As the so-called fiscal cliff gets nearer, you'll hear lots of talk about whether current tax rates on the rich are fair. As I've said before, fairness is a concept invented so dumb people can participate in debates. Fairness isn't a natural law of the universe. It's a psychological problem.

We sometimes get fairness confused with equality. Equality is usually good, and can often be measured with a satisfying precision. Fairness, on the other hand, is usually just a rationale for some sort of bias.

If you think the rich should pay higher taxes, you probably compare today's rates to years past when the tax rates on the rich were far higher, and you conveniently leave out the fact that few people actually paid those rates because of loopholes and deductions.

If you think the rich already pay enough taxes, you focus on the percentage of total federal income taxes they pay and leave out any mention of taxes the poor pay, such as payroll and sales taxes.

To demonstrate my point that fairness is about psychology and not the objective world, I'll ask you two questions and I'd like you to give me the first answer that feels "fair" to you. Don't read the other comments until you have your answer in your head.

Here are the questions:

A retired businessman is worth one billion dollars. Thanks to his expensive lifestyle and hobbies, his money supports a number of people, such as his chauffeur, personal assistant, etc. Please answer these two questions:

1. How many jobs does a typical retired billionaire (with one billion in assets) support just to service his lifestyle? Give me your best guess.

2. How many jobs should a retired billionaire (with one billion in assets) create for you to feel he has done enough for society such that his taxes should not go up? Is ten jobs enough? Twenty? 

Make sure you have your answers before reading on.

I thought of this question because I heard an estimate of how many families a particular billionaire supports. The estimate was a hundred. If you figure an average family is 2.5 people, one billionaire is supporting 250 humans.  He gets a lot in return, of course, but what struck me is how this number affects my feeling of fairness. When I hear that one person is supporting 250 non-relatives, plus a number of relatives too, it feels as if that billionaire is doing more than his "fair" share.  But as I've said, fairness isn't a real thing. It's just a psychological phenomenon that is easily manipulated.

My personal view is that if most credible economists say higher taxes on the rich are necessary to save the economy, I'm all for it. I think every rich person would agree with that statement. The question that matters is whether taxing the rich will help or hurt the economy. Fairness should be eliminated from the discussion.

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Dec 12, 2012
Very nice how you slickly changed the premise from taxing the rich to how many families a retired businessman should support for his contributions to be considered "fair".

Dec 12, 2012
Both are really Complex questions... Excluding unknown factors like illness,and lawsuits And some of the more predictable factors like inflation, and the depreciation,and appreciation of assets and the what not. A person living in a hypothetical "complete vacuum" Can live off 1 billion dollars for 30 years at 33.3 million dollars a year.

I would think maybe a more extravagant individual would have 100 or more personal employees.
And the least extravagant, maybe 10.

Paying 100 employees 40 thousand a year is an expense of 4 million a year. 12% of 33 million dollars. So 29.3 million a year would be left over for all other expenses... For an extravagant individual who likes to spend money on stupid s#*@t, they probably would have a hard time paying more taxes to support their lifestyles.

But A More modest retired individual with maybe 10 employees at 40000 dollars would have no problem living off 32 million a year. And so paying a bit more in taxes wouldn't be such a large problem for a more modest person.

If each billionaire in the United States this year (425 in 2012) had 100 personal employees , the total workforce of all the billionaires combined would be 42500 employees. A bit less employees than as many temporary workers Amazon.com is hiring this Christmas season... And way less than the over 2 million employees walmart has as a workforce.

I don't think raising personal taxes for billionaires would really hinder the economy...
+9 Rank Up Rank Down
Dec 12, 2012
Couldn't you say that South American plutocrat dictators "support" the livelihoods of hundreds of families who root through their trash for odds and ends to resell?

The more abject the poverty of the trash-resellers and the richer the plutocrat, the more of them he can "support", and therefore the more he should be allowed to lavish on himself, right?

