Thursday, April 16, 2009

What is 'Fair'?

There has been much use of the word 'fair' floating around recently. I personally do not generally use the word; 'Fair' seems like a childhood concept to me. Since I do not use it myself, and given my awe inspiringly poor grasp of implicit arguments, I am curious what people mean by 'fair'.

Since it is being used in the context of taxes lately, I will discuss it in those terms. All these stats are pulled from here.

As of 2006, the top 20% of people make 55.7% of all the money, and pay 69.3% of all Federal taxes. The rest of us make 44.3% of all the money, and pay 30.7% of the taxes.

For a more stark comparison, the top 10% make 41.6% of all the money, and pay 55.4% of all Federal taxes. The rest of us make 58.4% of the money, and pay 44.6% of the taxes.

The average tax paid (per household?) is $18,800. The average tax paid by the bottom quintile is $700. The average tax paid by the second quintile is $4,000. The average tax paid by the middle quintile is $8,600. The average tax paid by the fourth quintile is $15,700. The average tax paid by the top quintile is $64,000. (all numbers federal taxes for 2006).

The extent to which the majority of people in America are subsidized by the wealthy is difficult to overstate, at least in tax terms. Is this 'fair'? It is certainly hard to argue that the wealthy are not paying their 'fair' share. On the other hand, they can afford it. And the simple fact that their portion of the overall income is increasing proves rather handily that this is not a crippling burden.

I do wonder about the inevitable effects of this on policy however. The 'payocracy' effect (he who pays makes the rules) is nearly unavoidable. If they are paying for the Federal government, is it not 'fair' that they have more say in how it works? And 'fair' or not, is it in the best ineterests of the country if they do effectively control the government? Come to that, whether or not it is in the best interests of the country, can it be avoided?


TAO April 16, 2009 at 3:45 AM  

Well, based upon the logic that he who has the gold makes the rules then we are have hit nirvana.

Now, because we have allowed those who have the gold make the rules have we, based upon the current economic crisis, benefitted them?

OpenMindedRepublican April 16, 2009 at 4:14 AM  

As you may have noticed, I am more inclined to talk about what is than what it should be. The point of all this is, after all, to learn rather than to push my ideas.

It is not 'who has the gold makes the rules', it is rather 'who pays for the rules makes the rules'. Not an entirely trivial distinction.

As for whether or not that is the cause f the current situation, well, I have not yet found a system that prevents all recessions. I conclude at this point that such is not possible.

TAO April 16, 2009 at 9:46 AM  

Recessions are a natural aspect of capitalistic economic systems. Much like any system it has to have a way to deal with excess.

The same thing holds true with our financial meltdown, we are now going through a period of 'shedding' our excess, which in this case was an excess of credit.

So, what is "fair?" Is it fair that one pay a proportion of whatever benefit one gets from a government or a service?

Is fairness a quality that exists by and of its self or is it something, like beauty that must be defined?

Maybe the issue is we have no sense of the concept of fairness any longer. Maybe because we do not discuss the big ideas.

Without an ideal, or a 'what should be' in regards to fairness then how can we begin to even discuss fairness in the sense of 'what is' ?

How can I measure something that IS if I have nothing, such as WHAT SHOULD BE to measure it against.

(O)CT(O)PUS April 16, 2009 at 12:12 PM  

There is an old adage: “Figures don’t lie, but liars figure.”

And the numbers you have provided are less than truthful. Sorry, I don’t mean to be disrespectful, but this annoys the hell out of me.

There is also another measure: How equally is wealth distributed through the population? Here are the facts: Between 2001 and 2007, GDP increased approximately 30%, and 103% of this increase in national wealth went to the upper 1%. In other words, the increase in wealth was not equally shared: 1% got 103% of the increase, the other 99% lost ground.

From 2001 through 2007, wages did NOT grow in real terms adjusted for inflation. Meanwhile, the cost of education, housing, healthcare, and energy increased higher than the base inflationary rate … resulting in a loss of living standard for most of the population.

And consider this: If you earn $20k, you are probably living at the poverty line. If you earn between $40k and $60k, you will need every penny with no discretionary income left over to improve your life or educate your kids. For a very modest middle class life, one needs income in the $80K to $100K range.

