Monday, April 13, 2009

Moral Hazards In Taxation

In today's WSJ, Ari Fleisher touches on an issue that's been growing ever since the 1980's, when "taking people completely off the tax rolls" became a mantra of 'compassion.' Unfortunately, so many people have been excused from paying any taxes at all, they're very nearly a voting majority today:

According to the CBO, those who made less than $44,300 in 2001 -- 60% of the country -- paid a paltry 3.3% of all income taxes. By 2005, almost all of them were excused from paying any income tax. They paid less than 1% of the income tax burden. Their share shrank even when taking into account the payroll tax. In 2001, the bottom 60% paid 16.3% of all taxes; by 2005 their share was down to 14.3%. All the while, this large group of voters made 25.8% of the nation's income.

When you make almost 26% of the income and you pay only 0.6% of the income tax, that's a good deal, courtesy of those who do pay income taxes. For the bottom 40%, the redistribution deal is even better. In 2001, these 43 million Americans, who earn less than $30,500, made 13.5% of the nation's income but paid no income tax. Instead, they received checks from their taxpaying neighbors worth $16.3 billion. By 2005, those checks totaled $33.3 billion.

Today, Mr. Obama and many congressional Democrats want the "wealthy" to pay even more so there is more money for them to redistribute. The president says he wants the wealthy to pay their "fair share." Who can argue with that? But he never defines what that means. Is it fair for 10% to pay 70% of the income tax? Does he believe they should pay 75%, or 95%, or does fairness mean they should pay it all? It's clever politics to speak like that, but it is risky policy.

Mr. Obama is adding to this trend with his "Make Work Pay" tax cut that means almost 50% of the country will no longer pay any income taxes, up from a little over 40% today. A certain amount of income redistribution in a capitalistic society is healthy, but this goes too far. The economic and moral problem is that when 50% of the country gets benefits without paying for them and an increasingly smaller number of taxpayers foot the bill, the spinning triangle will no longer be able to support itself.

Fleisher's solution, eliminating all deductions and secondary taxes (i.e., FICA, Medicare and the Estate Tax) in favor of a uniform progressive tax structure--he doesn't offer up any suggested rates or bracket levels--is at least an interesting starting point, but whether you like those particular ideas or not, he hits on a point that no politician has been willing to touch: taxes have been so angled up to the higher earners that we're facing a looming moral hazard in taxation. When 50.1 percent of the electorate can vote themselves the spoils of the other 49.9 percent's income at no cost to themselves, you've got a recipe for economic and social disaster.

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