It can be argued that paying taxes is necessary to succeed as country, government, and socially. This sample paper from Ultius explores the effects of a concentration of wealth that makes the departure of wealthy taxpayers so problematic for the U.S.
Most modern societies, including the United States and the states within the United States, rely on taxes in order to fund the government. This means that when wealthy taxpayers leave state or national jurisdictions, those jurisdictions could experience potentially significant consequences. The essay will have four main parts:
- The first part will consist of a general overview of the logistics underlying taxation structures.
- The second part will discuss the reasons behind why the departure of wealthy taxpayers from states can have significant effects on those states.
- The third part will then more concretely consider what could be affected within a state, given the services that states are generally expected to provide.
- Finally, the fourth part will consist of a reflection on the implications of individual persons having this kind of effect on the well-being of states.
Overview of taxation
Taxation has been debated since the beginning of American history. In fact, taxation without representation was the key cause of the Boston Tea Party. To start with, then, a tax is simply a way in which the government retrieves taxes from its citizens. Some of the main classes of taxes include the sales tax, where a certain percentage is charged for every purchase and given to the government; the property tax, where money is paid for property owned; and the income tax, where a certain percentage of all money made by citizens is given to the government.
Understanding the American fiscal policies is important for taxpayers/ Some of these taxes are kept level across different income levels, whereas others are staggered on the basis of income level. This kind of staggering is called a progressive income tax. (The other two kinds are the flat income tax and the regressive income tax.) As Siemrod has written:
A progressive tax structure is one in which an individual or family’s tax liability as a fraction of income rises with income. If, for example, taxes for a family with an income of $20,000 are 20 percent of income and taxes for a family with an income of $200,000 are 30 percent of income, then the tax structure over that range of incomes is progressive. (paragraph 1)
Different income taxes
- Progressive income tax within the United States is staggered in this way, with wealthier people paying a higher percentage in taxes than less wealthy people.
- In contrast, a flat tax is where all people are required to pay the same percentage in taxes, irrespective of their level of income.
- A regressive tax would be a structure in which people who pay less money are obligated to pay higher levels of income in taxes.
In general, the debate within the contemporary United States is between the progressive tax and the flat tax, depending on different ideas of the nature of fairness (see Meehan). There would seem to actually be no real credible advocates at the current time for a regressive tax structure.
In any event, even under a flat (and not progressive) tax structure, though, the wealthy pay objectively more money in taxes than the less wealthy. This is due to the fact that even if percentages are kept stable across all income brackets, it is still the case that 20 percent of $50,000 is $10,000, whereas 20 percent of $500,000 is $100,000.
This is simple mathematics, and questions of fairness in the payment of taxes usually consists of debates over percentages of taxes and not absolute amounts of taxes paid. This means that in principle, for any jurisdiction, wealthier taxpayers are of greater interest than less wealthy taxpayers.
As Frank has pointed out, “audits for wealthy taxpayers have surged in recent years, leading some conservatives to question whether the IRS is unfairly focusing on those with high incomes” (“IRS,” paragraph 1).
In general, since the rich by definition have more money to give to the government, they are of special interest within the context of any taxation structure. President Barack Obama’s final budget proposal included ideas to overhaul income tax.
The departure of wealthy taxpayers
This means that when wealthy taxpayers leave a state (or other jurisdiction), it could have potentially significant consequences for the state. This is especially true of smaller states, where the general population—and thus potential pool of tax revenues—is smaller than it is elsewhere. For example, Singer has written about how Connecticut, one of the smallest states in the nation, has a special interest in its wealthy residents:
Connecticut, home to some of the richest Americans, has a big stake in the billions of dollars in revenue their taxes generate. State tax officials track quarterly estimated payments of 100 high net-worth taxpayers and can tell whose payments are down. Of that number, about half-dozen taxpayers have an effect on revenue that’s noticed in the legislature and the state Department of Revenue Services. (paragraph 2)
In other words, the revenue produced by these small group of wealthy taxpayers is so significant for the functioning of the state of Connecticut that the government of the state specifically keeps tabs on those taxpayers.
It is worth reinforcing this point. The nature of wealth disparities within the United States are such that a very small number of persons possess a highly disproportional share of the wealth within the nation. One lesser known implication of this is that within the current tax structure of the United States, this means that a very small number of persons are also responsible for providing a high proportion of tax revenue for the states within which they live.
Tax havens stills see wealthy departure
Even in a state such as Texas that is large and has no state income tax, wealthy residents still own the more expensive property and pay higher taxes on that property (see Bell). This means that if a wealthy taxpayer actually leaves a state, then that state may suffer from a loss of revenue that is much greater than what one may expect a single person to have on an entire state. But all that can said is that such is the power of having a very large amount of money.
A specific case of such a scenario recently emerged within the state of New Jersey. As Frank has reported:
“Our top-heavy economy has come to this: One man can move out of New Jersey and put the entire state budget at risk. Other states are facing similar situations as a greater share of income—and tax revenue—becomes concentrated in the hands of a few. Last month, during a routine review of New Jersey’s finances, one could sense the alarm” (paragraphs 1-2).
The man in question was a multi-billionaire. Mathematically, if one assumes a state tax rate of 7 percent, then 7 percent of (say) $5 billion would be $.35 billion, or $350 million. Clearly, this is not a negligible number. If such a sum were to simply disappear from New Jersey, it could significantly alter the budget of the state as a whole and cause probelms to the American economic system. Moreover, the risk of such a thing happening is more or less perpetual, insofar as there are no real laws preventing a private citizen of the United States from relocating from one state to another state.
