What is the purpose of our democratic society’s tax system? It’s very different from, say, Louis the Sun King’s France. His Minister of Finance defined taxation as: “plucking the goose to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. We only want to collect enough, not as much as possible. How well does our system perform? We have better measures than hissing:
- Effectiveness – % of government activities it funds – is it enough?
- Overhead – % of what is collected the process costs
- Fairness – % of the population considering it fair
- Clarity – extent to which the population understands what the taxes pay for
Effectiveness has two aspects. First, a perfect tax system would, not every quarter or year, but over the long haul, fully fund our government’s activities. By this measure, our current system is an abject failure. The problem is not so much that the gap widens during economic downturns, e.g., lower collections and higher spending post-2007, but that what’s collected is almost always significantly lower than what’s spent. I’ll comment below (see clarity) on why that is so. At this point we only need acknowledge that our current tax system is seriously ineffective.
The other aspect of effectiveness is what % is collected of the amount the system intends to collect, i.e., how much is illegally evaded. This 2011 study by the Federal Reserve Bank says: “18-19% of total reportable income is not properly reported to the IRS, giving rise to a “tax gap” approaching $500 billion dollars”. It is estimated that around $3T of income tax was evaded from 2001-2010.
Overhead means the cost of collecting. By this measure, too, our system gets a failing grade. This report, using IRS data, estimates it at 30% for the income tax system. Local property taxes, for example, have lower overhead. Embedded point of purchase taxes, e.g., on gasoline, have about 5% overhead. I haven’t tried to estimate overhead for our overall system. It would be good to get it a lot closer to 5% and have it cause less hissing.
Measuring fairness is a challenge. How to define it? The dictionary definition is simple, “a proper balance of conflicting interests” or “showing no more favor to one side than another” but it is not so obvious how to measure that in a tax system. Since we are a democracy, the best way is what % of the people considers it fair. From a recently published 131 page compendium of survey results I selected some of the most illuminating ones about fairness and clarity.
How many of us consider the current system fair? See below. A little under half (3% + 40%) and mostly only moderately fair. A quarter (24%) considers it not at all fair. Three of five, however, (59%) regard what they personally must pay as fair. Perhaps they are the same 56% who consider that middle-income people pay their fair share? Many more, however, (68%) feel the system benefits the rich and three of five (60%) want those who earn more than $1M a year to pay a minimum of 30% in taxes. Two of five (40%) consider that lower income people pay too much. Maybe they are lower income? Fully two thirds (66%) believe everyone should pay some tax although that question is somewhat loaded. Almost two thirds (64%) think corporations pay too little tax.
Would you say that our [federal] tax system is very fair, moderately fair, not too fair or not fair at all? (p. 20, Dec. 2011 Pew) Very fair – 3%, Moderately fair – 40%, Not too fair – 31%, Not fair at all – 24%)
- Do you regard the income tax which you will have to pay this year as fair? (p. 23, Apr. 2012 Gallup) Yes – 59%, No – 37%
- Do you feel the present tax system benefits the rich? (p. 25, Apr. 2012 CNN/ORC) Yes – 68%, No – 29%
- Are middle-income people paying their fair share in federal taxes, too much or too little? (p. 26, Apr. 2012 Gallup) Too much – 36%, Fair share – 56%, Too little – 6%
- Are lower-income people paying their fair share in federal taxes, too much or too little? (p. 27, Apr. 2012 Gallup) Too much – 40%, Fair share – 33%, Too little – 24%
- Are corporations paying their fair share in federal taxes, too much or too little? (p. 27, Apr. 2012 Gallup) Too much – 11%, Fair share – 21%, Too little – 64%
- Would you favor requiring households earning $1 million a year or more to pay a minimum of 30% of their income in taxes? (p. 31, Apr. 2012 Gallup) Support – 60%, Oppose – 37%
- [Should] everyone pay some minimum amount of tax to help fund government? (p. 20, Feb. 2009 Harris/Tax Foundation) Should – 66%, Current system is fair – 19%, Not sure – 15%
So, our current tax system is perceived to be less fair than we want. Another way to look at it is in terms of results. The tax system takes money from people at different rates and redistributes some of it to others depending on relative circumstances. How fairly do we think it does that? Almost three of five (57%) feel money and wealth should be more evenly distributed. Opinions are, however, equally divided (47% to 49%) on whether the government should redistribute it by heavy taxes on the rich.
- Do you feel that the distribution of money and wealth in this country today is fair? (p. 33, Apr. 2011 Gallup) Fair – 35%, Should be more evenly distributed – 57%
- Do you think that our government should or should not redistribute wealth by heavy taxes on the rich? (p. 33, Apr. 2011 Gallup) Should – 47%, Should not – 49%
Another perspective is, are we paying the right amount of tax relative to government spending? Half of us (47%) think we pay too much tax and half (47%) think what we pay is about right. But twice as many (61% to 26%) want to pay less, two thirds (67%) are against raising taxes and almost as many (61%) are unwilling to pay more. How to reconcile the desire to pay less with closing the government’s deficit? Three of five (61%) believe the deficit can be cut substantially without raising taxes and more than half (53%) favors balancing the budget by cutting spending.
