Tax Rates Are Fair; Deductions, Loopholes, and Exemptions Are Not

About Kelly Phillips Erb:

Kelly Phillips Erb is a founding shareholder of the Erb Law Firm, PC, in Philadelphia, Pa., where she focuses on tax law for businesses and families. Kelly authors the popular Taxgirl blog for Forbes.com; the blog has been recognized by the ABA Journal as one of the top 100 blogs written by lawyers for the past three years running.

I'm going to assume for a minute that we all agree what constitutes "rich" because that's half the battle. Of course, that still doesn't make the question easy because what's fair is also relative.

From a numbers perspective, the top wage earners are paying more, as a share of taxes collected, than the rest of the country. The top 5 percent of taxpayers paid more in federal income taxes in 2008, the most recent tax year for which full data is available, than the remaining 95 percent put together. And while the same 5 percent did earn a lion's share of the wealth (31.7 percent of the nation's adjusted gross income), they still paid proportionately more (58.7 percent of federal individual income taxes) in terms of dollars. In fact, taxpayers making between $200,000 and $109,735,999 pay more—by percentage of adjusted gross income—than every other tax bracket. And the "barely" millionaires (those making between $1 million and $10 million) pay the most—nearly three times the marginal tax rate of the middle class (roughly those making between $50,000 and $100,000).

[Read the U.S. News debate on the flat tax.]

Conversely, those at the bottom are paying less. For the same tax year, 2008, nearly half of all those that filed tax returns paid no tax or received every dollar back which was withheld. From 2000 to 2008, the number of non-payers increased by 59 percent even though the number of filers has only increased by 10 percent.

So the statistics tend to support the argument that the rich are, in fact, paying their fair share in taxes. But what about Warren Buffett? What about those ridiculously low tax rates for the super rich? Is that all a myth?

[Read 10 things you didn't know about the Bush tax cuts.]

Not quite. Those at the very top (the so-called 1 percent), like Buffett, may pay less, as a percentage of income, than many taxpayers by simply taking advantage of existing tax breaks. We get so caught up in tax rates and tax brackets that we aren't focusing on what's really creating the inequity: exemptions, deductions, and loopholes. Realistically, if we keep the focus on tax rates, we'll continue to argue about whether the rich are paying their fair share. If, however, we broaden our discussions about tax reform to include a combination of eliminating tax preference items and widening existing tax bases, maybe we'll get close to a notion of fairness that we can agree on.

• Read the U.S. News debate on the payroll tax cut.
• See a collection of political cartoons on the economy.
• Read about 7 groups with reason to protest.

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federal taxes