Kip Hagopian says no. He considers various arguments in favor of progressivity and isn’t persuaded. I appreciate Hagopian’s attempt to engage these arguments. Unfortunately, he says little or nothing about the three I find most compelling.
1. Luck. Many of the things that determine our incomes — intelligence, creativity, physical and social skills, motivation, persistence, confidence, connections, discrimination, occupation, employer, spouse, inherited wealth — are in significant measure a product of chance. They are heavily influenced by genes, our parents, our childhood neighborhood and schools, timing, and various fortuitous occurrences. Opponents of progressive taxation often emphasize the role of effort, but much of the variation in effort is itself a product of luck. (Progressive tax proponents sometimes fall into the trap of accepting the distinction between effort and luck; they’re then forced to argue that the latter matters more than the former.)
2. Ability to pay. Higher-income households tend to be able to pay not only more dollars but also a larger share of their income without suffering. One sign that this is true is that the savings rate increases with income; those with higher income tend to save a larger percentage. This may owe partly to a stronger future-orientation, but it’s mainly because they can afford to.
3. Income tax progressivity helps to offset the regressivity of other taxes. Some taxes are regressive, with higher-income households paying a smaller share of their income than lower-income households. Payroll (Social Security) and consumption (sales) taxes are the most prominent. If income taxes weren’t progressive, the tax system as a whole would be regressive.
Fairness is not the only criterion by which a tax system should be judged. We also need to consider how much revenue we want to raise and taxes’ impact on the economy. For my thoughts, see here and here.
April 3, 2011 at 10:10 am
Agreed 100% Lane, but is the Medicare part of FICA a flat tax?
April 3, 2011 at 10:14 am
I once met Bill Gates, Sr. at a meeting where he spoke on behalf of the Responsible Wealth Project. After the panel discussion, I asked if we might consider that the wealthy should pay a higher percentage of their income in taxes because they use a greater share of government services such as infrastructure, police, the courts, and even education–for their employees. All of the businesses they own take advantage of those services.
Mr. Gates agreed, and came up to me after the meeting to say that maybe we should call the progressive tax a “proportional” tax instead.
Carolyn Kay
MakeThemAccountable.com
April 3, 2011 at 10:37 am
Jon: Right — I’ve now corrected that. Thanks.
April 3, 2011 at 1:11 pm
“Some taxes are regressive, with higher-income households paying a smaller share of their income than lower-income households. Payroll (Social Security)”
Predictably, you do not mention that Social Security benefits are regressive as well.
April 3, 2011 at 5:49 pm
The law of diminishing marginal utility says that the more of something you have, the less valuable it is. So asking for two dollars from someone who has 10 will be asking for less utility than asking for one dollar from someone who has 5; the marginal value of a dollar declines, just like everyone else.
So flat tax is unfair, because we are asking far greater utility from people with less money than people with more. An excessively progressive tax would also be unfair. I believe a tax that perfectly followed the sloped demand curve for money would be the most fair.
Oh, finally, the other argument for progressive taxes is that rich people also get the most benefit from things paid for by taxes. They drive more, they have more valuable houses to save with a fire department, they are more likely to have property protected by police, they are more likely to receive subsidies for educational expenses, get the mortgage tax deduction, get deductions for charitable contributions, have money insured by the FDIC, use a bank guaranteed by implicit government guarantees and own stock in companies that receive government subsidies.
April 3, 2011 at 8:41 pm
Good post. Beyond the issue of luck, which our national mythology serves ever to minimize, there’s also the matter of economic rents: since they are not taxed directly, progressive taxation is an inexact way of recapturing them for the public. I suspect this is the reason that progressive taxation doesn’t seem to discourage productivity as much as theory (e.g., Laffer, Mellon, et al) would predict.
April 3, 2011 at 9:07 pm
This is probably another way of saying what Will says, but opponents of progressive tax rates fail to recognize the extent to which the wealthy can simply command what share of enterprise revenues they will take. Through mutual back-scratching, as exemplified by the toxic concept that executive compensation should be “aligned” with increasing “shareholder value” — um, which shareholders would that be, sir? — corporate CEOs can virtually dictate their compensation. That tends to flow down through the executive suite and white collar management to some extent, but to the factory floor. Executive compensation has looked more and more like the competition for the greatest “respect” that helps explain the explosion in athletes’ contracts.
