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A taxing question on paying taxes

We are going to be treated this year to a debate about a "fair" tax code. Good luck with that. We couldn't put 10 random citizens in a room and have them agree on what a "fair" tax code would be, much less 300 million Americans. You couldn't get 10 random economists to agree either. Fairness, like beauty, is in the eye of the beholder, and does not have a precise meaning. As one Supreme Court Justice famously said when trying to define pornography, "I can't define it, but I know it when I see it."

To the far left, the more steeply progressive the tax code, the happier they are. Part of that is simply their sense of fairness. The rest of it is wanting to stick it to the rich, that upper 1% that many of them hold in contempt and want to punish, believing that they acquired their wealth through force, fraud or inheritance. An absurdity of course, but believed by more than a few.

The far right would abolish the income tax as well as the IRS, which are also absurdities, while some others favor a flat tax, which would still result in the wealthy paying the most taxes, but not at the confiscatory levels favored by progressives.

So let's take a real example and think about the meaning of fairness: Most folks define tax fairness in terms of tax brackets. In the most recent Presidential election, it was revealed that Mitt Romney paid about $3 million in taxes in 2010 on an income of about $20 million, or about 15%. That was because capital gains were taxed at a lower rate than ordinary income.

Then if we consider that a hypothetical, well compensated executive assistant of his might have been paying about 20% of his or her $150,000 income, let's say $30,000, then it is easy to see why many see that as unfair. The assistant was in a higher tax bracket than was Romney. That argument is entirely defensible, and many adhere to it.

Now let's look at tax fairness in another way, not in terms of brackets but in terms of actual dollars. The Assistant was paying $30,000 and Romney was paying $3 million. That means that Romney was paying 100 times as much tax as his assistant. Was he receiving 100 times as much government benefit in one form or another? Should there be an upper limit on the amount of tax that any American should have to pay, just like there is already a cap on Social Security taxes?

So what is fair?

There is only one certain answer: Fairness will be determined and enforced by the party in power, which is one reason why this November's election is so important. But regardless of one's position about the matter, one thing had better be understood, and that is that changes in the tax code do not occur in isolation. We cannot just demand no tax, or a flat tax, or a steeply progressive tax, in the absence of a full understanding of the economic repercussions, to the extent that they can even be anticipated or predicted. And the problem is that they cannot all be known. Economics is not an exact science precisely because there is an unpredictable variable, which is human economic behavior. People do not always do what we expect, even if it is in their own interests.

We are going to hear a lot of debate about all of this in the coming months. We would do well to listen, not with the intent of arguing, but rather with the intent of understanding, which means putting aside our ideological filters and actually evaluating what we hear objectively. I think we are going to need good luck with that one too.

Filko lives in Williamsburg and has taught economics and political science.

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