The Freeloader Problem

This Daily Dish reader raises what (paradoxically) seems like an obvious point, but one that is not often discussed - that even tax paying, middle class Americans are direct benefits of redistributionist policies due to a progressive tax system. I like how he describes himself as a "taker" for benefitting from public services that he doesn't pay his "fair share"* for.

This reasoning I think is flawed from a few perspectives, but most strikingly he seems confused by the idea anyone is a beneficiary of the progressive tax system (and particularly in the form we have today).**

http://en.wikipedia.org/wiki/Fair_tax

*"Fair" in his sense I gather means ratably according to percentage of gross personal income.

**He is also confused on Socail Security. He comments "Social Security [is] one of the most successful "taker" programs in human history". Besides being an obvious hyperbole (for which I do am sure he is aware), he ignores the fact that nearly every other type of tax on income in the world today is more "taker" than FICA because it doesn't cut off at $90k.

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*"Fair" in his sense I

*"Fair" in his sense I gather means ratably according to percentage of gross personal income.

I don't think so. The natural interpretation of "fair share" is the cost of the government services you consume, which, for the very wealthy, is much less than they would pay under a flat income tax.

He comments "Social Security [is] one of the most successful "taker" programs in human history".

By "most successful," I think he means that it's very large and very popular, and that he personally likes it.

The natural interpretation

The natural interpretation of "fair share" is the cost of the government services you consume

Agreed. However, I sense that most people do not see things so rationally, and would call any sort of "regressive" tax system inherently unfair, which is why I bothered to point it out.

By "most successful," I think he means that it's very large and very popular, and that he personally likes it.

Maybe. I still interpret this comment to say that Social Security is more successful than most at redistributing wealth. I do not agree. One might point to medicaid and welfare in the US, and numerous socialist programs in europe and elsewhere that directly transfer wealth, and unlike social security, tax rich people at a higher rate and are not capped.

Of course I don't actually know what this person is thinking and it really doesn't matter. My point is that he thinks he is benefitting from a progressive tax system (however defined, although I interpreted his comment to mean an income tax where the rich are taxed at a higher rate), and I do not think he is. Although a progressive income tax is a particularly inefficient and wasteful way to fund a government, all progressive taxes disincentivize the creation of wealth, which is ultimately harmful to everyone. It is even possible that without the incredible deadweight loss caused by both progressive taxes and their collection that this person would not have lost his job or he would be able to find another job more quickly. I would also argue that a progressive tax system does not necessarily result in higher government revenue (even leaving aside any possibility that any particular government is on the wrong side of the laffer curve).

Compare a MS Billionaire

Compare a MS Billionaire with a MS employee. The employee pays about 8% payroll tax plus a 35% marginal tax rate on his $60,000 income. If he is careful with his money he can save maybe $10,000 a year.

The billionaire doesn't work for wages and his interest income is pocket change so he has no income and pays no income tax or payroll tax. The value of his stock increases on an average of 5% a year, say $50 billion dollars a year. He pays no taxes at all unless he sells shares for his spending money. Say he sells $50 million of shares a year. He bought them way back when so the entire $50 million is taxable. He pays 15% capital gains which is $7.5 million. If he is careful with his money he can save maybe $42.5 million a year. The middle class guy is ripping off the billionaire?

Do you think capital gains

Do you think capital gains taxes should be the same as income taxes? Would that make things fair? What about the private equity / hedge fund loophole? Should we close it?

Will Bama succeed in effective regulation of those who "take advantage of the system"?