Are Tax Breaks Fundamentally Unfair?


In my view, tax breaks are a function of various impulses: special interest lobbying, and the desire of politicians to do something about something by lowering the tax on it. The result is not a market economy, but an insanely complex, government-manipulated pseudo-market. And I see no way to really tackle it than a complete abandonment of all tax breaks, except for charity. Alex Brill notes the result:

When some millionaires don’t pay income taxes, it irks both the less well-off who pay hundreds or thousands of dollars in taxes annually and the millionaires who pay hundreds of thousands of dollars in income tax. Similarly, a typical taxpayer with an income between $75,000 and $100,000 should be miffed that nearly half a million others with the same income avoid income taxes completely. It is more shocking to hear of millionaires who pay no income taxes, but both situations raise legitimate questions of fairness.

The tax system we have is what one would expect of an oligarchy, not a democracy. It generates profound cynicism about government, it entrenches the rich while decimating the middle class, and it distorts market efficiency. Chart from Chris Edwards, who goes further:

All the different rates, deductions, credits and exemptions under the income tax create huge violations of the principle of equality under the law. For example, high earners typically pay a much higher share of their income in federal income taxes than do other Americans — despite President Obama's claims. IRS data show that households earning more than $1 million annually pay about 25 percent of their income in federal income taxes, on average, which is more than double the average rate paid by middle-income households.

Of course, historically the tax rate on the rich is very low, as Ezra Klein makes clear. His larger point:

[W]hen economists think about the role taxes play in a person’s decision to work, they think about two things. There’s the “substitution effect,” where higher tax rates make you work less, because you keep less of every extra dollar you earn. But there’s also the “income effect,” in which higher tax rates make you work more, because you need to earn more to be able to live how you want to live, or retire when you want to retire. The question is, which dominates?

Relatedly, Derek Thompson rounds up 11 tax charts.