The original "trickle down" economy.

If a system rewards people for participating and punishes them for staying out, and "participating" definitionally involves serving the powerful, then yes, the powerful "support" everybody.
Dec 11, 2012
The reality is that the president's calls for the wealthy to "pay their fair share" is nothing but shameless pandering to his base. This is why despite months of saying the rich should have their taxes raised, he has never actually specified how much. Giving an actual number would mean he would be giving his opponents something to argue with; why is that rate "fair" and not some other one? It's pretty ingenious, actually; he rallies his supporters with an appeal to their emotional sense of fairness, without giving his detractors anything specific to criticize.

There's only one tax rate that is truly "fair", and that is: everybody pays the same rate. I'm not necessarily advocating that position, mind you. (OK, that's disingenuous, I actually do advocate that position.) I just wish politicians would stop throwing around fairness like it was something they were really interested in.

I disagree, by the way, with Scott's assertion that fairness is not the same as equality. Maybe in the way that "fair" is generally used they are different, but to my mind equality is the DEFINITION of fairness. Nowhere but in the world of taxation would we consider it fair for one person to pay more just because they make more money. Everyone pays the same price for a movie ticket, and a can of Spaghetti-O's costs me the same as it costs Warren Buffet.

My tax plan would be variable, and tied to two numbers: the budget (as I posted earlier), and the poverty line. The tax rates would be: 0% for everyone up to the poverty line, as decreed during that year, and then whatever percentage was necessary for the rest of our total income to cover the budget that was passed by Congress. (I say "the poverty line" as shorthand for "the minimum amount needed to live without assistance", I'm not actually sure if that is the definition for it or not.) No exemptions. No deductions. Here's the percentage, it comes out of everything you make, once your income has passed the poverty barrier for the year.
Dec 11, 2012
All these discussions of how to fairly tax are interesting, however:

- We pay politicians to lie to us.

- We also rely on them to solve problems like this.

Until one of those two items changes, we will not see a solution to taxing the rich, as when we say 'the rich', we are definitely talking about those politicians.
Dec 11, 2012
Speaking of fiscal crises, Scott, isn't it about time for you to conduct your annual, communal gift-giving panic (er...guide)?

I'm guessing you can't continue to reuse the necklace-engraved-with the-names-of-your-wife's-children idea. Time to start soliciting fresh ideas. As a bonus, the comments tend to be some of the most entertaining of the entire year.
Dec 11, 2012
I had a thought last week on how to solve our financial situation. The problem with the way budgeting is done today is that Congress is caught in what is known as a "collective action problem". While everyone would benefit from balancing the budget, each individual member of Congress has an incentive to get as much money as possible allocated to his constituency. And the reason they have that incentive is that taxes (or, more precisely, tax rates) are invariant with respect to the budget, that is, what gets spent is not tied to what comes in. The people in a given state or district pay the same taxes regardless of how much budget money comes their way, so why wouldn't they try to maximize budget allocations that benefit them directly?

The solution to the problem, then, is to TIE TAX RATES DIRECTLY TO THE BUDGET. After Congress passes the budget for the next year, the tax rates are set such that the tax revenues will equal the amount to be spent (actually probably more, so that we can begin reducing the debt). More spending, higher taxes. Less spending, lower taxes. Using the previous year's incomes, plus inflation and some other factors, we should be able to calculate the rates to with a couple of percentage points.

To make it more interesting, the tax rates could vary state to state, depending on how much of the budget was allocated to be spent in each one, with national level budget (e.g. the USPS) being shared between all. There would also need to be accommodations for things like natural disasters, which is highly localized spend, but which should be shared as well. There are certainly complexities at play, but nothing that couldn't be overcome.

The beauty of this system is that it almost completely eliminates "pork" projects, because they would raise taxes, and specifically, they would raise taxes on the people who are supposedly benefiting from them. The residents of a state would be putting pressure on their representatives in Congress to only bring in projects which had a net positive cash flow, i.e. created more wealth than they drained through the higher taxes. It's always easier to spend someone else's money.

