made to the tax code starting around 1980 must be examined to help explain our current economic woes.

The chief criterion of a fair tax is the effect it has on the taxpayer. Does it treat people fairly, is it equitable, and how does it affect taxpayers' economic capacity?

If you tax someone who makes $10 million a year at the same rate as someone who makes $30,000 a year, say, at 30 percent, are you treating them fairly? One individual pays $3 million in taxes - the equivalent of 10 feet on his 85-foot yacht or the value of his vacation home - and still has $7 million to spend. The other individual pays $9,000 in taxes, leaving $21,000 and forcing him to forgo medical care or his children's tuition or possibly his mortgage.

To get around this inequity, our forefathers set up a progressive tax system where high-income taxpayers pay a higher percentage of their wages in taxes.

Until the 1980s, the United States used "equal sacrifice" for determining a fair tax system. This has been based on the idea that for taxes it is much less sacrifice to deprive a high-income person of a wine cellar than to deprive a lower-income person of milk for her infant. With the flat tax, the middle- and lower-income taxpayer feels a significant amount of pain before the wealthy taxpayer feels even the slightest bit. This is why a progressive tax system has always been a major component of the American dream - all Americans participate in the prosperity of this great nation.

Some argue that progressive taxes restrain the profit motive, resulting in less incentive to take the risk to create a new or expand an existing business.

Flat tax proponents say that that when we cut taxes on the wealthy and corporations, it leaves the money in the hands of those most likely to increase product supply. They believe the demand that this supply creates expands gross domestic product, increases employment and brings up the salaries of the middle and working class, ultimately increasing tax revenues.

In practice, the result of such changes has been a massive growth in the wealth of a relatively small segment of American society. It's resulted in anemic economic growth, sluggish tax revenues and deficits. Most economists no longer believe in this theory.

Consumer spending is the only thing that creates jobs, stimulates the economy and increases tax revenues, and to do that, consumers have to have money to spend. As Henry Ford said, "we cannot sell our products without decent incomes." You cannot concentrate money in so few hands and expect to be a prosperous and strong nation.

A consumption or sales tax such as the one under consideration by the N.C. General Assembly is even more unfair than a flat tax. It requires middle- and lower-income taxpayers to pay a higher percentage of their earnings in taxes than the wealthy. Simply, this occurs because the wealthy spend a much smaller percentage of their earnings than do middle and lower income earners, thus are taxed on a smaller percentage of their income.

Take sales tax on a car. If a $10 million income earner purchases an $80,000 car, he pays sales tax on a purchase less than 1 percent of his income. If a $30,000 income earner buys an $8,000 car, he pays sales tax on a purchase that is more than 26 percent of his income.

Thirty years ago top executives received about 40 times the typical American workers' salary; today top executives make 300 times the typical American worker's pay. Many of these same executives, who make more in a day than their employees make in a year, were explaining to their employees that they could not afford to give them a cost-of-living increase.

Over the past 40 years, the marginal tax on the highest-income tax bracket was cut from 70 percent to 35 percent, and federal tax money has decreased to 16 percent of GDP from 22 percent. For example, the Tax Act of 1986 resulted in a 47 percent decrease in taxes on families who earned $300,000 or more and an 18 percent increase in taxes for all others.

Americans paid an average tax rate of 35 percent in the 1960s and 26 percent in the 1990s. Today Americans pay only about 17 percent, the lowest among the group of seven industrialized nations.

After only three decades of Reaganomics and economic oligarchy, we are faltering on the American dream.

America would be wise to roll back some of the tax decreases on the highest income earners and allow the middle and working class to participate in the prosperity of this great nation.

William Cunningham, eminent scholar emeritus at Old Dominion University, taught educational administration courses there and coordinated a Navy masters program for training officers.

Posted to: Guest Columns Opinion

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Class Envy on parade

Whenever Liberals get nostalgic about the tax rates of the past, they always use examples of the extreme, like executives who are paid millions, and conveniently forget the small businesses crushed by those tax rates in between.

In 1980, there were 16 tax brackets, indeed topping out at 70% for incomes of $608,936.32(all dollar amounts in 2013 dollars) and above.

http://www.stanford.edu/class/polisci120a/immigration/Federal%20Tax%20Brackets.pdf

But the tax rate on an income of $129,476.71 was taxed at 49%, and $309,274.07, which would be typical of a successful small business employing dozens of others was a crushing 64%. Small businesses typically report their incomes as sole proprietors, and thus individual income rates apply. Remember that these same small business owners also pay 15.3% in FICA taxes on the same income.

Small business owners cannot accumulate the capital to expand when the owner is paying those rates.

Even if they could, it is simply wrong to take the majority of a hard working small businessman's income.

