On my first night of the graduate tax program at DU, our assignment was to memorize a set of percentages used in the Internal Revenue Code for a variety of credits and tax benefits.
On the second night, there was a roomful of befuddled accountants and lawyers who went hunting for categorical rules of thumb that would be easier to remember for the exam.
Finding none, the frustrated class complained that it was unfair to test our ability to memorize rather than our ability to understand principles of law. The instructor laughed and said, “The Internal Revenue Code is a political document, not an economic one.”
Tax fairness is a myth. It cannot ever be achieved because of two main factors.
The first is that all tax codes at every level are narcotics for politicians. From the “tax the rich” progressive to the “deficit hawk” conservative, the alluring high of cutting taxes for a favored constituency while punishing foes with tax increases is too tantalizing to stop them from using it.
The second factor is us, the taxpayers. In our minds, the calculus of fairness is simple, an unfair tax is one that we pay, a fair tax is one that someone else pays.
Like all myths, “tax fairness” runs headlong into some troubling facts. The progressive refrain is always that “the rich should pay their fair share,” while conservatives want to “broaden the base.”
Is that not already the case? In the tax statistics published by the IRS for tax year 2022, taxpayers with adjusted gross incomes of $500,000 or more (“the rich”) accounted for 12.5% of all income reported on tax returns. The same group paid 24.8% of all tax. Is that fair enough?
What about the “middle class?” While that term gets thrown around loosely, the truest “middle class” would be the largest group of tax filers whose incomes are between $50,000 – $75,000. They earn 18.6% of all income and they pay 13.6% of all tax. Is that fair enough?
The system is supposed to make the wealthy pay more tax than the poor and it does, but what it cannot do and what it will never do is make the higher amount of tax that a wealthy person pays hurt more than the smaller amount of tax a poorer person pays. Since that kind of outcome is impossible and economically destructive, playing games with the word “fair” is an unending political sport.
Tax law is intentionally an overly complicated puzzle. Most taxpayers see only the biggest items that make headlines and draw conclusions about what they think is fair. But if you really want to evaluate the fairness of the tax burden, you have to look more closely at the other side of the ledger, which is government spending and provisions known as “offsets.”
Offsets are spending reductions used to make the cost of a bill seem like less of a fiscal travesty.
Take, for example, one offset in the current legislation that should really be entitled the “Hate Hungry Children with Internet Access Act.” Buried in the Agriculture section, where SNAP benefits are found, there is a change in the income calculation method used to determine eligibility for aid.
The new rule states that internet connection fees cannot be included as part of the “excess shelter expense deduction.” The purpose of the excess shelter expense deduction is to reduce an applicant’s eligible income, thereby increasing benefits, so that they do not have to choose between things like housing and food.
Under the new provision, internet connection is treated as a non-essential housing expense, which will make it harder to get benefits if you also have money for internet service.
In the simplest terms, this means that children in poor households who are already on the wrong end of the digital divide and whose families struggle to have enough food will find it that much harder to keep up, catch up, and get ahead in order to improve the deficit score on the bill. Is that fair?
The offset created by this change to the SNAP calculation is such a small amount of federal spending that you would need a supercomputer to round the numbers to enough decimal places.
Real fiscal fairness can only be achieved by addressing the biggest items in the budget, without which it is impossible to ever determine what taxpayers’ “fair share” of the cost might be. Consider Social Security benefits, which is the safest bet to be the last item ever cut, especially with a huge voter bloc like aging Baby Boomers at stake.
Under the proposed law, the deficit is projected to be about $300 billion per year on average. In 2022, just over $19 billion of Social Security benefits were paid to taxpayers with incomes over $500,000, meaning people who do not need the money. Eliminating those payouts would, by itself, cut over 6% of the projected deficit.
Undoubtedly, cost-cutting in this way would infuriate those who feel entitled to their Social Security benefits. So, what if we thought about the fairness of Social Security in another way besides deficit reduction? The estimated number of Social Security recipients who live below the poverty line is over five million people. If the $19 billion in benefits were redirected to those recipients, each of them would receive over $3,000 of tax-free money each year. Lifting poor seniors out of poverty at the expense of wealthier ones would surely be more “fair,” but it would almost certainly come at a steep political cost.
There is no fiscal Ozempic that will reduce the bloated deficit and debt. It can only be accomplished with increased revenue, decreased spending and economic growth.
Figuring out how to right-size the balance between those elements to ensure the long-term economic health of the nation is a tricky enough task if were not in the hands of elected addicts on a tax code bender.
We could of course hold our elected leaders accountable for being fiscally responsible, but if we do, it could be our own tax burden that increases, not someone else’s. Who would think that’s fair?