Email Debate: What's Fair?

With the recent debate over the Buffett Rule and talk of economic fairness filtering into the presidential campaign, Matt and Stephen decided to get to the bottom of what we mean when we say "fair share" - and how that should be reflected in tax policy.  Let's see what happens when the emails exchanged by two people stop being polite... and start getting real.

Stephen: Matt, much is spoken about paying one's "fair share". But what does that even mean? Can you give me a principle that we could gauge future taxes on?

Matt: I actually think that "fair share" alone is a terrible political line because it sounds like something my kindergarten teacher would have said and it doesn't do anything to connect the idea of fairness to economic growth.  That being said, to me, fairness is the idea that we have the biggest economy in the world, and should ensure that everyone in the country at least has the opportunity to share in its riches.  Not a guarantee, but at least the opportunity.  We should build the best tax and government structure we can to ensure that - therefore, if you make a lot of money, you should be taxed at a higher rate in order to help pay for that structure and ensure broader opportunity for others living in the same country that nurtured your success.  

Stephen: This response does a great deal to use nice concepts and ideas. But from that I've only gained that you want a tax structure that allows everyone to participate in acquiring riches. Let's hold off on that idea for just a moment, but I'd like to get back to it later. Now, can you please articulate what a "fair share" tax systems would look like? How do we know if we achieved it? Unless it just based on ensuring broad participation in economic growth.

Matt: Something tells me that this will conclude with you arguing that the only "fair" outcome would be for everyone to pay a flat tax (i.e. 20% of your income regardless of what you make).  This is a compelling argument, but only on a superficial level.  We need to pay for a government that responds to the needs of its people, and it is our responsibility to ensure that everyone has as close to an equal chance as possible at succeeding in life.  Taxing everyone at 20%, or 30%, or whatever it is would not yield anywhere near enough revenue to pay for this.  Thus if you have more money, you should pay more.  Not an exorbitant amount, but more.  Utilitarianism 101 - greatest good for the greatest number.

Stephen: Not actually where I was going but it could easily have lent itself to that. So are you saying that government should create a budget, then decide how much income it needs then figure out taxation? (even under this system, we don't actually have a "fair share" principle yet). If this is what you want, I've got several reasons why that's ridiculous. If we just want an equal chance to succeed, something tells me your notion of what is necessary for success and (probably the outcome of this challenge) are quite different from mine. Also, just an FYI 20% of $100k is 100% more than 20% of $50k and 5x 20% of $20k. As for evoked utilitarianism, that's dangerous ground for you. Your version is just one of many and even yours could have far more sinister implications...

Matt: My point is that "fair share" is inherently subjective, which is why we have a democracy.  Your idea of fairness is different from mine, so we put it to the voters and have them decide.  Regardless of what happens, we continue to argue about it for the next four years and hope that some actual legislating gets done in the process.  I don't know how we come to a universal, over-arching fair share principle, but I do know that our constitution is designed so that we can debate it peacefully and have our justly elected representatives settle it with our input using the mechanisms at their, and our, disposal.

Stephen: Absolutely. So what is yours?  If we have this idea out in the open we won't just argue past each other on tax issues in the future because we'll know what the principal is. Otherwise we'll just be invoking some meaningless phrase to cover our position.  

Matt: I think I've put my view out there, but I'll condense it for the sake of simplicity: we live, in theory at least, in a meritocracy, so we should have a government that does its best to ensure and promote opportunity for the greatest number of its citizens.  Government itself is not always the solution, but there are some areas where it is indispensable (investment in areas where the free market comes up short, necessary regulation, justifiable direct benefits, etc.).  In order to pay for the society we want, we should tax people at a level commensurate with what they can afford to pay.  