If you are a high-income earner … say $1 million or more … a 3% increase in taxes will have no material effect on your lifestyle. In contrast, tax relief for lower middle-income earners can make the difference between survival versus bankruptcy. Fairness, indeed !!!

And consider this: Wealth never trickled down to the middle classes. Mega-millionaires spend their money on foreign cars and foreign vacations. Even conservative economists such as Gregory Mankiw (a former Bush administration official from Harvard U.) admits that supply-side theory has been thoroughly discredited and disgraced. The engine of economic growth has always resided within the middle class, not from the top down.

Now please don’t accuse me of being over-reactive. The subtext of your question and supporting numbers are all too painfully clear ... and dead wrong.

OpenMindedRepublican April 16, 2009 at 4:55 PM  

Octo - I sourced my data. If you disagree with it, take it up with the CBO. These are the best numbers I have.

I do not have numbers from 2007, but from 2001 to 2006 every income bracket increased in inflation adjusted dollars. (same source). From 1999 to 2006, the lowest quintile did lose money, a whopping $400 a year, $8 a week. The rest gained. And in case you were wondering, I have been that poor. $8 a week ain't the end of the world.

I currently reside in that $40k to $60k category you mention; just under half of my income is play money, to do with as I please.

And once again I don't do subtext. Seriously. I know it's weird, but that's just me.

TRUTH 101 April 16, 2009 at 7:27 PM  

I have no idea what you're trying to get at OMR. Do you say the wealthy that benefit the most from the largesse of America should pay less because that would be fair? The poor should pay more because the wealthy subsidize them with jobs and taxes. The middle class should pay more because you manage your money well and it's not fair that others don't?

Taxes are the price we pay for a civilized society. I think civilization is a good deal. If a program makes us more civilized I have no problem paying more taxes to fund it. Fair enough?

TAO April 16, 2009 at 8:23 PM  

Technically I am rich as I am in the one of the top percentile groups.

My basic needs are met, and so are a bunch of discretionary needs and a few others that we will not discuss.

Now, I have one house that I have lived in for 20 years and it is paid for. I have two cars and two drivers. I make no charitable based upon what I know right now Obama's tax plan is going to nail me.

I don't care and I knew he was gunning for my tax bracket when he took office and I still voted for him.

My sister and her husband are also wealthy, by the wage brackets as they gross $75,000 a year and are a family of four.

They are typical northern frugal folks. There is no lavishness in their living standards but they do own alot of land and are sending one child to college and have another child who is autistic.

They have no credit card debt but they are broke. I have watched as every year they make sacrifices to keep plugging along. First it was their retirement funding, then it was their emergency savings, and on and on it goes.

I love to rattle my sister about being upper middle class and being so far ahead of our parents and my sister just laughs and wonders if she is upper middle class then what are poor people doing to make ends meet?

I have seen the numbers and I know that median household income has stagnated since 1997. My own frugal sister, who is the absolutely tightest woman I have ever met, acknowledges that her own family is just one medical bill away from disaster and they have insurance.

She had a mammogram in October which was "free" but then had to have a biospy which cost $12,000 of which the insurance company paid 5,000 she has to pay 3,000 and the provider writes off the rest....

Now, I also have a deadbeat sister, who was in the military for a few years, then went off to California and a life of drugs and she gets her hospitalization for free from the VA and she starts at the Rochester Institute of Technology this fall at 44 and I have no idea how she is paying for that because she isn't. This one can spot a free lunch a mile away and she can milk anything out of anyone.

My issue, and forget the damn statistics, is too many people who are living by the rules and doing what they are supposed to are struggling while others who have done nothing are living the life of riley and chasing their dreams on someone elses dime.

Is that fair? A 4% tax increase isn't going to kill me at all...but all of the additional costs of life nowadays is killing the true middle class.

OpenMindedRepublican April 17, 2009 at 1:52 PM  

Actually, I am just trying to understand what people mean when they say 'fair'. Just that.

For example, the last paragraph of this post starts with "In order for the U.S. to have a progressive and fair tax rate, former President Bush’s tax cuts for the wealthiest individuals needs to be repealed."

By any objective measure, federal taxes are already progressive. So I conclude he means not progressive enough. But then one must ask "What IS progressive enough"? And again, what does 'fair' mean?