In addition to the factors identified in the post, it’s only fair that people who can influence how much income they have should pay a higher share in taxes.
April 4, 2011 at 5:58 am
Politicians and media are commenting repeatedly that their proposals are “fair”, or here questioning if progressive taxes are fair. But, importantly, what is “fair”? If meaning free from bias, then viewing a person’s tax burden based not on what they use, but their ability to pay is, sadly, not free from bias – indeed it is bias against wealth.
Arguing that someone should stump up the most because they can is somewhat like the guy who drinks as much as he can at a dinner out because he knows the bill will be shared and his drinks will be supplemented by the guy on soft drinks.
The only “fair” way to assess a tax burden is by looking at the demand that person makes on the tax receipts. Many services provided by those taxes protect not an income, but a personal wealth. Police protect all, but asset wealth benefit more (depending on the asset). The Navy protects the shores, but an asset wealthy individual benefits more from the prevention of invasion.
There is a lot to consider before a progressive tax can be deemed fair.
April 4, 2011 at 7:22 am
Point 1 is trite, impossible to prove (not even falsifiable, as a scientist would say) and even if true, it’s not in and of itself an argument of fairness without numerous other principles.
It’s impossible to prove how much of any one’s life is due to “luck” and how much to “effort” and “merit”. many of the things you identify as “luck” I think have much more conscious choice in them than you admit. Some may not be my choice but they are my parents’ choice, and so on. And we would not want to live in a “truman show” world where we measured everything. In any case, we cannot measure the past for those factors so it is impossible to prove or disprove any of your assertions. Which raises the question as to what coercion should exist when no empirical basis can be found to prove its justice.
It’s not a sufficient argument because, to make this argument one must introduce other principles, such as “society should reduce the impact of parents’ choices on their children’s outcomes” which seem highly controversial and re-frame the question of “fairness”. Finally even to the extent your point 1 assertions about one’s genes and parents are assumed to be true, you need other principles to prove that expropriating the results of one’s genes and parents is just. Even if my genes are luck, they are my genes more than they are anyone else’s, and as you are making a relative argument, i.e. that some person(s) extrinsic to me have a superior claim than mine to the output of my genes, you need to supply a principle that justifies the relative ranking you propose. Only a Marxian – to each according to their needs – argument (or Rawls’s variation on it) gets you there.
Point 2 is a correct statement in the abstract, but that does not in and of itself equate to fairness of the progressive rate structure unless you have add other postulates. For example you note that higher earners save more. But to assert that it is fair to take their savings and use them to pay for government or simply to transfer to others requires one to introduce other principles – that their savings are worse than others’ consumption, for example (which is a utilitarian argument not a “fairness” argument); that some level of consumption is enough; that a mechanism can “fairly” determine these things, etc. It is also highly difficult to derive a specific progressive rate structure from it that is not arbitrary.
Point 3 is weak. It’s partly wrong – sales taxes really peak in the middle class because many items in a lower income budget are not sales-taxed (rent, medical care, public transportation). But more important, it’s also circular – you’re trying to prove that a progressive tax structure is fair and the argument of point 3 is, if it weren’t progressive, it would be regressive and that isn’t fair. That’s obviously circular.
Your final paragraph is the most accurate. There is not much of a claim that the progressive rate structure is fair.
April 4, 2011 at 7:34 am
Just to finish, I think there are justifications for progressive taxation but they are utilitarian not fairness based. A fair tax – single rate to all – would likely discourage labor by lower and even some middle class workers and result in an aggregate welfare loss. And, at the extreme, there are social unrest risks which also result in aggregate welfare loss. But beyond those, I think there are no supportable arguments for progressive taxation.
April 4, 2011 at 5:04 pm
“Predictably, you do not mention that Social Security benefits are regressive as well.”
On a net basis, Social Security is slightly progressive, and a net basis is really the most appropriate way to make the accounting. Of course, on a net basis, Social Security is also quite solvent and secure, not a deficit creating monster as it is often portrayed.