Stephen: Matt, like so many liberal ideals before this one you invoked something nice we can all get behind (meritocracy), failed to illustrate a clear principle to explain what one's fair share was (apparently this is too hard. In your vision it seems to be what ever you need to extract from the tiniest fraction of society that you believe can bear any difficulty because they are well paid). So I'll raise my own principal: a fair share should be just like if we went out to dinner and split the check. If I ordered 50% of the food, I'd pay 50% or the bill. Similarly, if a tax bracket generated x% of overall income, they should be responsible for that % of government income (taxes). That seems fair to me. That way we all are putting up our portion of the bill and not unfairly burdening one group. If not, Matt will you pick up 75% of the next dinner bill we split? As for market efficiency and meritocracy, we'll get to them later.

Matt: I'm not sure if this illustrates a partisan ideological divide between us or maybe just more of a divide in political temperament, but to me the idea of generating one, all-encompassing fairness principle is problematic in and of itself.  How will you make policy based on the needs and changing demands of a given situation if your notion of tax fairness is static?  It's a variation of why the Republican Party is so intransigent right now - 95% of its congressional delegation is beholden to a special interest pledge to never raise taxes, at all, for any reason, no matter the situation.  I think I've laid out my principle of what should be fair in terms in taxation, and it's intentionally somewhat vague because a government's first obligation should be in responding to the needs of its people.  We should figure out which functions gov't should and should not serve, which people do and don't need help, and then figure out an appropriate amount for everyone to contribute based on their ability to pay.  Under this scenario, everyone pays some, and if you're doing better, you pay more, because a) you have benefited from this structure yourself and b) a more economically prosperous society is ultimately better for everyone. 

Stephen: LOL Matt, really? The idea of creating an all-encompassing fairness principle is problematic? This entire debate is based on your desire to raise taxes on the wealthy to create a welfare system to make it fair for the poor (and this seems to be an uncompromising position for you). The issue I'm bringing up is how much can we burden one group in order to help another (which you believe without any compromise ought to be helped). If we wanted to talk about rigidity in beliefs, that seems pretty rock solid. I'm advocating that we create a standard of how much one must pay for this systems that has somehow benefited them so much more than others (remember our benefits debate, yea you refused to define benefits there too). Furthermore, I'm yet to create any position in this argument on revenue generation (i.e. total tax income for the government) - that's a whole different debate. What I am advocating here is that tax income come from each bracket in an equal fashion to how much wealth said bracket generated. This seems incredibly fair to me, under any circumstance. Basically, what I'm advocating is if the government decides it wants to generate $100B, and the top 1% generated 25% of all the income, then they should contribute 25B; if the bottom 50% only generated 1%, then I would only expect them to provide $1B in taxes. Now we can have another debate about how much the government should need and why, but this idea of proportional taxes to wealth seems reasonable. 

Matt: Paying proportionately to one's wealth... Stephen, did I just hear you argue for a progressive tax? As for rigidity, I'm rigid about the desired outcome but certainly not the means. That's my point. Since our need for government involvement will vary, I don't think we should box ourselves in, although I do find your fairness principle to be intriguing. The real daylight between us on this issue seems to be the revenue question though. If your principle would generate similar levels of revenue to what we currently generate, I could support it. If not, I couldn't.

Stephen: Matt, I'm not opposed to a progressive tax since there are terribly regressive taxes out there (cigarettes, lottery). I want every member to pay his or her share to achieve the desired revenue outcome. We can figure out how much revenue is needed later on. The issue would then be on revenue that the brackets would be adjusted to meet the desired revenue. For example if currently the 1% earn 30% and pay just 25% I would be advocating a tax increase while if the bottom 50% earned just 20% but were paying 30% I'd want to re-balance that as well. 

Matt: Hm.  Did we just agree on something?  But here's another concern I might have with your principle - since $1 million is over three times as much money as $300K, why are these people in the same tax bracket?  I would argue that a millionaire should be paying significantly more than someone who makes low six figures... yet these folks each pay 35% in income taxes, and with the national cutoff for the top 1% at about 300K, they still pay the same amount under your scheme.  Create more tax brackets and the millionaire's rate sinks even lower, because there's less total income in that tax pool.  Under my broad definition of fairness, more tax brackets would help to ensure that everyone is paying an appropriate share of their income.  Under your more specific one, this might be a bit more difficult.  Just a thought.