(O)CT(O)PUS April 17, 2009 at 1:55 PM  

OMR: This too from the CBO just released: Income Gaps Hit Record Levels In 2006, New Data Show:

New data from the Congressional Budget Office (CBO) show that in 2006, the top 1 percent of households had a larger share of the nation’s after-tax income, and the middle and bottom fifths of households had smaller shares, than in any year since 1979, the first year the CBO data cover. As a result, the gaps in after-tax incomes between households in the top 1 percent and those in the middle and bottom fifths were the widest on record."A larger share of the nation's after-tax income ..." means what it says. The rich get richer while the rest get nothing. Selective hearing, OMR? Of course, I forgot. You don't do subtext.

OpenMindedRepublican April 17, 2009 at 2:13 PM  

Octo - selective hearing would rely on me reading every single press release and ignoring the ones I don't like. In truth, I simply have little use for press releses or pre-digested numbers. I prefer to look at raw data and form my own conclusions.

There is no arguing that the wealthy have been increasing their relative share of income. You may have forgotten my position on progressive taxes.

So then, would it be accurate to say that your definition of 'fair' would be whatever it takes to lower the income gap?

(O)CT(O)PUS April 17, 2009 at 2:31 PM  

OMR: Octo - I sourced my data. If you disagree with it, take it up with the CBO. ......... But OMR, I saw your CBO and raised you a CBO. Now you are telling me you don't read press releases. Any more hidden cards?

OpenMindedRepublican April 17, 2009 at 2:40 PM  

Seriously man, did someone kick your dog or something?Why such a focus on arguing with me? I don't really mind so much, but is it getting us anywhere?

This post was an opinion question, not a policy proposal.

And regardless of the arguing, what is your opinion? How rould you define fair?

(O)CT(O)PUS April 17, 2009 at 5:43 PM  

OMR: And regardless of the arguing, what is your opinion? How rould [sic] you define fair?............................
Fair enough. I define "fair" as raising the highest marginal tax rate to 50% (approx. the same as during the Reagan years) while reducing the marginal rate to middle-income earners by 50%. Thus, those in the $40K to $60K quintiles will stop trying to make the case on behalf of those earning > $1M. In other words, vote your own economic self-interest and stop giving away the store to mega-millionaires.

BTW, like TAO, I happened to be in the highest marginal tax bracket and believe in the nobless obligue of helping others less fortunate.

TRUTH 101 April 18, 2009 at 9:05 AM  

I would rather lower rates and do away with 90% of the deductions.

Luis April 19, 2009 at 1:51 AM  

Have you considered that the reason wealthy people are paying more of the burden is not because of unfair taxes, but because people who have become unemployed and have fallen below the poverty line have increased, along with people who make large amounts of money? If people in the middle class have incomes that fall too far, they still make an income, but fall below the minimum tax levels. Necessarily, what wealthy people pay then becomes a higher percent of the tax burden.

This would explain why taxes have fallen so dramatically for wealthy people and yet the burden could remain high--not because of unfairness against wealthy people, but simply because the wealth is not spread around more. Instead, it is becoming concentrated in the highest strata, while more people inhabit the lowest areas where we tax little or not at all (not counting payroll taxes). If there are more people in the middle class, then more of the burden will be carried by them.

By the way, the numbers you use are in question; using quintiles to classify wealth and liability distribution are, at best, a clumsy tool. Many--millions, not just a few--in the third quintile actually pay more in taxes than those in the fourth, and many in the fourth pay more taxes than in the fifth. Taxes work much more specifically to smaller groups than that tool is capable of accurately describing. See this summary of this report (authored by moderate Republican Jim Saxton); in the latter, for focus, see section V, "Misclassification of Taxpayers."

On the word "fair": this was the key word used by Bush in 2000 to pass his big tax cuts for the wealthy. When people questioned the focus of the most of Bush's tax cuts going to very wealthy people, his response was that since they paid the most taxes, they should get the biggest breaks--that was only "fair."

I never liked this for a variety of reasons. One of which is that I have known people who worked all their lives for 80 hours a week doing back-breaking work for minimum wage. I know that a lot of wealthy people worked hard to get where they are, but harder than that? I seriously doubt it. And yet a major focus of the Republicans has been to lower or eliminate the estate tax, a tax which is applied to the income of people who literally did not work even one moment for the money that is being taxed (it's not a tax on the dead person, money is not being taken from them). Two extremes of the spectrum, but examples of how "fairness" is extremely difficult to apply to large numbers of people whom must be averaged out by the millions on quintile charts.

