Paying our “fair share” of taxes

Let me begin by saying that this is not a political post about how much money anyone should be paying.  I am assuming that every individual or corporation will pay all of the taxes that s/he/it is required by law to pay, but also no more than is required.  Rather, the purpose of this article is to remind us that government tries to achieve a number of objectives – many of them pass through the taxation process, but sometimes through other mechanisms.  One of the simplest illustrations is home ownership.  Government wants to encourage home ownership.  One way this objective is fostered is by allowing taxpayers to deduct from their taxable income any amount paid in interest on their home mortgage.  Consequently, two individuals, otherwise alike in every financial way, will pay two different amounts in tax if one is a homeowner and the other is a renter.  The homeowner, paying less tax, is still paying her “fair share” because she is accomplishing a governmental objective. 

Another illustration that shines a light on the “fair share” of tax from a different perspective is municipal bond interest.  Let’s assume two retirees, one investing all of his assets in certificates of deposit (CDs) and another investing all of hers in municipal bonds.  Setting aside possible complications such as the Alternative Minimum Tax (AMT), the latter retiree will pay no federal income tax.   However, the federal government wants to encourage new bridges, roads, and so forth in municipalities.  Municipal bond holders typically receive a lower rate of return than they would on comparably-graded corporate bonds.  In this case, municipal bond holders are paying an implicit tax in the form of receiving a lower rate on their investment.  Again, such bondholders are achieving governmental objectives directly, not in this case through the taxation process.  This retiree, paying no federal income tax, is paying her fair share even though it is $0.  Through the tax code, government also fosters the objectives of charitable organizations.  Taxpayers may be able to reduce their federal tax liability to $0 by achieving governmental objectives directly through charitable contributions.

I am not as knowledgeable about corporate taxes.  Having said that, when we hear that a major corporation such as General Electric does not pay federal income tax one year, we can be fairly certain that GE is not avoiding taxes illegally.  Corporations have far more “direct” ways that they can achieve governmental objectives that reduce tax liability.  The government encourages corporations, through incentives in the tax code to: invest in new equipment, hire workers, clean the environment, train workers, give money to charities, and so forth. 

So, if your political inclinations advise you that individuals or corporations are not paying their “fair share,” you should work to change the tax code.

P.S.  It was reported widely that Warren Buffett said he is in a lower marginal tax bracket than his secretary.  What I never saw reported in the media is that this is only the case because he is pulling “a fast one” of sorts.  It is entirely legal, but Buffett is paying himself only a $100,000 salary to run a multi-billion dollar conglomerate.  He is choosing to receive his compensation through capital gains, which are taxed at a lower rate.  If the company he controls set his salary at $5 million, which would be a more typical rate, his marginal tax rate would be much higher than hers.  Oh, yes.  His secretary is not in the typical pay range either.  For his public statements to be accurate, she makes at least $200,000/year.  http://www.forbes.com/sites/paulroderickgregory/2012/01/25/warren-buffetts-secretary-likely-makes-between-200000-and-500000year/  I am surprised that there isn’t more outrage that Buffett is dividing his compensation this way from those who seem to see people not paying their “fair share” in so many other circumstances. 

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One thought on “Paying our “fair share” of taxes

  1. Suffice it to say that there is a reason why, when one testifies in court, one has to swear to tell the “truth,” the “whole truth” and “nothing but the truth.” Those are 3 different things. Yes, it is true that Mitt Romney and GE and every other rich person are paying the legal minimum that they owe in taxes. They are not doing anything illegal. And yes, it is true, that there is nothing wrong with profits, and no one, including me, should have to pay a dime more in taxes than required. It is also true that the tax code is used (too often) as a means of achieving social objectives, such as home ownership, and that is not necessarily bad. However — and this is a BIG however — the big corporations and the rich people have lobbyists and friends who manipulate Congress to pass those provisions of the tax code.

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