The “Fair Share” Canard

Tonight, I’ll be on WITF’s Smart Talk to discuss why jobs aren’t coming back quicker and if we should allow tax rates to increase (i.e., allow the Bush tax reductions to expire on January 1, 2011).

Given that one of the other guests frequently calls for higher taxes on the “rich,” I’m sure we’ll hear a lot about them needing to pay their “fair share.”  So I thought this math exercise and some facts on who is paying what share of taxes already would be appropriate to share tonight.

Economist John Lott’s provides an excellent math exercise.  Here’s my summary.

If someone makes five times as much income as someone else, should they pay five times more in taxes?  While it is doubtful that the higher income earners get five times the benefits from government, let’s just say that it’s “fair” for them to pay five times more in taxes.  But that’s not even close to how much higher income earners pay.

Take two married couples with two children and no other deductions.  One family makes $60,000 per year and the other makes five times more, $300,000.  The $60,000 a year family would face a federal income tax bill next year (if the rates remain unchanged) of $1,466 and the $300,000 a year family would face a tax bill of $71,134. That’s not five times more in taxes for their five times greater income, it is nearly 50 times more in taxes!

The reality is that the rich already pay more than their “fair share” under the current tax rates.  According to IRS data from 2007 (chart here from The Heritage Foundation), the top 1% of income earners paid 40% of all federal income taxes and the top 10% paid 71% of the total, while the bottom 50% paid only 3%.  More than one-third of U.S. earners paid no federal income tax at all.

Can’t wait to talk about how “fair” things are already tonight!