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Sep 29, 2016
Presented by
Amity Shlaes

Is the U.S. tax system fair? Are the rich paying too little or too much? What about the middle and lower class? New York Times bestselling author Amity Shlaes answers these questions, and offers a tax solution that most Americans could get on board with.

When Congress first created the income tax, the highest tax bracket was 7%. Now, the highest tax bracket is 40%.

  • When a federal income tax was first adopted, the original top tax bracket was 7%. In 2016, it stood at 40%.View Source
  • In 2014, just 2.7% of all tax-filers paid 51.6% of all federal income taxes, and 20% of all earners paid 84% of all incomes taxes.View Source
  • The bottom 80% of earners paid just 15% of all federal income taxes.View Source
  • Related reading: Flat Tax Revolution - Steve ForbesView Source

Progressive taxation punishes success—exactly the opposite of what we want our tax system to do.

  • Progressive taxation increases like stairs, so that the last dollar you earn is taxed more heavily than the first.View Source
  • When a federal income tax was first adopted, the original top tax bracket was 7%. In 2016, it stood at 40%.View Source
  • In 2014, just 2.7% of all tax-filers paid 51.6% of all federal income taxes, and 20% of all earners paid 84% of all incomes taxes.View Source
  • The bottom 80% of earners paid just 15% of all federal income taxes.View Source
  • Related reading: The Greedy Hand - Amity ShlaesView Source

A flat tax is much more fair than a progressive tax—and a majority on both the left and right agree.

  • A flat tax, unlike a progressive tax, requires one to pay the same rate on all dollars earned. According to research, a majority of both conservatives and progressives view the flat tax as more fair than our current system of progressive taxation.View Source
  • Read Amity Shlaes on the flat tax.View Source
  • Related reading: The Greedy Hand - Amity ShlaesView Source
  • Related reading: Flat Tax Revolution – Steve ForbesView Source
  • Related reading: The Mismeasure of Inequality – Kip Hagopian and Lee OhanianView Source

In 2014, the top 2.7% of tax-filers paid 51.6% of all federal income taxes. The bottom 80% of tax-filers paid just 15% of taxes.

  • In 2014, just 2.7% of all tax-filers paid 51.6% all income taxes, and 20% of all earners paid 84% of all federal incomes taxes.View Source
  • The bottom 80% of earners paid just 15% of all federal income taxes.View Source
  • Related reading: The Global Flat Tax Revolution - Cato InstituteView Source

The rich, by any standard, pay far more than their fair share of the nation’s taxes.

  • America’s progressive taxation system is the most progressive—higher rates for higher earners—in the developed world.View Source
  • The top 10% of all earners in 2012 paid 70% of all federal income tax while earning 48% of all national income. That’s highly disproportionate.View Source
  • In 2012, the top 1% paid 38.1% of all federal taxes, but took home only 21.9% of all income earned.View Source

A “progressive” tax system is actually regressive since it disproportionately punishes success.

  • In 2014, just 2.7% of all tax-filers paid 51.6% of all federal income taxes, and 20% of all earners paid 84% of all incomes taxes.View Source
  • The bottom 80% of earners paid just 15% of all federal income taxes.View Source
  • Related reading: The Greedy Hand - Amity ShlaesView Source

The fairest tax system would be one in which all taxpayers pay the same percentage to the government.

  • A flat tax, unlike a progressive tax, requires one to pay the same rate on all dollars earned. According to research, a majority of both conservatives and progressives view the flat tax as more fair than our currentView Source
  • Read Amity Shlaes on the flat tax.View Source
  • Related reading: The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It – Amity SchlaesView Source
  • Related reading: Flat Tax Revolution – Steve ForbesView Source
  • Related reading: The Mismeasure of Inequality – Kip Hagopian and Lee OhanianView Source

Tax the rich some more.

That recommendation comes from many politicians.

It seems obvious to tax the rich. We tell ourselves they won’t miss that little extra bit we take. And after all, it’s only right that they pay their fair share.

The technical name for taxing the rich more is progressivity. And it’s hard to oppose a concept that shares its roots with an optimistic word like progress. But this surface logic obscures some important truths about progressivity. So let’s stand back.

The first thing we see when we take our distance is surprising. It is that many people don’t know what progressivity is.

Suppose you pay five dollars in tax on your income. A rich man pays ten dollars, because he makes twice as much as you. This arrangement sounds like progress, right?

But that is not a progressive tax schedule. It is a proportional one—a true fair share. What was once known as the tithe, but is now commonly called now a flat tax. Under a flat tax, everyone pays the same rate no matter what they earn.

In the 1980’s a poll by political scientist Karlyn Keene suggested that Americans thought flat proportional taxes were fair taxes. And as we know from architecture and art, humans are wired to like proportionality. A progressive tax structure by contrast is actually disproportionate.

Progressivity resembles a flight of stairs. Each individual starts out at the bottom, paying the same rate, say 10 percent. When his income rises to a certain line, the taxpayer moves up a step on the staircase and his rate goes up to, say 20 percent, but only for the share of income past that line. At the next step, the rate goes up again, say to 30 percent, but again only for the last stair of income. And so on.

But the prospect of going up all those stairs tires the climber. Surveying the rates at the top, workers stop chasing a promotion they once thought they wanted. Why bother? The taxman will take the money anyhow. When workers or professionals stall on the stairs, the government loses money, but so do regular people. For when the person who decides not to earn more money is a business owner, the result of that decision is a smaller company and fewer jobs for others.

Of course some people do keep climbing, no matter what. Some people are wired that way. And those taxpayers can get to the point where they pay half of what they earn—especially in high tax states—which leads to the greatest argument against the progressivity staircase: Progressivity is unjust. People have a right to what they earn—even Californians and New Yorkers.

But politicians like being able to say that they are ensuring that the rich pay their share. And nothing proves their anti-rich credentials like sponsoring fresh legislation for more progressivity. So for years, President after President, Democrat and Republican, and Congress after Congress have passed law after law to make the income tax more progressive.  

President Richard Nixon signed a law that took nine million taxpayers at the bottom end off the income tax staircase entirely. Other presidents like Ronald Reagan and Bill Clinton took a few more million out. George W. Bush removed even more. So today nearly half of Americans pay no income tax at all. And 10 percent of earners pay over 70 percent of all income tax. Talk about disproportionate.

Here we get to a genuine question of fairness. There’s something wrong with our democracy when people who pay no tax can vote for tax increases on fellow citizens who already do pay tax.

But reversing a century of progressivity won’t be easy. For when you cut taxes for all in a progressive rate structure, the rich necessarily get a larger tax break. That is so because they pay a greater share to begin with, and advocating “larger breaks for the rich” is not a popular political move, to put it mildly.

Many economists make the case for a true flat tax. Others tout a sales tax. Consumers would then pay taxes only on what they buy.

Either way, it’s time for politicians to give up their small talk about the earned income credit, the child credit, and so on, and get out their saws to dismantle the big staircase—our disproportionate income tax.

The country could then try a tax code that’s simple and easy to navigate, like a new road that runs straight ahead into the horizon.

Many of us would call that progress.

I’m Amity Shlaes for Prager University.

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