Ask The Readers: What Is A Fair Share?

Ask The Readers:  What Is A Fair Share?

We’ve heard it throughout the campaign season, and with the recent election results, we may hear more about the rich paying their fair share. But what exactly is a fair share of taxes on income?

Here is the data from 2009:

Share of Taxes

    • Top 1% of income earners earned 17% of all income in the US and paid 37% of all the federal income taxes in the US
    • Top 5% of income earners earned 32% of all income in the US and paid 59% of all the federal income taxes in the US
    • Top 10% of income earners earned 43% of all income in the US and paid 70% of all the federal income taxes in the US
    • The bottom 50% of income earners earned 13.5% of all income in the US and paid 2.25% of all the federal income taxes in the US

Effective Tax Rates

    • Top 1% of income earners paid an effective tax rate of 28.9%
    • Top 20% of income earners paid an effective tax rate of 23.2%
    • Bottom 20% of income earners paid an effective tax rate of 1%

Yes, I realize that there are other taxes at the federal level, namely the payroll tax, but that is money set aside for future use.  You get that back in the form of retirement income and medical care.

I am just curious and have yet for someone to explain how the current tax code is not fair?  If the answer is that the rich can afford more, then that’s probably a more honest answer, but the fairness argument doesn’t seem to hold any ground.  If this is not a fair tax code, then what is a fair one?  Please leave a comment below!

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Edwin is a marketer, social media influencer and head writer here at I Am 1 Percent. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.


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21 Comments

  1. Stan @DebtsnTaxes

    I think that the only fair tax code would be for us to switch to a flat tax/no deduction system. I think it’s ridiculous that the rich pay such a high percentage of the total taxes our country collects. Our current tax structure rewards irresponsibility and punishes the responsible. That needs to change. Sadly, I don’t see it happening.

    Reply
    1. iam1percent

      Yes, that would be the most fair in the traditional sense, but a progressive system is probably warranted to a degree. Now the extent of that degree is what is up for debate.

      Reply
  2. Mark

    Great post, and spot on. Fairness has nothing to do with it.

    Reply
    1. iam1percent

      The rates I quote are directly from IRS data. Mitt Romney and other millionaires are exceptions. However, to the Mitt Romney example, is the purpose of the tax code to generate revenue to the government or to create fairness?

      Mitt Romney pays a low tax rate because most of his income is in the form of capital gains. As historic data show, whenever the capital gains tax increases, revenue to the treasury decreases. The reverse is also true. When the capital gains tax is lowered, revenue to the treasury increases.

      That said, it may be “fair” to raise his rate, but ultimately, the US Government will collect less revenue from the tax.

      Reply
  3. Mrs. Pop @ Planting Our Pennies

    Theoretically, one could say that “fair” treatment would be treating all money equally – all income, no matter what the source taxed the same way, and no deductions or tax credits.

    But there are enough lobbyists in DC that major changes in the tax code are unlikely anytime soon.

    Reply
  4. nicoleandmaggie

    There are a lot of ways to frame this question that elicit different answers about what is fair. Here’s why marginal tax rates make sense (and flat taxes really aren’t fair):

    http://nicoleandmaggie.wordpress.com/2011/10/24/marginal-tax-rates-why-they-make-sense/

    Reply
    1. iam1percent

      FYI, I’m not proposing a flat tax. Just wondering how the current progressive rates are not “fair”.

      Reply
  5. Lance @ Money Life and More

    There is no one size fits all answer. What is fair depends on the person answering the question. The people who use the most pay the least and the people who pay the most use the least. Someone has to pay for it.

    Reply
    1. Mochi and Macarons

      I like your answer to this the best.

      Reply
  6. Christie @ Smart Money Junction

    I think the income tax rates are as they should be. Top income earners should pay more as they can afford to do so, but the ones that are earning lower income should be charged less.

    Reply
    1. iam1percent

      I believe there is also data to show that the bottom 47% of income earners pay no federal income tax so its not possible to charge less to the bottom 47%.

      Reply
  7. so

    I think a fair working compromise would be to raise marginal rates so that the effective rates were closer to 33% for the top 1%, 28% for the top 10%, and broadening the base for the bottom 47% (maybe by reducing the standard deduction or something like the AMT for lower earners?). So, move back to pre-2000 tax rates, but broaden the base at the bottom.

    At the same time, raise the income limits on deductions like student loan interest, Roth IRA contributions, passive activity losses, child credits, etc. so that the folks in the bottom of the top 1% are not excluded from taking those deductions and credits because their income is above $100K-150K or so. To the extent deductions are phased out b/c incomes are too high, $400-500K (adjusted for inflation) is a reasonable place to start. 150K is basically upper middle class on the coasts once you factor in housing.

    The one thing that’s interesting about the income vs. percentage rates cited in this post is that the share of taxes paid by the top 1% (and bottom 47%) is commensurate with their wealth, but not their income.

    Reply
    1. iam1percent

      so, I can agree to your proposal…its certainly reasonable, particularly since i am at the bottom of the top 1%…..

      Reply
      1. so

        Yeah, I go in and out depending on RE income for the year, so my proposal is also self-serving, but I think that is a fair compromise. Plus, increasing the passive activity loss limits will make RE investing more desirable and help that sector.

        What I’m really hoping for from the fiscal “cliff” tax deal is some stability. I don’t like rates changing every ten years and all the temporary cuts and sunsetting. Give us some stability so we can plan for the future!