I predict we would see the budget shrink drastically, without too much effect on the actual level of services provided. Wasteful contracts would come under intense scrutiny, because people would have an incentive to scrutinize: they can get lower taxes. We would be optimizing for the best behaviors, not the worst.
Dec 11, 2012
In my mind, we have a major spending problem. In my state, all school districts, counties, municipalities, cities, and the state itself must balance their budgets. In listening to the ongoing conversations, and seeing the creative accounting that's done, it's obvious that we would deficit spend at each level if we were allowed to, perhaps with some good intentions, but mostly out of lack of self control. I'm presuming that other states must not have this same law, because I see a lot of chatter about some of these states potentially declaring bankruptcy. And at the national level, we clearly can't exercise any spending self control.

So, sure, you could always raise taxes to help reduce the deficit some. That's not addressing the problem. I see that one party is proposing raising taxes, and simulataneously increasing spending (already!) with a new plan.

I'm totally willing to discuss raising my (far from top 2%) taxes, but first, I need to see us show we can manage what we've got responsibly, and balance this budget. And really, isn't that the best way to convince us we need more taxes anyway? Just like the local school district, you make all the hard choices (cut some busing, some extracurriculars, etc). When the public sees the impact, and wants more... it comes with a cost. That's when the school levy passes. And on the national level, that's when you'll get buy-in to widespread tax increases.
-4 Rank Up Rank Down
Dec 11, 2012
Hello Scott,

here are the answers to your questions:

1 - How many jobs does a typical retired billionaire (with one billion in assets) support just to service his lifestyle? Give me your best guess.

Answer: not enough. Most of a billionaire's income is channeled to high-paid jobs like "art gallery owner" or "custom-built yacht dealer" and only a comparatively low percentage actually goes to the low-wage jobs like "chauffeur' and "personal assistant" you misleadingly refer to.

2. How many jobs should a retired billionaire (with one billion in assets) create for you to feel he has done enough for society such that his taxes should not go up? Is ten jobs enough? Twenty?

Answer: infinite. Nothing can justify NOT increasing the billionaire's current tax rates, as any billionaire with a sense of fairness (!!!) will tell you (see Warren Buffet). It is the government's job to allocate his tax money in a way that maximizes the benefits for the society. Those benefits cannot always be measured by number of jobs created. Using your own cartoon from Dec. 7 as a metaphor (http://dilbert.com/strips/comic/2012-12-07/), I would say that increasing taxes on billionaires is a way of increasing the probabilities of that share of their income ending being used to fund research on cancer rather than paying for a !$%*!$%*!$ that costs more a than a "normal" person's entire net worth.


P.S. - The supposed "dumbness" of the concept of fairness is a fabrication of recent millionaires as a rationale for their recently acquired greed. :-) Fairness isn't a natural law of the universe. It's a human invention that help us keeping us... human.
Dec 11, 2012
To add to my post. Replacing all taxation with a simple poll tax of $20,000 per year (up to a maximum of 40% of gross income) and making minimum wage $20 an hour (strictly enforced)would be roughly equivalent to the present situation.
Dec 11, 2012
Those are sort of trick questions. A person in an economy as integrated as this one will contribute to the support of thousands, if not millions of individuals. But none of them completely.

He may contribute most of the livelihood of a few people (his personal assistants, butler etc). He may contribute a tenth of the livelihood of afew more (his gardener etc). And he may contribute a thousandth, or a millionth to many many more people.

But this can be summed up pretty easily by the equasion PE= E/e. Or the Person equivalents supported is equal to personal expenses over average cost of living. So if your retired billionaire has annual expenses of say $1,000,000, and the average (weighted) cost of living of all the people he helped support is $20,000 then he is supporting 50 people.

