Monday, January 26, 2004

Rights & Reason: Taxing Fairness

ABC's John Stossel debunks the core economic policy of the entire Democratic presidential field:
According to presidential candidate Al Sharpton, "The top one percent in this country pays very much less than ten percent, very much less than five percent."

Sharpton said he thinks the wealthy should pay "somewhere around 15 percent."

But that's so silly because — and I bet most of you don't know this — the IRS says the richest 1 percent of taxpayers already pay 34 percent of all income taxes. Twice what Sharpton wanted them to pay.

Still you may feel the rich should pay even more. It's a tempting thought, since they have so much.

But let's remember the facts: the top 1 percent of Americans — those who earn more than about $300,000 a year — pay 34 percent, more than a third of all income taxes, and the top 5 percent, those making over $125,000, pay more than half.
The purpose of taxation is to finance government operations. But the purpose of the "progressive" income tax is to forcibly redistribute wealth from those who earn it to those who demand it. It's a remarkably simple principle that most politicians are incapable of acknowledging.

But ignoring reality has consequences. When politicians raise taxes on the rich and pass other laws designed to prevent wealth creation—i.e. regulation—the result is massive budget instability. The California budget crisis that swallowed former Gov. Gray Davis was due to this "soak the rich" mentality, as Sacramento Bee columnist Daniel Weintraub explains:
California's skewed income distribution, combined with progressive tax rates, means that the people at the very top of the income heap pay a very high percentage of the personal income tax collected in this state.

Their extraordinary, onetime income surge at the end of the last century provided most of the new tax revenue that legislators and former Gov. Gray Davis used to raise teacher salaries, increase welfare benefits and expand eligibility to state-provided health care. But the decline that followed also accounted for most of the revenue drop that contributed to the state's fiscal crisis. And as of the most recent tax year, they hadn't hit bottom yet.

The million-dollar earners peaked in 2000, when 44,000 of them -- about enough to fill your average baseball stadium -- reported incomes totaling $172 billion and paid more than $15 billion in taxes. The tax take from that relative handful of returns accounted for more than one-third of all income tax paid in the state.

The next year, the number of returns reporting incomes that high slumped to 29,000. Their combined income also declined, by nearly half, to $95 billion. And here was the killer: Their tax liability dropped from $15 billion to just under $8 billion.
Any wealth redistribution scheme will ultimately collapse under its own weight: Social security will fail because eventually the present workforce won't earn enough to support the growing beneficiary population; Medicare will fail when the government cuts reimbursements to the point where doctors stop participating; government schools will crack under pressure from private competitors and home educators. The only defense mechanism the government has is to raise taxes and prevent competition. But these alternatives only prolong the inevitable.

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