Defining a Fair Share of Income Taxes

With few exceptions, my clients tell me they don't want to pay more than their "fair share" of income taxes. The implication is that they are willing to pay a "fair share".

But what is a fair share? And are we talking about a share of government spending or a share of the personal income tax? And how do we define a "share"? Is it an equal part of the total tax or the total spending? Or is it an equal percentage of the total? Those on the left of the political spectrum argue that income tax rates should be progressive -- meaning that tax rates should increase as income increases. Those on the right of the spectrum are more likely to argue on behalf of a flat rate tax or even for a national consumption tax.

The proposed federal budget for 2010 is $3.6 Trillion. There are about 310 million people in the U.S. So the budget works out to an average of about $12,000 per person. We have about 100 million households in the U.S., so the budget works out to about $36,000 per household. Is that how we should define a "fair share"? Obviously, a lot of households don't make that much or only make a little bit more than $36,000. But almost half of the households in the U.S. made less than $50,000 in 2009. The poverty level for a family of three is about $18,000 and about 15% of the households make less than that amount. We can't tax 100% of anyone's income and if a family with $50,000 of gross income had to pay $36,000 in taxes, the amount that is left would put them below the poverty level. But if you exempt those lower income people from paying any tax, then the total has to be divided among a much smaller number of households. (Actually, almost all of the personal income tax is paid by the taxpayers whose income is above the median.)

However, the government gets a lot of its money from sources other than the personal income tax. There is a corporate income tax and the Social Security tax and the Medicare tax and a few hundred diverse excise taxes. And the government does not base its spending on the amount of taxes it expects to collect. If the spending exceeds the tax revenue, the government borrows the difference -- which they call a deficit. (Instances when tax collections exceed spending are very rare.)

The taxes we pay are not based on what the government spends. It is based on the existing system of collecting taxes. Then the amount that can be spent is based on a combination of the estimated amount of tax revenue plus the amount that can be raised by issuing additional federal debt.

Therefore, government spending is a function of the taxes it can collect.

From time to time, the government will attempt to raise more taxes if they can find some sort of crisis (like a war) or urgent need (like health care or the climate) that will motivate the voters to agree to higher taxes. But when that amount gets to be excessive in the perspective of the taxpayers, they look for ways to reduce their tax burden. Some of them engage in political action like the current tea party movement. Others engage in tax evasion. Those who can afford professional help look for legal ways to restructure their assets to defer or avoid taxes. And a few choose to vote with their feet and expatriate.

Because the income tax is a body of law, I have concluded that a "fair share" is no more than what is required to avoid excessive fines or other sanctions like incarceration. What is excessive varies from person to person. Some taxpayer will tolerate a much heavier burden than others. So it comes down to what the law permits. As mentioned in an earlier memo, when tax rates are high, there are inevitably more "loopholes" or tax incentives available for those who wish to use them. The cash for clunkers and the first time homebuyer credit are only two recent examples. Not all available tax "loopholes" are worth the cost or the risk or even the time that is required to utilize them.

So it comes down to a process of identifying the varied tax breaks that are available and then exercising judgement and analysis to determine which of those tax breaks are suitable for a particular person or family.

A fair share is then based on finding the minimum amount of personal income taxes that are tolerable for a particular taxpayer.

And because there is no other logical way to determine what constitutes a fair share, there is no moral duty to pay any more than the law requires.

Vern Jacobs

www.vernonjacobs.com