Stephen: We might have agreed here. I have no opposition in theory to pulling $300k earners out. In fact it may turn out that $1.2M is the real cut off line. I don't know without really getting into the details but ideally you'd pay as close in federal taxes as are proportionate to your share of earnings (I mean if we had enough computer to break down everyone's exact share that would be ideal but probably excessive since tax brackets can really lump groups together). But yea in principle I'm not opposed to more tax brackets to create more tax fairness. 

Matt: Maybe Congress should start email debating?  Although I suppose if we were being realistic, two more emailers would have swooped in at some point to offer me a weekend of free drinks and you the secret service treatment so long as we constructed a view of "fairness" friendly to their interests.  In the meantime - I can get behind your principle in theory but I would have to run the revenue numbers to ensure that it generated a similar amount of receipts as our current system.  Now that we've solved one big problem... on to Social Security?

Stephen: Revenue would, under my system, be determined independently. So if we wanted to raise $250 (for simplicity's sake), and the total US population's income was $1000, and the top 1% were particularly dickish and earned $500, they would be responsible for $125 in the $250, and say the bottom 25% earned just $200, they would only be responsible for $50 and so on. The revenue goal is less important than the structure of generating it.

Matt: So if I'm understanding you correctly, once the government decides how much revenue it needs, each tax bracket pays proportionally to the amount of income their bracket generates.  This would be necessary for me to endorse the proposal, since I think we should set taxes based on expenditures, with the caveat that the latter be determined by a thorough and rigorous review of what we do and don't need.  Let's run the numbers under our current scenario - we have a $3.8 trillion budget, and a $14.6 trillion GDP.  The top 10% of income earners (those earning above about $114K) bring home 45% of that $14.6 trillion.  So would that top 10% be responsible for $1.7 trillion (45 percent of 3.8t) in taxes, collectively?  If so, we might still need to do some adjusting, so that the person making $200K doesn't get boned while the person making $200 mil gets off easy.  

Stephen: Absolutely OK with more detailed tax brackets. Like I said, ideally the IRS would be able to say you, Matt earned .0002% of total US income and therefore owe .0002% of revenue and that's x. Now that's not totally practical since it would require too much (although no reason some decent excel work and databasing couldn't actually do it), but I'll settle for detailed tax brackets. Also, I'd cut out all tax deductions except for those for education loans and charity (I'd actually increase the charitable giving deduction since I believe charities are more efficient that government - but these things are all for another debate).

Matt: I'm a big fan of the charitable giving deduction and it made me a bit uncomfortable (several congressional Dems took the same position) when Obama proposed getting rid of it in his first budget.  Ultimately we need to attack problems that require attention from as many angles as possible, and charities are bound to have a unique and different approach, in many cases at least, than gov't.  We should encourage them as much as possible, and to Obama's credit, he has expanded on the faith-based initiatives program that was a Bush legacy.  As for deductions, I do share your view that we have way too many but another one I'd consider keeping is for mortgages, a lot of people could get burned by eliminating that one.

Stephen: Yea I don't think we can just pull out the rug from under people who expect mortgage deductions, but I would like to phase it out. Personally, I think it's allowed too many people to get involved with a home they couldn't really afford because of some awful tax justification that just doesn't make a lot of sense. So that'd have to be removed from like all mortgages after 2013. 

Matt: Agreeing is boring.

Stephen: Let's close this out then.  Want a closing statement?

Matt: Stephen, I remain wary of firm pledges but this principle is the closest I have come to agreeing with you, especially if we put revenue first.  Email debates will save the Republic!

Stephen: I'm still not sure how you can be even vary of a principle you agree makes sense, if not for some competing principle that the rich should be made to cover the costs to "make it fair for low income individuals". Which would seem contradictory since you do accept that the principle seems fair.

Have an opinion on fairness?  Think our tentative accord works in theory but not practice?  Tell us all about it in the comments section...