What does tax fairness mean?

Published October 13, 2017

By John Hood

by John Hood, syndicated columnist and NC SPIN panelist, October 11, 2017.

Back when I used to commission regular surveys of North Carolina voters, one of my favorite questions had to do with tax fairness.

The wording varied over time, but here’s essentially what we asked. If someone earns twice as much as income as you do, what do you think is the fairest system: that person ought to pay less than twice as much in taxes as you do, that person ought to pay about twice as much as you do, or that person ought to pay more than twice as much in taxes as you do?

Almost no one offered the first response. Some people agreed with the third response. But most people agreed with the second approach, in which one’s tax burden rises in proportion to one’s income.

In policy speak, these alternatives are called regressive taxation, proportional taxation, and progressive taxation. Politicians and analysts debate them all the time, but the terms don’t always adequately serve to convey the underlying meaning or assumptions. And if you use these terms in survey questions, you aren’t likely to get useful insights.

“Progressive” sounds good and “regressive” bad, for example, because we certainly all want to go forward and not backward. But in this context, the terms really refer to horizontal lines on a distribution chart. As you go left to right in household income, does the share of income paid in taxes progress upward or regress downward?

The reason people tend to respond favorably to proportionality as a standard, I believe, is that it comports with their intuitions and experience. The religiously minded are familiar with the concept of tithing. Those who have more are expected to give more. But the tithe — the “tenth” of one’s income — is a proportion.

In the voluntary context of a religious institution, to be sure, it’s a guide rather than a mandatory floor or ceiling. Government is different. You “contribute” — or else. Unless you are an anarchist, you believe that people ought to be compelled to help pay for government services. You probably also believe that the taxes people pay ought to be levied “fairly,” even if you haven’t explicitly defined the term for yourself.

Tax fairness exists in two directions: horizontal and vertical. If you and I have the same incomes but pay significantly different tax bills, that’s a question of horizontal fairness. I happen to think some such differences are entirely fair and necessary, because they correct for what would otherwise be biases in the tax code over time.

For instance, if government taxes money that is invested and then also tax the return on that investment, it biases the tax code. The ultimate return on that investment is taxed twice — once by reducing the original principal available, and then again by reducing the interest, dividend, or capital gain on it. One or the other ought to be taxed, but not both. That’s the rule for individual retirement accounts. It’s a good one.

The other form of fairness is vertical. What shares of income should people at different incomes pay in taxes? In this case, I’m in favor of proportionality after an initial exemption of some income from tax — the policy governments already follow in offering standard deductions as well as personal exemptions or credits (which adjust for the size of the household). In effect, then, I think the overall tax system ought to be modestly progressive.

What system do we actually have? I’ll use statistics from left-of-center think tanks, just to be fair. Among taxpaying households, the bottom 20 percent pays about 15 percent of their income in federal, state, and local taxes. The next quintile pays about 19 percent. The middle quintile pays 23 percent. The fourth quintile pays 27 percent. The highest-income quintile pays about 32 percent, with the top 1 percent of taxpayers in income paying 40 percent of that income, on average, in taxes of all kinds.

Whatever you think about this, our tax system is clearly not biased against poor- and middle-income taxpayers.

John Hood is chairman of the John Locke Foundation and appears on the talk show “NC SPIN.” You can follow him @JohnHoodNC.

https://www.carolinajournal.com/opinion-article/what-does-tax-fairness-mean/

October 13, 2017 at 6:15 pm
Susan Young says:

I've got to hand it to you, John. You can make our tax system sound fair. You even sound logical (almost). What you fail to consider is the percentages of wealth allotted to each sector. That someone with billions has to pay an "unfair" 40%! Please. Millions of people are trying to live on annual salaries of less than one tenth of just that one 40%. What do these 40 percenters need all that extra money for? Another island? Another jet? Another swimming pool?

October 14, 2017 at 11:44 am
Norm Kelly says:

Poor John. There he goes again, using facts & figures to counter libs. Libs don't care about facts & figures, they ONLY care about feelings. The average 'poor' person, or slightly below middle class, voter believes the lib lie that 'rich people' first got their money by taking advantage of 'the poor'. Second, this group of voters believe that 'the rich' don't pay as much as 'the poor'. Remember when Romney hadn't paid taxes for over a decade? The lie-telling lib who spewed this garbage had no proof, no evidence in fact, that the statement was true, yet was allowed to spew garbage because and only because of being a lib. And cuz media types that reported the drivel from the lib pol are allies of lib pols, they simply repeated the lie without doing any investigation. And how did 'the poor' that vote lib react? They believed the lie; once again proving that if the lie is repeated often enough in enough places, it will be believed. Which is what keeps libs in office.

So long as libs continue to use the lie/line 'the rich don't pay their fair share', and it gets carried without question by their media allies, lib voters will continue to believe the lie. Notice that not a single lib pol defines 'their fair share'. And not a single media ally asks that very important question because they know the answer would be '95-100% might do the trick'. It's a hard job, a major uphill battle, that John and others are fighting, but the work must go on. If only 1 voter has their eyes opened by reading such a story, then it's one more educated voter who starts to question the lies and schemes of lib pols, and one more voter that potentially moves to the 'good' side, moves to the light. It takes a long time when it's one at a time, but the job eventually gets done. Of course, those like John are also fighting big education, the establishment education, to get the truth out, which only makes their job harder.

Cudos to John for continuing to try refuting lies with facts. What a thankless job!

October 14, 2017 at 1:06 pm
Susan Young says:

And don't forget the loopholes. And the off-shore accounts. Many wealthy (non) taxpayers avoid most if not all taxes.