There is the argument of the value of work done--millionaires provided far more value for the work they did than, say, a dishwasher. First, I would argue that this is not true: take away the 'unskilled labor' industry, the nation will fail just as surely--more surely--than if you removed the executive class. And frankly, the executive class hasn't been showing off so great as of late.

I would also argue that probably more of the wealthy salaries are not as much a matter of talent than they are of opportunity and connections, being given a name-brand education and falling into the right circles. Sure, there is the lazy welfare cheat versus the self-made genius millionaire, but these are extremes, not norms. Far more normal is an average American couple who did not get special education and have to work damned hard to scrape by, versus someone who had more opportunity and advantage from birth going to better schools, making the right connections, getting a good job with good chance for advancement, and working from there. Was that "fair"?

New tack: am I correct in assuming that your presumption of "fair" relies on the idea that for each dollar earned an equal amount should be paid? This is the usual definition of "fair," to which I do not personally subscribe.

I liked the statement best which essentially pointed out that wealthy people became wealthy because of the system we have in place; that without the United States as it is, they never could have gotten that wealth in the first place. Therefore, they owe the country more than one usually might pay. They benefit more from the system, so they pay more--not in total dollars, but more in terms of percent of income and burden.

There is also the more standard, and to me also powerful argument that wealthy people can afford higher taxes. A completely flat tax would have a $50,000 household paying, say, $10,000 in taxes, and a $5,000,000 household paying $1,000,000 in taxes. Sure, the million-dollar tax debt seems far more onerous, but the $10,000 tax bill will sting the other household far more.

If the $5M household pays $2 million, they still have an incredible wad of cash left to live in luxury, and if the $50K family pays $5000, that will ease their lives considerably. Does that not seem fair? Not by all standards, but it is certainly arguable.

To the argument that the $5M household worked hard for that money, did not the $50K household? Today, many $50K households have two earners working more than full-time; I doubt that a $5M household really put more sweat into their work. Also, see the "owe the country more" argument.

In short, I think that the wealthiest people should pay more rather than less, to greater degrees than are currently the case.

As for "fair"? That is so subjective a term that I would suggest that it be used in relative terms rather than absolute terms. Also, remember that "fairness" is about compassion more than it is about hard, cold numbers coming out to a sharp evenness. Should the $50K family be more compassionate to the $5M family, or the other way around? Answer me that.

OpenMindedRepublican April 19, 2009 at 4:30 AM  

Luis! First off, welcome!
After a year or more of pestering you at your blog I finally give you a chance to return the favor.

The first thing to understand is that I have no real opinion as to what is 'fair'. It's really just not a word I use. I am a very cause/effect outcome-based thinker.

You may have a misapprehension regarding my position on progressive taxes. I did a post a while back here. I am a bit off the beaten path for a Republican on this one.

Some of the problems with the quintile system I have already started running into. But as it stands, they are still the best numbers I have (yet).

The Bush tax cut for the wealthy seems to be more spoken of than real. Bush cut taxes for everyone, to an irresponsible extent.

Resistance to the estate tax is something of a moral issue. It is hinged on the basic belief that someone should be able to pass on a better life to their children. Several conservative types I know would like to see it abolished entirely. I personally do not know enough about how the numbers fall to have an intelligent opinion on the subject.

Your comparison of the millionaire to the laborer has a bit of a hole in it. Anyone can do menial work. That's why it pays poorly, and why the supply so rarely dries up. If I could get payed what I do now to sit at a damn desk to actually work with my hands I would be gone in a heartbeat. I remember menial and semi-skilled labor. It was so relaxing. But I get payed more to do what I do now because few people can do it.

And honestly, anyone who worked 80hours a week all their life for minimum wage seriously needed to grow some ambition. I can see getting stuck in a job like that during a recession, but that is not a lifelong excuse.

It is not about how hard you work, it is about providing value.

The argument about relative affect of taxes on higher income people is one I agree with. I put it this way - "If a guy with 5 billion dollars suddenly only had 3 billion dollars, would it affect his life in any way other than a number on a piece of paper?"

