The national debt is about $14.5 trillion, and each person’s share is about $45,000. If someone proposed taxing each individual $45,000 to pay off the debt, nobody would think this a fair proposal. We expect those who have more to also pay more taxes. But in many other areas, everyone has to pay the same amount. The equal dollar in the legal system creates numerous injustices.
Finland fines people for speeding based on their income, so very rich people can pay over $100,000 for a single speeding incident. Some are worried that other EU nations will refuse to enforce Finnish fines, breaking the European Union. The idea is controversial and is unlikely to be applied here in the U.S., but it deserves consideration. If we cannot make fines fair based on income, perhaps we can base them on the price or class of car.
Even the tax system is not as fair as many believe.
Social security tax takes in 15.3 percent of a self-employed person’s income (employers pay about 60 percent of that for those who work for a company). The rich pay less of this tax, and the injustice is obvious to many. One newspaper letter writer recently said, “Because no Social Security tax is paid on earnings above $106,800, the highest earners pay a smaller portion of their wages for Social Security than most workers. This is just the opposite of our progressive income tax system.”
If everybody paid the tax on all their income, the tax could be lowered substantially. Many say that the limit ensures that nobody pays in more than they get out, but in fact nobody’s contributions pay for their own future payouts. Instead, current contributions cover current payouts. Most who are now receiving social security did not pay enough to earn their payouts, and that’s the way it should be. Inflation ensures that someone who earned a dollar a day eighty years ago gets enough money from social security today to avoid starvation . Their payouts are according to average needs, not according to their contributions.
Those slightly richer are hit by the Alternative Minimum Tax (AMT), which maxes out at 28 percent. As inflation hits and the numbers remain unchanged, the AMT is increasingly applying to the affluent middle class while failing to touch any billionaire. Meanwhile, the billionaires are unaffected because most are already paying more tax than 28 percent. Your tax bracket is the highest rate at which any of your income is taxed, as explained on this nifty web page. Depending on filing status, you get an actual tax rate of 28 percent at between $300,000 and $400,000 in income. So if you have a $1 million windfall, it’s better to take it all at once, paying the AMT in one year instead of two or three.
A single, self-employed person making $100,000 would pay $21,617 in federal taxes plus $15,300 in social security taxes for a total of $36,917, or 36.9 percent.
A single, self-employed person earning $1 billion would pay 349,977,314 plus (15.3 percent of $106,800 = $16,340) = $349,993,654 or 34.5 percent.
I don’t have all of the numbers, but it is possible for someone caught at the lower end of the alternative minimum tax to pay an actual tax rate of 38 percent or higher, after social security and medicaire taxes.
If you, like Warren Buffett, are a billionaire who earns most of your income from investments, you’ll pay much less. Buffett’s tax rate last year was 17.4 percent.
Losing your home
If you are a poor person, the legal system is less likely to defend your right to stay in your home. Most poor people who own their home are old. In 2005, the supreme court ruled in Kelo v. City of New London that a city could take an old person’s home for purposes of economic development. After all, the old person is no longer creating jobs. They’re retired.
The city did agree to pay Ms. Kelo above market rate for her home, the place she loved. The blurb for the book about her story, Little Pink House, says, “Suzette Kelo was just trying to rebuild her life when she purchased a falling down Victorian house perched on the waterfront in New London, CT. The house wasn’t particularly fancy, but with lots of hard work Suzette was able to turn it into a home that was important to her, a home that represented her new found independence. Little did she know that the City of New London, desperate to revive its flailing economy, wanted to raze her house and the others like it that sat along the waterfront in order to win a lucrative Pfizer pharmaceutical contract that would bring new business into the city. Kelo and fourteen neighbors flat out refused to sell, so the city decided to exercise its power of eminent domain to condemn their homes, launching one of the most extraordinary legal cases of our time, a case that ultimately reached the United States Supreme Court.”
One commentator drew a simple conclusion from the case: “Maybe governments just shouldn’t be allowed to steal.”
Justice Sandra Day O’Connor warned in her dissent, “Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms.”
Where should old people live? Kelo was already living in a poor area and was improving the home she lived in. But the government decided to take her home from her. Had Kelo been living in a wealthy neighborhood, the economic development argument would have been less powerful. Thus, this decision allows the taking only of poor people’s homes while protecting the homes of the rich.
But the law harms poor people in many other ways, simply by valuing their property at market rates.
As the case of Peevyhouse v. Garland Coal Company shows, poor people have less rights. Willie and Lucille Peevyhouse owned a farm containing coal deposits in Oklahoma scrubland. In 1954, they agreed to let a coal company mine the coal as long as the company restored the land afterwards. The company mined the coal and did not restore the land. The difference in value between the strip mined land and actual productive farmland was only $300, but the cost of restoration was $25,000 in labor. The Peevyhouses sued. The court awarded them the difference in value of the land, $300, not the cost of restoring their home. Had they lived in an area where land values are high, the law would have defended them. It chose not to defend them precisely because they lived in an area where land values were low. The Oklahoma legislature eventually intervened to ensure that it could not happen again, but this case was decided according to legal principles that determine the allocation of damages. These principles do not usually take into account the value of a person’s home to themselves, a value that is beyond money. In the Kelo case, they tried to take that value into account, but could only offer Ms. Kelo more money to get out of the way of the Pfizer bulldozer.
Pfizer, by the way, left New London in 2009. Economic development contracts, like employment contracts, are often one-sided, with the city giving up too much and the corporation promising nothing.
Modern times, discredited economics
The root of the problem is the sort of economics that caused our current economic problems. The Tiebout Model is popular among legal theorists and planners. It says that municipalities are like markets, each offering different services at different prices, as if anyone could move and take their home with them. It absolves bureaucrats of the blame for unpleasant decisions, because if you don’t like a service cut, then you can leave. It simplifies decisions by removing the blame for those decisions. You can see why it became popular, but you can also clearly see why it is so unfair.
Economics always assumed that people are “rational” and act only in ways that can be of benefit to them. Any psychologist, advertiser, politician, or propogandist could tell you that’s just not true. You don’t have to be insane to behave irrationally. Fear and greed disrupt the stock market in ways that traditional economics ignores. Acknowledging our shared humanity makes decisions by people like Greenspan, author of the housing bubble, more difficult. It forces them to deal with the real world, which offers less certainty than the sterile economic models that the right loves so much.
Economic policy makers need to acknowledge the consequences of their decisions, however unpleasant. Judges and lawmakers should too.