What is a “Fair Share” in Paying Taxes, Anyway?

In 2011 Mitt Romney paid $1,935,708 in taxes and made $4,020,772 in donations to charity, presumably most of it to the Mormon Church. Did Mitt Romney pay his fair share of taxes? That depends on how one defines “fair,” which we can think of in two uses: (1) fair value for services rendered; (2) fair percentage of earned income.

Fair value for services rendered. For what amounts to roughly the same services rendered by the government that I received in 2011 (military, police, fire, roads and infrastructure, courts, and other essential services, along with future promises we both hope will be honored—Medicare, Medicaid, and Social Security), then Mitt paid almost two orders of magnitude more in taxes than I paid. And, presumably, I got everything from the government that Mitt got (except for Secret Service protection because I’m not running for President), or at least in the ballpark. So, by this definition of “fair,” it seems not unreasonable to ask: why should Mitt pay so much more than me when he doesn’t get additional police and fire protection, better roads and bridges, superior courts, and the like, than I receive for my much lower taxes? Almost no one accepts this definition of “fair,” but it’s worth thinking about as an exercise in critical thinking about how society should be structured. If Mitt and I lived on the same block why should he have to pay so much more for the same road on which we both drive? Is Mitt’s house going to get extra special fire protection from the local fire department because he paid more than I did? If we both sent our kids to the same public school, do Mitt’s kids get two orders of magnitude better education than my kids? The answer to all of these questions is obviously “no,” but why are we not asking these questions?
Fair percentage of earned income. Mitt paid about 15% of his income in taxes. I paid about double that amount. Here we can turn the above questions around and ask why Mitt should only pay half of what I’m paying in percent of income for those same roads, schools, police and fire departments, courts, and the like? I’ll admit, it irritates a little that I’m paying so much more in percentage than Mitt, but I must also confessedly note that knowing Mitt paid almost two million in taxes attenuates that irritation considerably. Two million bucks is a lot of dough to hand over to bureaucrats in hopes that they do something useful with it.

So this entire topic turns on a simple definition of what we mean by “fair,” and that, in turn, seems to turn on what our goals as a society should be: equality of opportunity or equality of outcome? Equality of opportunity would seem to favor the position that we all pay our fair share of taxes in raw numbers. Equality of outcome would push us toward the position that we all pay our fair share of taxes in percentage. Given the messiness of politics it seems a foregone conclusion that we’re never going to get close to achieving either one, but if I had my druthers I suppose I would prefer that the system be designed to insure equality of opportunity over equality of outcomes. I would prefer we try to protect people’s freedom to do what they want without restrictions because of race, creed, color, religion (or not), birthplace, disability, etc. In other words, I strongly favor strong laws against discrimination. Thus, I’m not anti-government across the board. We need government for lots of important things. But making sure that outcomes in life are roughly equal for everyone is not one of them. Steve Jobs and Bill Gates changed the world in their own way, and now Gates is investing his billions in charitable causes to insure that people around the world at least have the basics in life (water, toilets) so that they can have a shot at approaching an equality of opportunity. Gates will do more with his hundreds of billions than the government ever will ever accomplish with trillions of dollars of our tax money, most of which is wasted in inefficient allocation processes that Gates would never stand for. Look what he just did by funding a prize for a $100 toilet! Can you imagine what it would cost for a government agency to design a new toilet? Or, can you imagine what Bill Gates could accomplish with a trillion dollars?

Some people resent the rich for evolutionary and historical reasons I outline in my book The Mind of the Market:

Evolutionary egalitarianism. Humans evolved in small groups of a couple of dozen to a couple of hundred individuals in hunter-gatherer communities, in which everyone was either genetically related or knew one another intimately, most resources were shared, wealth accumulation was almost unheard of, and excessive greed and avarice was punished. Thus, we naturally respond to a free market system in which conspicuous wealth is paraded as a sign of success with envy and anger, and the expectation is that someone or something more powerful than those greedy individuals should implement corrective action.
Resentment of historical inequalities. Throughout most of the history of civilization, economic inequalities were not the result of natural differences in drive and talent between members of a society equally free to pursue their right to prosperity; instead, a handful of chiefs, kings, nobles, and priests exploited an unfair and rigged social system to their personal benefit and at the cost of impoverishing the masses. Thus, our natural response is to perceive such inequalities as ill-gotten gains and to demand controls from the top down to limit the amount of wealth accumulated by any one individual. Whenever anyone says, “they should do something about it,” the they that is invoked is inevitably the social institution with the most power: in our case, the government.

To this I add the fact still today, with all the checks and balances allegedly in place to keep the system fair, some people are still able to rig the system in ways that we regular folk cannot, and these are often rich people. Crony capitalism is a very serious problem, which is why I recommend my friend John Mackey’s forthcoming book, Conscious Capitalism, as a significantly more humane form of market capitalism that also has the virtue of financially rewarding truly moral behavior.

I know in this forum that readers turn apoplectic at even a whiff of libertarianism, which is almost always mistakenly conflated with anarchism or minarchism or anarchocapitalism, or something else that implies a dramatic curtailment of government. So let me state for the record that I fully recognize that we need a Leviathan state to protect our freedoms and insure our liberties through laws applied equally to everyone. And that includes very strong laws governing Wall Streeters, who will cheat worse than doping athletes if given the chance.

And while I’m ranting…Tyler Hamilton’s new book, The Secret Race (which I wrote about in my last blog), reveals that Lance Armstrong made positive drug tests “go away” by calling the president of the governing body of the sport (the UCI) and making donations to their drug-testing agency (WADA). This would be like Barry Bonds making a donation to Major League Baseball’s steroid-testing agency during his playing years, and them accepting the money and withdrawing any further investigation of his steroid use. That level of corruption is a microcosm of what goes on between government and the rich. The problem isn’t rich people, any more than the problem is that some athletes like Lance Armstrong are incredibly successful. It is that the system can be hacked and rigged and cheated. There is nothing wrong with Lance (or Romney) making lots of money through hard work. The problem is what the system allows them to do with that money that is unfair to those who want to compete fairly. According to Hamilton, Lance’s money bought him the best doping doctors to the exclusion of other cyclists. The rich can buy politicians in the same way. The problem is not the money, it is that “we” (Congress) allows the money to be used to buy politicians.

The solution is to fix the damn system, not get rid of gifted athletes or entrepreneurs.