As for your last question - My answer would be that it is not for me to tell someone else how compassionate they sould be.

Time April 19, 2009 at 12:16 PM  

Obviously no one is paying their fair share, or we would not be 11 trillion dollars in debt.

It's not strictly a number, it's a commitment to paying for our society.

We all should have been paying more to escape the danger of such a huge debt.

If we are arguing numbers, then we are missing the point. To Pay our bills.

Argue over who's paying 5% more, or 5% less, where's the commitment to pay enough to have a surplus, not a huge debt?

Slanting the progressive tax scale to define who pays more. or who pays less, is a political game used to get votes.

How we spend our tax money is another game defined by political party ideology and priorities.

The only way to come up with such amounts is to have a healthy middle class. By sheer numbers only a great middle class can produce such money.

That is why government policies should be aimed at promoting a healthy middle class. The rich cannot pay for all of it and the poor cannot pay at all.

The urgency to bailout these corporations is to benefit the middle class not the rich, but as usual the rich will get richer as a result of these bailouts. They have already benefited by us paying for their business mistakes.

Hopefully this will create a better business climate, improving the middle class, but again benefiting the corporations.

Statics, facts, graphs, can be made to show different truths. No one side owns the truth.

Data is infinitely debatable. You cannot use one set of figures to support only one inescapable conclusion, as soon as you try, someone else has a different interpretation of those same figures.

You cannot use just numbers to solve a problem, or to find the root of a problem.

It has never been a secret that their is natural financial unfairness in our tax system. It's only the last 30 years that we have decided not to pay our bills.

Taxes before Reagan were 30%-50% higher, but we had little debt, we were paying our bills and building the best society in the World, building the greatest middle class the World had ever seen, the best schools, the best military, and capitalism was roaring.

The argument is not the numbers, but what kind of society we want to live in.

Maybe reality is all of us have to pay more.

OpenMindedRepublican April 19, 2009 at 3:32 PM  

Time - I have probably said this a dozen times in a dozen places, but I will repeat it until it catches on.

You will know the Republican party is back in business when one of the big names stands up, says we need to raise taxes and pay off the debt, and doesn't flinch or apologize when they all turn on him. (Or her, it may take until Megan grows up at this rate)

Until then, I am the loyal opposition in my own party.

Luis April 25, 2009 at 12:41 PM  

As for your last question - My answer would be that it is not for me to tell someone else how compassionate they sould be.And yet, that is what our laws do all the time. By avoiding it, you are simply saying that there should be no compassion at all. The law cannot be neutral on compassion; it either incorporates it or it does not. Progressive taxes employ this compassion; non-progressive taxes do not. You are not telling people to be compassionate, nor demanding it. You are using human compassion in deciding how to cut the pie. If you have a starving child on one side of the table and a bloated fatcat on the other, don't tell me that you would have governments dish out all to the fatcat because his taxes provided for most of it. (Or would you?)

But the question is a fair one that you side-stepped; it essentially presents an image of different classes of taxpayers, one that can well afford to pay more and still live in luxury, and another that will be hard-put even if given a break. Is your ideal of governance the lack of compassion and the hard evenness of numbers that completely ignores the hardships suffered or not by each group? I'd like to know your solution beyond the platitudes.

OpenMindedRepublican April 25, 2009 at 4:26 PM  

This was a difficult question to answer because it is framed in terms that I do not think in.

I do not agree with your assertion that compassion is the only justification for progressive taxes. Those who are working class gain from the fruits of their own labors. As one moves towards the professional class, they gain from the composite labor of others. The investor class gains from the economy itself. Each has a growing gain from the infrastructure, each therefore contributes a growing amount to maintaining it.

Social programs can be justified as easily from a purely practical perspective as they can from a charitable one, but it yields a different focus. I do not support long term assistance, especially not 'hand out' style assistance. I am fairly typical of conservatives in that I believe in providing opportunity rather than outcome.

In case you missed it, I put a link to my position on taxes in my initial response, but I do not know how well it realates to what we are discussing here.

I think in the final analysis I am not a compassionate person in the sense that you mean it.

OpenMindedRepublican April 25, 2009 at 5:05 PM  

Luis - Opon review, I think that I have failed to answer your question again. As I said, this is a difficult subject for me conceptually.