- Do you consider the amount of federal income tax you have to pay as too high, about right, or too low? (p. 4, Apr. 2012 Gallup) Too high – 46%, About right – 47%
Would you like to see the amount Americans pay in federal income taxes increased, decreased, or remain about the same? (p. 6, Jan. 2012 Gallup) Increase – 13%, Decrease – 61%, Same – 26%
- Would you favor or oppose raising taxes as a way to reduce the budget deficit? (p. 55, Mar. 2011 PSRA/Pew) Favor – 30%, Oppose – 67%
- Would you be willing to pay more in taxes to reduce the federal deficit? (p. 50, Jun. 2011 Bloomberg) Willing to pay more – 36%, Not willing – 61%
- Do you think it is possible to bring down the deficit substantially without raising taxes? (p. 54, Mar. 2011 Bloomberg) Is possible – 61%, Not possible – 37%
- Which would you prefer to balance the federal budget deficit? (p. 56, Jul. 2011 Economist/YouGov) Increase taxes -10%, Decrease gov’t spending – 53%, Both – 29%
Now we arrive at our tax system’s clarity. How accurately do we understand the cost of our government’s activities and how that relates to the taxes we pay? This is where our system fails most spectacularly. We want to pay less taxes and we imagine we could cut government spending to make that possible. What spending do we want be cut? Waste!
We believe almost half of all government spending (47%) is wasted. Where? Social Security, the largest program? Four of five (79%) oppose cutting Social Security spending. There is less opposition to raising the Social Security eligibility age (44% in favor, 54% opposed). Opinions are quite evenly divided on what we could save by raising the age of eligibility. I don’t know what % of the population knows Social Security does not in fact contribute to the deficit – we collect more Social Security taxes than we pay in benefits.
How about cutting Medicare etc, our second largest program? Opinions are equally distributed from a lot to not much on what that would save but three quarters of us (76%) are in any case against cutting Medicare.
Should we cut defense spending, the third largest area of spending? Three of five (58%) oppose that but almost half (47%) think we could make very large savings by pulling out of Iraq and Afghanistan and two thirds (66%) favor doing that. Will they oppose spending the money to invade Iran?
Since the top three areas of spending account for 62% of the total, how to eliminate that 47% of waste? Two of every three of us (42%) believe we could make very large savings by cutting aid to foreign countries and 72% favor doing that. Sadly, our total non-military foreign aid in 2011, $32M, is one thousandth of one percent of total federal spending.
- Do you think people in government waste a lot of money we pay in taxes, waste some of it, or don’t waste very much of it? (p. 15, Apr. 2011 CNN) A lot – 73%, Some – 23%, Not Much – 4%
- For every dollar you pay in federal taxes, about how many cents do you think are wasted by the government? (p. 16, Jan. 2013 Reason-Rupe) Wasted – 47%
- In order to reduce the budget deficit, would you favor or oppose reducing spending on Social Security? (p. 60, Mar. 2013 CBS) Favor – 18%, Oppose – 79%
- Would you favor or oppose gradually raising the age of eligibility for Social Security to 69? (p. 53, Mar. 2011 Bloomberg) Favor – 44%, Oppose – 54%
- Savings by gradually raising the age of eligibility for Social Security to 69 would be? (p. 53, Mar. 2011 Bloomberg) Very large – 19%, Fairly large – 28%, Fairly small – 24%, Little difference – 24%
- Would you favor or oppose significantly reducing benefits for Medicare? (p. 53, Mar. 2011 Bloomberg) Favor – 22%, Oppose – 76%
- Savings by reducing benefits for Medicare would be? (p. 53, Mar. 2011 Bloomberg) Very large – 19%, Fairly large – 25%, Fairly small – 27%, Little difference – 24%
- In order to reduce the budget deficit, would you favor or oppose reducing defense spending? (p. 60, Mar. 2013 CBS) Favor – 38%, Oppose – 58%
- Savings by pulling all troops out of Iraq and Afghanistan would be? (p. 53, Mar. 2011 Bloomberg) Very large – 47%, Fairly large – 28%, Fairly small – 12%, Little difference – 11%
- Would you favor or oppose pulling all troops out of Iraq and Afghanistan? (p. 53, Mar. 2011 Bloomberg) Favor – 66%, Oppose – 30%
- Savings by cutting aid to foreign countries would be? (p. 53, Mar. 2011 Bloomberg) Very large – 42%, Fairly large – 30%, Fairly small – 14%, Little difference – 10%
- Would you favor or oppose significantly cutting aid to foreign countries? (p. 53, Mar. 2011 Bloomberg) Favor – 72%, Oppose – 26%
This is already a long post so I will make only two comments about state and local taxes. Property taxes are considered the most unfair of all, perhaps because they may force folks whose incomes drop sharply at retirement to sell their home. Estate taxes, primarily federal but which have also been levied by some states, are also very unpopular, which is inconsistent with our idealization of the “self-made man”.
The next post in this series will say more about fairness. How should society’s wealth be distributed? The cynic would expect all of us to think we personally should have more. What do we actually want? My analysis of our current tax system and how its results compare to what we want will at that point be sufficiently complete. I will then force myself to establish some proposals for a better system.