Attachment - Tax Fairness

To start, we must distinguish between fairness and justice. Fairness is having your say. Justice is getting or paying what is due to or for you.

Lower income taxpayers depend on the fairness of the system, rather than individual fairness. It is costly to make one’s case to the IRS when disputes arise. To an extent, they must pay and obey. As long as they can provide information when it is lacking or work out payment arrangements when they do not have funds available the system is fair. Generally, they do, although currently the unopened mail resulting from the pandemic stretches that fairness, as Chairman Neal noted in August (2020).

Higher income taxpayers have more room to argue with the IRS, as well as more to argue about. Sometimes their attempts to hide income are too clever by half. If they succeed in beating the system, the result for all of us is both less fair and unjust. A wealth tax, because the elements are both debatable and gameable, compound the problems inherent in current capital gains taxation.

The tax rate on capital gains is seen as unfair because it is lower than the rate for labor. This is technically true, however it is only the richest taxpayers who face a marginal rate problem. For most households, the marginal rate for wages is less than that for capital gains. Higher income workers are, as the saying goes, crying all the way to the bank.

The injustice in the system is baked in by the maldistribution of income in the economy at large. Prior to the Kennedy-Johnson tax cuts, high marginal rates prevented the extraction of economic rent from workers. Any labor cost savings went to the government, so gains in the economy were shared by all. In 1981, the problem got worse and in 1986, higher marginal rates were traded for reduced tax benefits, with corporations taking the hit. The class warfare which began in 1965 was over twenty years later. Labor lost, both organized and otherwise.

Recently, tax rates for corporations and pass-through income were reduced, generally, to capital gains and capital income levels. This is only fair and may or may not be just. The field of battle has narrowed between the parties. The current marginal and capital rates are seeking a center point, as much of the recent tax law was based on negotiations, even as arguments flared publicly. Of course, that would never happen in Washington. Never, ever.

Compromise on rates makes compromise on form possible. If the Pease and Affordable Care Act provisions are repealed, a rate of 26% is a good stopping point for pass-through, corporate, capital gains and capital income. A single rate also makes conversion from self-reporting to automatic collection through an asset value added tax levied at point of sale or distribution possible. This would be both just and fair, although absolute fairness is absolute unfairness, because there would be little room to argue about what is due and when. 

Ending the machinery of self-reporting also puts an end to the Quixotic campaign to enact a wealth tax. Out of fairness, if the revenue committees do give its proponents and opportunity to testify, it must hear from me as well. It would only be fair.