Re Mark T’s criticism of point 1, the key thing is to recognize that there is nothing terribly natural or just about the “natural justice” of a flat tax. The fact that the economy produces a result does not make the status quo fair. An argument for a flat tax is deeply dependent upon the belief that there is inherent fairness in the status quo distribution of income and wealth prior to the imposition of taxes. If that belief is shaken, the case for a flat tax on a justice basis collapses. A progressive income tax is a backstop that recognizes that people often receive benefits that they do not deserve, rather than because they have “earned” them.
It is hardly radical to suggest that taxes, when fair, should “create pain” everyone proportionate to their ability to pay and that the ability to pay of the high income is proportionately greater, and that the status quo should yield to this vision of equal pain because the status quo is not presumptively fair. Progressive income taxes are a backstop against market failures and policy mistakes elsewhere in the system.
Point 3 is first a methodological point. If one is going to look at progressivity/regressivity one needs to look at the aggregate tax picture, not just federal taxes that are only part of the story. To judge the status quo, you need to do that. And, there is no doubt that state and local taxes are much less progressive than federal taxes, on average (your state may vary). As a whole, the aggregate tax system is much closer to flat than it appears. Also, on a percentage of income basis, state and local taxes generally really are regressive. In addition to sales taxes, there is the incidence of real property taxes, and there are a variety of excise taxes (e.g. car ownership t axes) that even when lower in straight dollar terms for the poor are still high on a percentage basis.
April 5, 2011 at 3:23 pm
If I may briefly impose on the host maintaining this blog to briefly reply to “ohwilleke”
Re point 1, whatever the merits of your assertions, they are really not responsive to my criticism. You’re responding to something I have not written. My point was simply that there is no basis to prove the contentions about “luck” which are stated as if they were fact. Your own comment uses the word “recognize” as if there were something empirically observable that I am missing. There is nothing empirically observable. The point is simply a postulate, like a religious belief. You can hold it personally, I don’t care. But you can’t prove it and thus the argument collapses to those who do not share your faith.
Point 2, I am going to skip to be brief
Point 3, again, I think you are not really responding to my argument. I understand what you say as a descriptive matter but it doesn’t prove anything about fairness. The argument “progressive is fair because regressive is unfair” is simply circular (it’s the same as saying “regressive is unfair because progressive is fair” – that’s circular).
April 7, 2011 at 11:25 am
I think the problem with Hagopian’s analysis is that he uses several unrealistic assumptions that drive his conclusions. First is the assumption that the $25,000 household works far fewer hours and the $150,000 household works far more hours. If this were true of typical $25,000 and $150,000 households, he might have a point, but of course it’s not true.
Second, they split up the bill after, not before, building the gate. If, realistically, they agree (i.e. bargain) on the split before building the gate, the picture changes dramatically. Now you have the far more insightful and real worldish situation that the three households will have to strike a bargain that is agreeable to all. (Or else not build the gate).
How will they make the bargain? I think the bargaining will reflect the marginal utility concerns raised in Meg’s comment above.
The $150,000 household may insist on only paying one-third, or only paying a share proportional to its income, but that may result in the gate not being built. The best outcome for the $150,000 household may well be a bargain where it pays a share higher than its share of total income.
Finally notice that there is an equal number of each type of household. Suppose instead there were 100 households reflecting the actual percentages for each income level that occur in the US population. The 150,000 household would of course no longer pay 78.2% of the bill, it would pay the far lower share it required of it under the US tax system. Now would it want to build the gate, that is the question that Hagopian should be addressing.
April 7, 2011 at 11:52 am
To follow up my own comment, suppose you assumed there were 10 households instead of 3, and divided up as follows: 3 low-income households earning 25,000; 5 middle-income households earning 75,000; and 2 high-income households earning 150,000.
Now if each middle-income household contributes $6550 and each high-income household contributes $23,450 (as in Hagopian’s example), then each high-income household only contributes 29.4% of the total, instead of 78.2%. (I now assume a more expensive gate costing $79,650 just to keep the math simple).
April 19, 2011 at 5:45 am
1. Luck: The factors you call luck can all have their probability changed significantly by effort and taking rational risks. If you tax such “luck” you tax the effort and punish the risk taking. What you tax you get less off. This is all needed for wealth creation and thus any revenue.
2. Ability to pay: This is the same argument as the first one. I am able because I am lucky and I am lucky because because I work on tweaking my chances in my favor. Fairness does in no way translate “ability to pay” into “having to pay”.