But the short answer is I don't know.

Many of my positions are in flux right now, the main purpose of this blog is to develope them more fully.

Time April 25, 2009 at 6:37 PM  

Charity is a part of capitalism, not a by product of capitalism.

Compassion does not have to figure in the equation.

Charity is good for capitalist's business.

Capitalism is more than a system to make profit, it is based in fair trade, fair profit %, ethical and moral values, and the service of providing for the community.

Welfare (different than charity) is important for the health and national security of the country.

Again, compassion does not have to figure into the equation. Seeing to it that people have the basic necessities of life promotes security of the country.

It's fine if people want to describe Charity and Welfare as moral obligations, but they are also necessary to preserve peace and security within the country. if people have nothing, crime rates do rise.

If opportunity is not being provided by private industry, the people will petition their government to help provide opportunity.

Whether or not the government should be in the business of providing individuals opportunity, is a matter of political ideology. I think it should be, especially if private business is failing to do so. Politicians, being what they are, will respond to public outcry.

Luis April 26, 2009 at 12:30 PM  

Here are a few questions, slightly related but off-topic.

1. Laffer-curve economic theory says that the more you tax, the less people will work for the money they make. I assert that this works when you approach 100%, but I would also assert that at lower levels, it actually stimulates the desire to work. Take away more money and people will be discouraged, but people almost always want more money, and will work harder to reach their personal goal if that is necessary. Thoughts?

2. It is true that if you tax some one 100% he will stop working as it gets him nothing. And certainly, if you tax him at 25% for $100,000 and then 90% for every dollar after that, it's likely that he'll stop working at $100,000. This is the theoretical basis against progressive taxation, and it was used successfully to lower income taxes in higher brackets. But, to the best of my knowledge, it was all voodoo, as Bush Sr. said--there was never any proof that lowering income taxes from, say, 38% to 34% would raise revenues. Do you agree that playing with the numbers in the middle ranges--especially when talking about just 3-4% increases--would have no discernible negative effect that could be traced back to the increase, and may in fact have a positive effect?

Or would you perhaps hold that such results are unknowable simply because the economic engine is far too complex with far too many variables that it would be impossible to track the effects of one element?

OpenMindedRepublican April 26, 2009 at 1:41 PM  

I would say that I do not think that raising taxes will make people work harder in any measureable sense. Other than the temper tantrums some people are pitching, I cannot see 3-4% having any real effect at all.

As far as effect on revenues, the Laffer curve was misused horribly. The results of the Clinton vs Bush tax rates demonstrates this pretty clearly.

I think in a simplistic way the Laffer curve works, but it's utility is questionable if you don't know where the peak is. And I would say there are two major feedback effects that will distort the 'curve' effect.

The first is that cost of living is a function of disposable income, so reducing disposable income will not (within ranges we are discussing) have a drastic effect on people. Luxuries would get more expensive. I think this is probably why Europeans have less 'stuff' than we do.

The second is less deterministic, but more important. What is people's perception of how well their tax money is being put to use? A society with a high degree of belief that their tax money is being used productively would willingly pay very high taxes without complaint. A society that feels it's money is being wasted will look for ways to avoid paying.

Luis April 26, 2009 at 11:31 PM  

I would say that I do not think that raising taxes will make people work harder in any measureable sense.My thinking is that many people have defined goals; they want to reach X number of dollars in their account or some other kind of milestone or pay for a specific thing (e.g., a mortgage or other debt). Raising taxes means they either work hard or longer--but in any sense, more--in order to reach that goal. Of course, other factors can have the same effect, but I would posit that raising taxes will create a certain amount of additional labor to make these goals more reachable.

I think in a simplistic way the Laffer curve works, but it's utility is questionable if you don't know where the peak is. And I would say there are two major feedback effects that will distort the 'curve' effect. If anything, I would think that is an understatement, but I would agree in basic terms. Have you heard of Martin Gardner's "Neo-Laffer curve"? (See illustration here.) There are so many variables (ranging from tax shelters, loopholes, or other dodges, to any number of personal events effecting behavior) that people behave differently, both positively and negatively, so as to make a hash of Laffer's curve. The variables create noise that is only overcome at the extreme ends of the curve.

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