Method 1: Portion of income left after taxes and necessities
We start by realizing that giving up necessities to pay taxes constitutes
a severe burden. Being taxed into poverty is inhumane. To be able
to afford all your necessities, but to have to give up some comforts
to pay taxes constitutes an inconvenience, but not a severe burden.
Being able to afford all your necessities and comforts, pay your
taxes, and still have money left for luxuries and investments does
not constitute a burden at all. So to estimate tax burden, we should
estimate how much necessities and comforts a person must give up
just to pay his taxes.
We start by looking at 2009 tax rates. We estimate how federal
taxes impacted citizens' abilities to pay for necessities, simple
comforts, or deep comforts. We find that only the lower classes
had to give up
||necessities just to pay taxes
and only the middle class and poor had to give up comforts to pay
taxes. High incomes (above $180 K) suffered no real burden at all.
|This suggests that a fair tax burden would be tax rates
that don't require any citizens to give up necessities or comforts.
Taxes could be assessed only on income after comforts. This change
would put all tax on incomes under roughly $60,000 to zero. In turn
it would raise taxes on incomes over roughly $120,000.
||Red line represents no tax on comforts.
Blue represents current rates. It also assumes a linear threshold
model. A nonlinear model would lower the rates below $200,000 and
raise them above $1 M.
|This method to make tax burden fair would lower taxes
on all citizen making less than $100,000, and raise taxes on all citizens
making more than about $150,000.
Method 2: Number of days needed to work for taxes and necessities
We could estimate how many work days are necessary for citizens
to pay for basic necessities including taxes. Again, we recognize
that doing without necessities, food or shelter, as a result of
taxation is a far greater burden having less to invest or spend
||When we do this, we notice that the poor have the highest
tax burden (over 200 days), and those making over $100,000 the least
(less than 67 days.)
|From this approach, we can define fair taxation
to be the same number of days until tax freedom for all citizens.
By setting tax freedom rate to 68 days we could increase federal revenues
by about 3%. This method would lower taxes for those making less than
||As above,the Tax Freedom Day method would reduce taxes
to 0% for everybody below about $50,000.
Method 3: Relative status drop caused by taxes
Another way to look at tax burden is to ask how much do taxes reduce
your relative status in society? For example, in 2009 a person with
an adjusted gross income (AGI) of $34,000 was at 58th percentile;
he earned more than 58 percent of his fellow citizens. If he paid
5% in federal taxes his take home pay became the same as the gross
of a person at the 56th percentile. We could say that taxation reduced
his status about 2 percentile points.
Here we estimate the status drop due to taxes for
citizens a various income levels.
The middle classes suffered the greatest drop in
status due to taxation.
|If we see the burden of taxes as being our drop in status,
then we would see fair taxation as meaning that all citizens would
suffer the same drop in status. A 3% tax would result in roughly 1
percentile point drop in status for citizens up to about $180,000.
But to get a 1% status drop for citizens making more than about $200,000
the tax rate would have to rise very rapidly to achieve this drop.
The tax rate would be close to 80% for million dollar incomes, and
close to 95% for $5 million dollar incomes. The result would be a
maximum after tax income of about $290,000. Even with the majority
of citizens paying a 3% tax, federal revenues would increase.
||For all citizens between $30,000 and $200,000 this approach
to tax burden fairness would reduce their taxes.
| A problem occurs at the low end also. 3%
is a high tax rate for those already impoverished. And those earning
at the 1st percentile or lower can not drop another percentile point.
It's not mathematically possible. Otherwise, the idea seems fair:
all Americans suffer the same drop in status due to taxes. But Americans
won't stand for a maximum income.
Method 4: Historical precedents for tax burden
We might trust the intuitive instincts of the past. We might look
at some time in the recent past. We might ask what tax distribution
has already been trusted to divide the burden somewhat fairly. We
might say what tax distribution affected most of us recently?
Over the last few decades tax rates charged to the lower
and middle classes followed a simple curve. We could trust
that curve to represent an intuitively fair distribution of
burden and extrapolate that curve to the higher incomes.
We can model the distribution of taxes using
either a logarithmic or linear curve. The logarithmic curve
shows a very tight fit.
||Both methods would keep taxes about the same for citizens
making less than $100,000. The linear model would result in rapidly
rising taxes about $100,000.
|The logarithmic model would actually reduce taxes for
those between about $100,000 and $1 M. But it would raise taxes on
those making more than $2 M.