Diminishing marginal utility is a good argument but it does not bring you very far. If you cannot afford basic food, shelter and clothes you cannot afford to pay any taxes, I agree. But when you can afford that, the marginal utility of more money becomes highly subjective and cannot in fairness be used as a measure of objective taxation.
3. Income tax progressivity helps to offset the regressivity of other taxes: So you try to use evil to cure evil? I think evils should be added and not multiplicated.
May 13, 2011 at 6:37 am
Re: Are progressive taxes fair?
I wanted to comment on your 3 reasons in favor of progressive taxation: Luck, ability and countering regressivity.
1. Luck. Undoubtedly luck plays a role. So does effort. We’ll never parse out the difference. Two comments: a. It is a non-sequitor to say that if the income came from luck, that the government/society/others has a right to take it. and b. If we were able to parse them out perfectely, would you then be comfortable with no progressivity on those that make their money with pure effort & no luck? 3. Countering regressivity. The argument you put forth is really about measurement. You almost argue that if we measure taxes correctly, we should strive for neither progressivity nor regressivity. and 2. Ability to pay. They can pay more and they save more. But you are implying that spending is good/needed and savings are not needed, hence tax away some of the saving. I can’t agree with that. Saving is in fact vital; it has a lot of value. (I’m glad I found your blog. I may disagree with where you land but it’s refreshing to hear much deeper and better supported arguments than I usually see.)
May 17, 2011 at 10:17 am
Dr. Kenworthy,
I understand your background is in sociology so perhaps my economic background has me internally conflicted.
1. Luck. I actually had not considered this before now. I really have no objection to this and think it’s a valid concept. If and only if the raised income tax on those with more luck actually is transferred to the benefit of those with less luck. I question if this actually takes place. How can we know?
2. Ability to pay. Certainly – however, the next logical question is whether or not they should.
3. This is where I wish you would have provided some support. Granted, this may be due to my own ignorance on the tax code, and I do understand what you’re getting at, yet I don’t see how you’ve come to the conclusion that overall we’d be regressive were it not for the “progressivity” of the income tax. What other specific tax types are so regressive?
Also, I’ve read elsewhere and found it a sound argument for progressive taxation that the rich (or as you might call them, the lucky) make greater use of the commons (there goes my inner economist again) and therefore should be taxed accordingly (to a higher extent). Obviously this would be more likely to apply to corporate or other forms of taxation, but it does provide some degree of support.
I’m also curious what your thoughts are on the role evolution (more specifically darwinistic concepts) plays here. You argue that those who are more lucky are so as a result of chance. Is this really the case? Even if it is, is that necessarily wrong and should they be “hindered” by greater taxation? It seems that the differential here would be to answer the question of whether it is greater to benefit a society as a whole or to benefit the individual/family unit.
May 20, 2011 at 11:49 pm
I am with John Rawls and oppose progressive income taxes.
He preferred progressive consumption taxes, according to Rawls, because it “imposes a levy according to how much a person takes out of the common store of goods and not according to how much he contributes”.
A simple way to have a progressive consumption tax is to exempt all savings from taxation.
With his emphasis on fair distribution through state initiatives, Rawls’s initial appeal is mainly to the left, but left-wing thinkers also found his acceptance of capitalism reactionary and his tolerance of social discrepancies unpalatable.
Rawls was alive to the importance of incentives in a just and prosperous society.
If unequal incomes are allowed, this might turn out to be to the advantage of everyone. Rawls’s theory does not rule out the competitive pursuit of excellence.
In the Law of Peoples, Rawls expanded:
• Imagine two countries starting out from roughly equal levels of wealth.
• One invests in industry, the other prefers “a more pastoral and leisurely society”.
• Some decades later the first country is twice as wealthy as the second.
• Should the industrialising country be taxed to give funds to the second?
• According to the duty of assistance, Rawls said there would be no tax!
The industrial society, through its own efforts, outstripped its lazier rival. Rawls asked why it had to give away its gains to those who have worked less hard?
Was it that old leftie and Nobel laureate James Merrless who was most disappointed to discover that the optimal top marginal income tax rate was zero?
