August 31, 2009

Taxes and Pizza

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“What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin,” wrote Mark Twain. Those making over $250,000 may soon prefer the taxidermist. President Obama is desperately trying to adhere to his campaign promise of not raising taxes on those earning below $250,000. This is ill-conceived policy that is unsurprisingly supported by congressional Democrats, namely those on the far left of the party. The claim that Americans must pay their fair share is valid, yet our politicians have it backwards. Soaking high earners is both an economic and a political mistake.

Americans ridiculed as being rich (earning over $250,000) pay more than their fair share in taxes, contrary to what many claim. The IRS reports that in 2007 (the most recent year for which data is available) the top 2% of federal income tax filers earned roughly 28% of the nation’s income yet paid nearly 49% of all federal income taxes. In contrast, the bottom 50% of tax filers earned just over 12% of the nation’s income, but accounted for fewer than 3% of federal income taxes.

Imagine you and nine other friends decide to order a $10 pizza pie after a late night of Collegetown debauchery. You put in $5 towards the pizza, 50%, but receive only the crust. Is this fair? Hardly. Yet, this is the U.S. tax system run amuck.

The middle class must be taxed as a matter of practicality. The House of Representatives led by the illustrious Nancy Pelosi has elected to fund part of health care reform by raising taxes on “high-earners.” However, this is unlikely to raise enough revenue to cover costs, especially if net worth continues to decline. California offers the perfect example of this policy gone awry. For years California relied on personal income taxes from the wealthy, but as the economy deteriorated and wealth declined so too did much of California’s revenue. Now, the Governator is selling signed copies of “Jingle All the Way” to raise money.

The nature of a progressive tax system is that those who earn more, pay more, and those who earn less, receive more from social welfare programs. This makes sense, to a degree. However, the bottom 50% of American taxpayers must have some skin in the game or else everything from food stamps to national defense is just a case of 7 million Americans paying for 70.5 million Americans. It is difficult to assess where the line should be drawn, but if after a long night I were paying for half a pizza and only had the crust, I would be angry.