But as for fairness (I agree it is a dumb concept) I'd prefer to talk about balance. In a capitalist economy most of that billionaires assets are probably invested in some productive way. Which is fine. And a billionaire who constantly reinvests his vast income and lives a frugal life usually doesn't attract too much calles of unfairness (unless he is a jerk). Because investment means letting someone else use your property for the benefit of both.

But wealth is power, and power corrupts. Which means that being rich tends to increase the chances that a person will be a jerk. And it is this jerkiness that those higher taxes tend to compensate for.

Consider this. If we were to replace progressive taxation with a simple poll tax (the most equal and 'fair' system). This would work fine if so called 'job creators' were to pay their employees enough to cover the poll tax. Functionally, you would end up with exactly the same amount of money coming from the same number of people. But psychologically this would be much more unpalatable.

In a way, progressive taxation is asking the rich to pay the poll tax of the people they are (or should be) supporting, rather than expecting them to give those people the money so that they can pay the poll tax.
+16 Rank Up Rank Down
Dec 10, 2012
RayKremer: "and as long as we are on the right-hand side, downward slope of the Laffer curve, the way to raise revenue is to allow the economy to grow by lowering taxes."

That might be relevant, if that's the side of the Laffer curve we were on. In June economists were polled on whether they thought a reduction in federal income tax rates would lead to higher tax revenues within five years. Guess how many agreed or strongly agreed with that statement? I'll give you a small hint: It was less than one.

That's right, not a single economist agreed with you. None. Nobody. Zilch. Zero.

RayKremer: "The other big secret is that we have much less of a tax and revenue problem as we do a spending problem."

We're spending more than we're taking in. As we have control over both spending and how much we take in, so there's no absolute here, only opinion. The problem with saying it's a spending problem is that nobody really agrees with you. Hell, even if you just poll registered Republicans you can't get a majority to agree on decreasing spending on anything that actually matters: Military; social security/pensions; and Medicaid/Medicare.

So sure, everybody SAYS they want spending to be cut in some abstract way that doesn't actually impact them, but very few are actually willing to do anything meaningful.
+14 Rank Up Rank Down
Dec 10, 2012
I agree with your view of fairness versus equality. Treating everyone equally and treating everyone fairly are two different (if sometimes related) things. I have just one little quibble with your article. It is the use of the word support instead of employ. A billionaire supports himself and his family. He employs his housekeeper, butler, etc. These people work hard for their money which they use to support themselves and their families. An employer (especially in a capitalist society) employs some one because they provide goods and services that they prize more than the amount of money they spend in employing that person. I sincerely doubt a billionaire (even one so charitable as Warren Buffet) employs someone as a way to give their money away for no beneficial return. That's why he gives to charity.

"My personal view is that if most credible economists say higher taxes on the rich are necessary to save the economy, I'm all for it. I think every rich person would agree with that statement."

While I don't doubt your word, I know you can't possibly speak for every wealthy person. I also know that there is no group of people that contains more than 100 people that agrees completely about anything. My proof is that if I created a poll that said simply "Is Obama president of the United States, vote yes or no" That poll would get some non zero amount of votes on No.
+11 Rank Up Rank Down
Dec 10, 2012
Hmmm...my guesstimation was 100 people...figuring on 25 employees, each representing a family of four [an average, that is]. And so I was still way off, but a lot depends on the way you define 'supports'.

I am persuaded by the statements that all the wealth of millionaires and billionaires in the USA are a paltry percentage of the truly enormous [16 trillions?] size of the national debt and annual budget deficits. The American government doesn't have a taxing problem...it has a spending problem. [Yes, that's a paraphrase of something talk conservative radio blabbermouths are saying....but I'm not just parroting them. I know the difference between million, billion and trillion and it seems obvious to me that a whole lot of people either don't know, or are pretending very hard not to know].
Dec 10, 2012
I think the only way to evaluate fairness of our system is to look at the trends that have resulted from our system. Here's the first graph I pulled up
- I can't swear it's completely accurate, but I've seen this general trend depicted different ways. They include the following statement:

"In 1980, the last pre-Reagan year, families in the bottom 90 percent averaged $30,446 in income, after !$%*!$%*! for inflation, $72 more than the $30,374 comparable families earned in 2006. The top 0.01 percent in 1980 took home an average of $5.4 million, less and one-fifth the $29.6 million average income of the super-rich in 2006."

