Montana Viewpoint

February 14, 2005

The statement “this is a fairness issue” is used to describe virtually every bill that has been presented in this session of the Montana Legislature. I don’t believe it.

The term fairness implies that everybody involved is benefited equally, and usually nothing is further from the truth. My major exposure to the “fairness issue” is in the realm of tax legislation, which has always been my major interest.

Some people like a sales tax because everybody pays something. That’s fair, but is it fair if some people pay a greater share of their income in sales tax than others? Imagine that two families with different incomes make exactly the same purchases over a year’s time. Then figure at a 4% sales tax they have each contributed $2000 to the state treasury for that year. A family bringing home $20,000 a year is paying 10% of that in sales tax, but a family with $40,000 income pays only 5% of their income in sales tax, and a family with $80,000 income pays 2-½ %. Is that fair? [The 2000 bucks of sales tax is an unlikely figure, but it’s easier to do the math with it.]

Is an income tax fair if it taxes everyone at the same percentage, or is it fair if wealthy people pay a higher percentage of their income in taxes. There’s a debate for you, and it centers on an economic concept called “the value of the marginal dollar.” Say what? All that means is that a buck is worth more to a low income person than a high income person, and if that’s the case, should taxes be based on the face value of a dollar, or on how valuable that dollar is to the taxpayer?

Figure it this way, a wealthy man and a poor man each go to a burger joint and buy a hamburger for two bucks. The wealthy man leaves a dollar tip and the poor man leaves a quarter. Which one is the bigger tipper? Which tip is worth more to the person giving it?

“Capital gains” is a species of income where taxes have recently been reduced. You have (I hope) a capital gain if you sell your house, your livestock, or your Wall Street stocks. So getting a capital gains tax reduction is fair for everybody, right? Well, that might depend on who you are. For 2001 in  Montana, 64% of all capital gains were earned by taxpayers with annual incomes over $120,600—the top 3% of the income bracket.

In fact, 787 households with incomes over $500,000 had 34% of all capital gains income. Their average annual capital gains income was $360,805, and their average tax was $3526—one tenth of one percent (0.1%) of the average gain.

Folks with incomes between $25,000 and $34,000 a year had average annual capital gains of $581 on which they paid an average tax of $16, or 2.8% of the average gain.

So, is a capital gains cut equally fair to all?

It goes on and on. Property taxes, sales taxes, taxes on gasoline; you name it; and almost always a tax increase or reduction benefits different people differently. There was a French Minister of Finance in the 1700s who said that the art of taxation was the ability to pluck the most feathers from a goose with the least amount of hiss.

It’s true, and different groups of people have different amounts of hiss. Generally, the more influential they are, the more they hiss. It’s the little guy who stays quiet and gets plucked clean.

And that’s not fair, at least in my book.

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620