        Reply
  8. getagrip

    You focus only on personal income tax. You neglect capital gain, property, corporate, estate, etc. taxes. The picture is bigger than just income tax. That said, a few points:

    1. The family making $25K a year and getting by has to purchase many of the same things, food, clothing, school supplies for the kiddies, utilities, etc. as a family making $250K. Their vehicles are likely to both need gas weekly, but that tank of gas, that bag of grocieries, etc. are going to be a much larger proportion of the $25K salary than the $250K salary. The staples eat up the baseline.

    2. There is no requirement that if you make ten times as much you have to pay ten times more to live your life. Lifestyle inflation is not a need.

    3. Who is more likely to get a tax return and put it right back into the economy via spending?

    4. If you need money do you go to your better off family member or the one who is scraping by?

    So, what do we want from the society and economy?

    One possible answer is we want businesses to grow, be created, etc. How does that happen? People have to spend money for products? So who do you want to encourage? Do you encourage the masses of people who have almost no choice but to spend most of their income on products or services businesses provide or people who will take that money and not buy products and services but buy pieces of businesses who have no one purchasing their products so they don’t grow and can’t get off the ground?

    So, the way I look at the personal income tax system is that the Government wants to encourage: folks who produce future society members, hence tax breaks for married people and having kids; the bulk of people to spend all their money into the economy, hence the less you earn the less you pay and the greater the percentage you typically put into the economy; business to grow and be invested into, hence for those who have enough money to not just subist but grow the capital gains rate is lower than the upper income tax bracket rates.

    Is it fair? Again, the tax system is more than just the personal income taxes and you’d really, IMHO, need to look at the bigger picture to determine that, but the above may provide some additional things to consider.

    Reply
    1. iam1percent

      The other taxes you mentioned above mostly affect higher income individuals more than middle or poor americans (i.e. cap gains, prop, estate). Nevertheless, your example of a $25k family doesn’t take into account that they already pay $0 in taxes to begin with. My question is…isn’t that fair already?

      Reply
      1. AmandaMNN

        Using the extreme doesn’t make the point well. Forget the $25k family and do the numbers with a $60k family. The $60k or $80k family is stuck in the middle – they still have to put $60 worth of gas in their cars each week and register those cars annually (more or less expensive depending on where you live). They still have to buy the same groceries you buy (assuming you don’t live on caviar and champagne! 🙂 ). They still have to pay for the clothing. At the end of their month, they may have been able to invest a little in retirement or savings, but mostly their entire paycheck is going to be taken up with regular household expenses. In the meanwhile they are paying taxes. And most of them don’t have the number of deductions that the higher income earners have … the tax deferred investment opportunities, etc.

        Those “middle” families (and heck, depending on where you live, I’d even say that “middle” could be anywhere from $40k all the way up to $150k or more) are the ones who get screwed come tax time. Screwed even worse if they don’t happen to own a home, for whatever reason.

        Assuming that the $60k family pays 12% of their income in taxes at the end of the year, that’s proportionally a much bigger chunk of their money than when the $150k family pays 12% of their income … even if it’s the same percentage.

        As to what would be fair? I really don’t know. I like @so’s thoughts above. I do think that raising the minimum deduction amount would be a good start. I think doing away with a lot of the nickle and dime deductions (that a lot of people don’t understand, know about, or take anyway) would be a good start. I don’t think it’s as simple as Moar taxes for rich peeples!!! But I think that a couple of percentage points to those making $250k or more is really NOT going to hurt them as much as most of them are screaming about.

        Reply
        1. iam1percent

          According to the CBO, the 20% of taxpayers earning between $50,100 and $73,999 pay an average 15.1%. As stated in the post above, the top 1% paid an average of 28.9%.

          You say, “I don’t think it’s as simple as Moar taxes for rich peeples!!! But I think that a couple of percentage points to those making $250k or more is really NOT going to hurt them as much as most of them are screaming about”, but aren’t these two sentences contradicting each other?

          In one sentence, you say its not as simple as the rich paying more. Then in the very next sentence, you advocate the rich paying more.

          Sure, the rich could probably pay more in taxes…A family making $250 doesn’t need all that money. My question is, how much should we the people allow them to live on? If we’re looking to raise there federal income taxes by only 4%, its just another $10,000. Why not raise it 5%? Why not another 6%? Can’t these people live off of $50k like most Americans?

          You’re probably saying, well, no one’s advocating for an increase above 4% of what they’re paying now and that I’m being ridiculous. But a few years from now as the deficit continues to rise, who do you think they’ll tax again? In a few years, someone will advocate squeezing a bit more from them.

          Reply
      2. getagrip

        Okay, just to be clear, those people in the example earning $25K are not paying $0 in taxes. They pay taxes and have those deductions taken out of their paychecks just like you do. They can adjust what is taken out via adjustments on their W4s just like you can. So technically it is a lie to state they do not pay taxes, they follow the same payment rules on earned income you do. What you are calling unfair is that in a number of cases, mostly people with kids and families, they pay $0 dollars in effective tax rates and that is what your numbers sum up. So you view it as fair that people making very high incomes are able to lower their effective tax rates via a number of shelters and strategies unavailable to the bulk of Americans, but in your eyes it is unfair for someone in a lower bracket to take advantage of the Government created incentives and opportunities in the tax code to do the same? They pay their taxes, the Government has chosen to allow them to recoup their share. If you are the one allowed, I’m sure you are likely to feel it is fair. If you aren’t, you are likely to feel it’s unfair.

        Reply
        1. iam1percent

          The facts are against you. A couple with two kids, earning less than $26,400, would get an $11,600 standard deduction and four exemptions worth $3,700 each, reducing their taxable income to zero…so they really do pay $0 in income taxes. These are deductions anyone can take just by having a heartbeat.

          Also, please point out anywhere either in the post or in my comments where I said that the current rates are unfair. I merely stated that they’re fair already.

          Reply

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