Wednesday, September 28, 2011

Fairness Of Taxation

FLG has been reading a lot about the capital gains tax and income inequality lately. How this is all very unfair.

Imagine that there are two people, both the same age. Person A makes $40,000 and Person B makes $73,000. Since Person B makes roughly twice as much, then the logic goes that they should pay more. But the argument is often not just more, but at a higher rate.

Moreover, let's imagine not just that Person A makes 40k and Person B makes 73k a year, but that Person B earns that not from the sweat of their brow, but they're that horrible of horribles a rentier who earns their income entirely from investments. Which is to say that one is a hardworking stiff and the other living fat off the land. In fact, Person B has almost $1 million in the bank. Then surely Person B needs to pay more.

As FLG wrote earlier, both Person A and Person B are the same age. Let's say they are 65. Person A has been working for 40 years and, even though Person A made a consistent $40k for each those 40 years, was never able to save anything. Person B, on the other hand, worked for the same number of years and made the exact same amount, but saved 20% of their income, $8000, each year. Assuming a 5% return, at the end of 40 years, that person has $966,398.19. And if we assume they draw that down over 20 years, they can withdraw $73k and some change every year.

So, insofar as fairness goes, is it fair to argue that the person who scrimped and saved over 40 years should pay more taxes than a person who spent every dime?

FLG realizes this is a highly simplistic and stylized example. He's not accounting for tax deferred retirement accounts, etc. He's just making the point that looking at wealth and income and a single point of time and saying that large discrepancies are prima facie unfair is a drastic oversimplification.

2 comments:

Anonymous said...

Colbert, he said, 'maximum feathers, minimum hissing.' Not a word about fairness. Of course, he didn't have to worry that untaxed peasants would vote themselves larger benefits.

I think you start by figuring out what the government must do, and how much it will cost. Then, you think how to extract this from the pockets of the populace with the minimum of economic damage. Only then do you start thinking about 'fair'.

dave.s.

Galatea said...

Saying that the difference between the person who saved and the person who spent is personal willpower, or better budgeting, is the real drastic oversimplification.

Shockingly enough some of us have noticed that only white straight men ever make it.

 
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