Most people who call for higher taxes from wealthier individuals do so because they feel that they are being treated unfairly by our economic system. Taxation, however, is not as straightforward as such a statement implies. Taxes consist of different types of taxes, which have distinctly different effects on individuals.
In order to fully appreciate the discussion regarding the fairness of taxes, one must evaluate how the current tax system functions from multiple perspectives. Once you do so, the discussion will become much clearer.
The most recognizable tax for most people is the sales tax. We all have experienced it on our regular basis by paying a higher price at the register than the stated price on the item. For example, if you purchase a pair of sneakers that cost $100 and the sales tax in your state/city is 6%, your final bill will be $106 after adding sales tax.
The reason that sales tax is so controversial is because sales taxes do not consider the income of the taxpayer. All taxpayers pay the same rate regardless of how much they make, so regardless of whether someone makes $20,000 or $20 million, they would pay the same rate of sales tax on the shoes that they bought.
The tax’s impact is worse for lower-income households than higher-income ones. A six-dollar tax doesn’t register as a payment to a wealthy person, however it could be more noticeable for someone who receives minimum wage and works part time.
The tax becomes even more oppressive for those who depend on everyday items. Many everyday goods fall into the unknown grey area of luxury versus necessity. Basic items like food, cleaning products, school supplies and technology, can have a very large tax burden attached to them; however it is those who can least afford the items being taxed who end up paying the greatest amount of tax.
Because each state and local government establishes their own sales tax system but does not work together to create uniformity, there are states that charge high sales taxes, states that charge low sales taxes and states that do not charge a sales tax.
One of the common arguments for creating a fairer sales tax system is to exempt or exclude essential goods from being taxed.
Income taxes are not paid uniformly to the government; income tax is paid progressively depending on how much an individual earns – or what level they fall into within the progressive tax structure. The higher the amount earned from wages, interest, dividends etc., the greater the rate of tax paid for an “earnings band” of each tax bracket will increase.
For example, a person with a low to middle income might only be taxed at 10 to 12 percent for part of their wages. As an individual’s income increases, more of their income will fall into the higher tax brackets when they exceed certain amounts.
What many people do not understand about the brackets is that just because they moved into a higher tax bracket, that does not mean that entire income is taxed at the higher rate. The only dollars that are taxed at the higher rate are those dollars that fall into the higher tax bracket.
As a result of the way the tax system is set up, taxpayers who make a higher income pay a greater percentage of their total income than those who earn lower amounts due to these higher income individuals generally having the ability to have more money available to pay taxes with.
Critics of this system, however, believe that having a very high marginal tax rate could result in a lack of incentive to work or invest. This debate about where the maximum tax rate should be will likely be continuing for many years.
Policy makers have proposed many additional tax brackets to include only those earning over one million dollars a year. Unlike an income tax, which taxes you on income earned, a wealth tax taxes you on wealth accumulated.
To determine net worth, you would need to add up all of your assets (such as cash, investments, real estate, etc.) and then subtract your liabilities (debts). The total left over is your net worth. When a person’s net worth exceeds a certain amount they may become subject to taxation on the amount of their net worth that exceeds that limit.
Political proposals have suggested starting the net worth threshold as high as fifty million ($50,000,000). Under some versions of these proposed taxes, wealth in excess of fifty million ($50,000,000) may be taxed at approximately two percent (2%) and will likely have a higher tax rate for billionaires.
For an individual with tens of millions ($10,000,000+) of dollars, the annual payment for these proposed taxes would be minimal compared to their total wealth.
Proponents of this wealth tax believe it can help reduce the extreme personal wealth differences seen in todays society by making those individuals with large personal fortunes pay a greater share of the cost of government services and infrastructure.
Opponents of this wealth tax believe implementation of such a tax would be very difficult due to issues of enforcing the tax, disagreements over the valuation of various assets, and attempts by high net worth individuals (those who qualify for taxation due to wealth) to avoid paying their taxes through the transfer of their assets or themselves to other jurisdictions.
In summary, while it sounds simple enough in theory to implement a wealth tax on high net worth individuals, in practice the implementation would be extremely complicated.
What does the term tax the rich mean to you?
Most people use it to express their views on the broader issues of fairness and balance within our tax system. For example, do you think that we should be taxing basic necessities less than we currently do or that we should be doing higher taxes for people with higher incomes? Or some wealthy people should have to pay a wealth tax?
There are many answers to these questions but the fact remains that our tax system is not made up of one clear rule. Instead, it consists of a number of disparate policies that affect expenditures, income, and wealth in a variety of ways.
The first step in determining if our current tax system is fair or whether it needs to change is to understand the various pieces that comprise it.