So the 26 year trend is that the super rich have increased their income by a factor of five while the average American's income has been flat. This is obviously affected by a lot more than government policies, but on the fairness test, this implies that the rich can afford to pay more and still be WAY ahead.
+20 Rank Up Rank Down
Dec 10, 2012
Liberals and Conservatives have completely different views of the purpose of taxes:

Liberals - Taxes are a tool to enforce/implement fairness.

Conservatives - Taxes are used to pay for government services and should be as low as possible to only pay for services mandated by the Constitution (defense, interstate infrastructure, etc.).
Dec 10, 2012
In a free market goods and services are bought at their fair market value. The billionaire is getting something, but the workers providing goods and services are giving up something. I call this a fair trade, not one supporting the other.

Therefore, your statement about a billionaire supporting 250 humans is extremely misleading. Those humans are supporting themselves. Or perhaps not - perhaps you should think of them as dependents of the billionaire, but that means the billionaire was dependent on millions of others and instead of spending that money he just kept it. That seems rather selfish to me. Or it would if I were to think of it that way, which I don't. Perpaps the billionaire earned that money by charging $1 for something that saved a billion people $2! Then his billion would be very well deserved and not selfish at all. This is closer to the way I think of things - billionaires have billions because they added (or inherited) value. But how can you say that the billionaire earned his billion and these employees didn't? Can we have it both ways?

To answer your questions:
(1) Probably a couple thousand decent paying jobs, assuming a lavish lifestyle and considering that money cycles through the economy over and over.
(2) Jobs created due to buying stuff at fair market value should be unrelated to income tax rates, so there is no upper bound.

The problem plaguing new job creation is the lack of faith in the economy. There is plenty of cheap money available for job creation, but investors are reluctant to use it. Increasing or decreasing taxes on wealthy Americans will not change that. Only a renewed faith in our economy will do it.

I'm personally in favor of treating capital gains income the same as other income for everyone. This is what seems fair to me.
+10 Rank Up Rank Down
Dec 10, 2012
[As the so-called fiscal cliff gets nearer, you'll hear lots of talk about whether current tax rates on the rich are fair. As I've said before, fairness is a concept invented so dumb people can participate in debates. Fairness isn't a natural law of the universe. It's a psychological problem.]

Fairness is as real as love, hate, fear, greed, etc. None of those things are a natural law of the universe either but they are a strong motivation of human thought and action and therefore, are as real as fairness. Which is to say they are real enough that you can't just dismiss them.
+8 Rank Up Rank Down
Dec 10, 2012
The rich should at least pay the same percentage of taxes if not more. To compare against you example, consider ten thousand people who make a 100k per year (10k x 100k = 1 billion). How may non-relatives do those people collectively support? I'm guessing more than 250, because the rich might support a few expensive service providers. People with 100k would support many more less expensive service providers (like hair stylists, for example).

The argument should be against all the tax breaks that the rich get. The middle income group should have just as many avenues for tax breaks OR no one should have it.
+26 Rank Up Rank Down
Dec 10, 2012
When the 16th Amendment was introduced to institutionalize a federal income tax, it was stated that only the top 1% would have to pay those taxes.

When the Alternative Minimum Tax (AMT) was enacted in the 1960's, it was to make sure that a few hundred millionaires (who at the time were apparently paying no federal income taxes) would pay their fair share of taxes.

Sound familiar ? And at what levels of income now require the paying of federal income taxes and how many of those are now possibly subjected to the AMT ?
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