Taxing Issues

Mar 8, 2010 • Thinking Economically • 120 Views    No Comments

How much should government spread the wealth?  In a recent speech, Harvard economics professor Gregory Mankiw gives an answer by focusing on two issues.

The first issue involves the facts:  Beginning with a Warren Buffett story, Dr. Mankiw then shares some recent data.  Although Warren Buffett pays a 17.7 percent tax rate while his assistant’s 30 percent rate exceeds his own, Dr. Mankiw challenges Mr. Buffett’s conclusion that our system is insufficiently progressive.  As support, he cites the following average tax rates in the United States:

The poorest quintile pays a 4.5 percent rate (average income of $15,400). The middle quintile pays a 13.9 percent rate (average income of $56,200).  The top quintile pays a 25.1 percent rate (average income of $207,200). The top one percent pays a 31.1 percent tax rate (average income of $1,259,700.)  Qualifying, Dr. Mankiw does point out that the rate for the top quintile includes 9.1 percent in corporate taxes.  As for Mr. Buffett, Dr. Mankiw wonders whether his rate is relatively low because of the dominance of capital gains income which has a 15 percent rate. 

The second issue is more philosophical:  We have to decide who should pay more by considering what we believe is fair to everyone and what we believe is best for everyone.

Indeed, millions of people will feel that it is both fair and better for society to have those with higher incomes pay a lot more than they now pay. Those who have less will get more, society will be more egalitarian, and no one will live beneath a certain standard. 

But, on the other hand, as Dr. Mankiw asks, “Is it good for all to have a few pay a lot?”  Will overall well-being diminish if we penalize the affluent?

Mankiw does say that if the affluent enjoy more services from society, perhaps they should pay in return.  If the affluent harm society in any way, perhaps they owe compensation.  But still he wonders whether it can ever be fair for people to pay over a third of their earnings in taxes.

The answers?  We won’t all agree.  But…building from accurate facts about who currently pays what, and knowledgeable opinions about why, each of us can wisely decide how much government should spread our wealth.

The Economic Life

Contemplating taxes takes us to three approaches: Progressive taxation takes a higher percent from those who have higher incomes.  Regressive taxation takes a higher percent from those with lower incomes.  Proportional taxation takes the same percent from all.  Our current income tax approach is progressive while a sales tax is regressive.

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