So, it is deceptive to tout only the extremes when advocating progressive over flat taxes. The net cast to capture those few multi-million dollar incomes instead entraps your doctor, the hardware store owner and the home builder next door.

Fair is important.

"If you tax someone who makes $10 million a year at the same rate as someone who makes $30,000 a year, say, at 30 percent, are you treating them fairly? One individual pays $3 million in taxes - the equivalent of 10 feet on his 85-foot yacht or the value of his vacation home - and still has $7 million to spend. The other individual pays $9,000 in taxes, leaving $21,000 and forcing him to forgo medical care or his children's tuition or possibly his mortgage."

The answer to the question "are you treating them fairly" is yes. The tax rate in that instance is a constant, not a variable. It's something both men face equally. That tax rate is without bias and it favors no man over the other.

If I could make an observation: what isn't being fairly described is the non tax life of the two people. It is just supposed the ten million dollar man has a yacht. It is just supposed the 30K man requires medical care. It is presumed 10 million has a 3 million dollar home and it is just as assumed that 30K guy even has children.

In order to sway the reader the description of the two men props up the life of the millionaire and brings down the life of the 30Ker.

I'd contend the real issue contends with whether a tax on income is itself justified. Another issue is why does that same tax need to be unfairly applied.

A consumption tax appears more fair to me.

Well Said

The thing about taxes -- by whatever means they are levied -- is that they devalue the currency by an amount equal to the "volume" of collection compared to the "quantity" of money.

Progressive taxation disrupts social order for this very reason: It causes the common value of money to be different for different people, which leads to grievances, which leads to conflicts, which leads to government choosing winners and losers in an attempt to arbitrate, and so on, endlessly.

If income taxes are to be the method of funding the federal government, they must be exactly the same in every way for every federal tax payer. This is the only way for the value of money to remain constant for every user. Our progressive income tax system must be eliminated.

Income taxes are also especially susceptible to abuse through the creation of loopholes to support cronyism or social engineering. This is one reason some economists favor consumption taxes over income taxes as a means for funding government.

The devaluation effect is the same, but at least the payment of consumption taxes is mostly under the control of the consumer, not government.

So: I support the Fair Tax, because it is consumption-based.

Of course a flat tax is fair on the surface

but it reminds me of the economic equivalent of a quote by Anatole France.

"In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets, and steal loaves of bread."

Perhaps the fair tax is the way to go. Of course, wages would have to rise and theoretically should as employers are not withholding anything.

But I would not count on that. Not with the employment problems we have now.

Or get rid of all the loopholes and deductions and have a mildly progressive tax.

There is a baseline of living expenses to provide the minimum safe housing, clothing and nutrition. And it is close to the median household income.

Flat tax does not tax just discretionary income. But necessities for those at the margins.

Nice Quote, But...

RE: "In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets, and steal loaves of bread." (Anatole France)

It's a great quote, but I don't see how it applies: The law is compulsory, whereas the value of money is what it is.

Besides, the law may forbid sleeping under bridges, yet people do. What money can buy is not subject to quite as much personal discretion.

Oh well. If a creative consensus is building to try new things in raising taxes to support government, I'm all for it!

A flat tax would be compulsory also

The value of money may indeed by what it is, but it doesn't negate the fact that there is a minimum for decent living and to tax that away is certainly counterproductive since it takes that money from the marketplace.

Our economy is much more dependent upon the vast majority of spenders rather than the top percentiles.

The investor classes may provide the money for building companies, but they will go nowhere without a lot of people buying their products.

Henry Ford and Walter Reuther were on a plant tour back in the 50's. Ford was showing off his robotic machines that reduced the manpower on the assembly line.

Ford asked Reuther if he was worried about fewer union members paying dues.

Reuther replied that he wondered how many cars the robots would buy.

Discretionary spending makes our GDP grow. And if most of our workers can only afford the basics such as food, clothes and shelter after health care, education and taxes take the rest, whither goes our economy?

Cunningham is correct.

In our efforts to re-create the fair tax, we forget the lessons learned in the past. The so-called flat tax is anything but fair. The current tax structure is the most repressive (regressive) in my lifetime. As far as I am concerned, 1986 marks the year when the tax code took a huge turn toward giving the treasury away to the super rich. It was called tax neutral. It was the greated movement of money from the middle and lower classes to the upper one percent in my lifetime. I do not hate rich people. However, there are too many people who are struggling just to get by who are being taxed to death by "fees," sales taxes, and so forth. Too many in America have forgotten what the notion "common good" means.

A Curiosity Question

Is it "fair" for a dollar to have one value for the rich, and another value for the poor?

Put another way, wouldn't it be best (more fair) if a dollar had exactly the same value for both rich and poor?

Dollars have the same value for both rich and poor

The rich just have a lot more of them.

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