June 29, 2011 at 2:05 pm
Among the many problems with Rawls’s ideas is that the modern developed economy is almost entirely a service economy and thus there is no “common store of goods”. This is a common fallacy of redistribution argument – the supposed existence of a storehouse of wealth that ex ante belongs to no one and is simply plundered by those who are more greedy than the mean. But in truth, the economy is mostly the labor of (presumably) free people and the value placed on that by their (presumably) peers. To say nothing of how digitalization has made it a commonplace to take something out of the “common store” and yet leave everything there for the rest of the population.
June 29, 2011 at 11:27 pm
mark T, good point.
progressive taxes do treat some people as mere sources of money for others, as Nozick observed.
resources have moral histories. there is no central distributor of wealth distributing manna from heavan.
of couse, there is director’s law.
Director’s Law states that the bulk of public programmes are designed primarily to benefit the middle classes but are financed by taxes paid primarily by the upper and lower classes. The law was first proposed by Aaron Director.
The philosophy of Director’s Law is that, based on its relative size in the population, the middle class will always be the dominant interest group and median voter in a modern democracy. As such, the middle class will use its influence to maximize the state benefits it receives and minimize the portion of costs it bears.
the growth of the state in the 20th century was in tandem with the growth of the middle class in relative size and as a unified politically articulate group.
after 1980, there was more political diversity within the middle class and the costs of furthur tax rises was rising at an increaing rate, so public sector and tax growth tapered,
September 23, 2011 at 4:02 pm
What is fair?
How much money can a person keep out of what he makes?
What is fair?
Why should government be allowed to take income taxes at all?
Why should government be allowed to decide what is fair?
Simple question: WHAT PERCENTAGE SHOULD THE ‘RICH’ PAY?
HOW MUCH?
How many percent?
Percent, please.
PERCENTS
How much?
How many percent?
Come on, HOW MANY PERCENT?
September 23, 2011 at 4:03 pm
Just in case it didn’t sink in:
HOW MANY PERCENT SHOULD A ‘RICH’ PERSON BE ALLOWED TO KEEP OF HIS EARNINGS?
HOW MANY PERCENT SHOULD HE BE FORCED TO PAY IN INCOME TAXES?
PERCENT
PERCENT
GIVE ME A NUMBER.
January 6, 2012 at 4:26 pm
My genes belong to me lucky or unlucky, they make up who I am. I see no difference between being asked to give up the fruits of my labor genes for the purpose of leveling the playing field and being asked for the generous supply of eggs in my ovaries. Life is unfair. People are different. My luck belongs to me. The richest woman I know has a dead son. I have 6 healthy kids. I may have nothing in my pocket but I consider myself the lucky one of the two of us. The US tax code is not there for the purpose of redistribution or social engineering. When government serves to engineer our society it becomes oppressive. Taxation should be the responsibility of the states who then contribute to the federal government. Direct taxation from the federal government is unconstitutional and they knew it when it was introduced it to pay for the civil war. The mess we are in, all the debt we owe, goes back to this unconstitutional action when the federal government usurped its citizenry. The tax is illegal regardless of how it is levied progressive flat or fair.
January 6, 2012 at 6:12 pm
Lane, on luck, are you talking of option luck or brute luck?
Nozick accuses Rawls of begging the question if he intends to argue from the arbitrariness of brute luck to the moral desirability of equality.
Unless we have already established a presumption in favour of equality, the fact that luck plays a role in bringing about an unequal outcome does not per se undermine whatever moral legitimacy the outcome enjoys.
Nozick also pointed out that under Rawls’s difference principle, who ends up with more and who with less will depend on contingencies no less arbitrary than those that are claimed to taint the distributive outcomes of a market economy unregulated by the difference principle
According to Nozick, if brute luck factors influence the endowments and possessions that individuals come to have, provided that this distribution does not come about via violation of anyone’s Lockean rights, the contribution of luck to the outcome does not morally taint it. Bringing about an unequal outcome does not per se undermine whatever moral legitimacy the outcome enjoys.
Equality presupposes that individual talents are collective assets and my good luck is at the expense of your bad luck.
The market economcy through private innovation and technological advances produced massive improvements in well-being, with disproportionate advances for the poor.
No egalitarian theory can deliver the promised levelling of differences in wealth without seriously compromising overall levels of social welfare. By expanding the scope of government, the door is opened to selfish political forces whose political clout ensures ill-conceived programmes.