Concrete effects on wealthy tax abandonment
A state needs tax revenue in order to fund a wide range of services, including everything from libraries to buses to Medicaid. As Budget and Policy Priorities has indicated (and the list is worth quoting at length):
“By far the largest areas of state spending, on average, are education (both K-12 and higher education) and health care. But states also fund a wide variety of other services, including transportation, corrections, pension and health benefits for public employees, care for persons with mental illness and developmental disabilities, assistance to low-income families, economic development, environmental projects, state police, parks and recreation, housing, and aid to local governments” (paragraph 3).
From the perspective of the average citizen, it is easy to assume that a city just functions naturally somehow, as if of its own accord. But the truth, of course, is that an elaborate fiscal structure is needed in order to keep cities and states functional, and the money for doing that comes primarily from the taxes that states collect from their citizens.
In this context, if wealthy taxpayers leave a given state, this could significantly compromise the capacity of those states to fulfill these basic capacities such as welfare programs, infrastructure, and education. Another way to say the same thing is that several states have become disproportionately dependent on a small group of taxpayers, to the point that the states’ general capacities to provide services to its citizenry would become significantly impaired.
This practical fact, however, would seem to call attention to the moral question of why states have become so dependent on select wealthy taxpayers in the first place, and what this says about the state of American democracy today. The following section of the present essay will be dedicated to at least beginning to address this deeper moral and political issue at hand.
The fact that several states have become dependent on such a handful of very wealthy taxpayers is surely problematic; but then, this is not actually the primary problem; that primary problem consists of the fact that there exist such huge disparities of wealth within the United States in the first place. A general perception of this kind of economic injustice, for example, has been a driving force behind the campaign of Bernie Sanders for the presidency of the United States.
It was also this kind of awareness that was behind the Occupy Wall Street protests a few years ago. If a few taxpayers can make or break the budgets of some states, then this is only because those few taxpayers possess such a disproportional share of the wealth of the nation in the first place. In other words, the problem is not so much the tax situation per se as it is the structure of the kind of economy that enables such a tax situation to come into being in the first place.
Moreover, the question could perhaps be asked whether wealthy taxpayers ought to feel an obligation to stay within their home states in order to not disrupt those states’ budgets in such a substantial way. However, this question is perhaps somewhat irrelevant before it is even asked, given the nature of the economy system that allows for such extravagant concentrations of wealth in the first place. A highly wealthy taxpayer probably thinks like a stereotypical businessman.
This means that he would be able to move his domicile and assets to a state where he would have to pay less in taxes, he will probably do so, without any serious regard for what will happen to the state that he leaves behind as a result of his absence. In essence, an economic system that enables extreme concentrations and disparities of wealth also rewards selfishness and a certain disregard for social responsibility. This being the case, the real question would consist of how to reform the system, and not of how to change the behaviors of individual taxpayers within that system.
In summary, this essay has consisted of a discussion of the effects of the departure of wealthy taxpayers from a given state. The essay began with an overview of taxation structure itself, proceeded to consider what happens when wealthy taxpayers leave, turned to a consideration of the concrete effects of such a departure, and finally engaged in a moral reflection on this state of affairs.
A key point that has been made here is that the very fact that a few wealthy taxpayers could have such a significant effect on the fates of entire states is itself a symptom of a basically broken economic system. The idea of taxation within a democracy is that all citizens should pool their resources together in order to pursue the common good. The kind of concentration of wealth that makes the departure of wealthy taxpayers so problematic is thus in and of itself a serious social problem that needs to be addressed.
Bell, Kay. “5 Higher Taxes for Wealthy Taxpayers.” Bankrate. n.d. 2 May 2016. http://www.bankrate.com/finance/taxes/higher-taxes-for-wealthy-taxpayers-1.aspx.
Budget and Policy Priorities. “Policy Basics: Where Do Our State Tax Dollars Go?” Cbpp.org. 14 Apr. 2015. Web. 3 May 2016. http://www.cbpp.org/research/policy-basics-where-do-our-state-tax-dollars-go.
Frank, Robert. “IRS Takes a Closer Look at the Wealthy.” CNBC. 13 May 2013. Web. 2 May 2016. http://www.cnbc.com/id/100731798.
Frank, Robert. “One Top Taxpayer Moved, and New Jersey Shuddered.” New York Times. 30 Apr. 2016. http://www.nytimes.com/2016/05/01/business/one-top-taxpayer-moved-and-new-jersey-shuddered.html?_r=0.
Meehan, Colette L. “Pros Cons of a Flat Tax.” Chron. n.d. 2 May 2016. http://smallbusiness.chron.com/pros-cons-flat-tax-4210.htm.
Siemrod, Joel B. “Progressive Taxes.” The Concise Encyclopedia of Economics. n.d. Web. 2 May 2016. http://www.econlib.org/library/Enc1/ProgressiveTaxes.html.;
Singer, Stephen. “Connecticut Keeps Close Eye on Its Super-Rich Residents.” Hartford Courant. 9 Feb. 2015. Web. 2 May 2016. http://www.courant.com/business/hc-ap-connecticut-rich-residents-dont-leave-20150209-story.html.