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.
Agreed 100% Lane, but is the Medicare part of FICA a flat tax?
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
Jon: Right — I’ve now corrected that. Thanks.
“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.
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.
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.
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.
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.
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.
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.
“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.
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).
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.
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).
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.
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.)
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.
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?
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.
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,
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?
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.
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.
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.
If the federal tax code is progressive, shouldn’t all taxes, fines, jail terms and cost of goods be progressive, as well? In other words, shouldn’t everything be progressive? Why isn’t property tax progressive? State income tax? Sales tax? FICA and Medicare? Motor vehicle fines? Prison sentences? Merchandise?
Why does Bill Gates pay the same amount for a speeding ticket as someone on welfare? Why would he have the same prison term as someone on welfare? Why should he pay the same amount for a lightbulb as someone on welfare when he could afford to pay $10,000?
The obvious reason is that a majority of Americans wouldn’t stand for it — even if that same majority would benefit most from it — because it is on its face unequivocally unjust. In America, when two people are asked to do the same task, the law affords them equal protection. You can’t have one person taking a test in a dark basement while another is in a well-lit room, regardless of whether the guy in the basement is a genius and you’re trying to level the playing field. In this country, the standard holds that people must be treated equally, without exceptions for level of wealth, intelligence, race, gender, etc.
Is the progressive tax fair? No. Is it needed to keep our govt stable? Perhaps, but only if the folk taxed permit themselves to be taxed progressively. In other words , our volunteer progressive tax system is in play only as long as the majority of folk consider it fair. Since the majority don’t pay anywhere near the taxes as a minority, it will always be considered fair, ‘almost’. Didn’t Russia switch from a progressive tax to a modified flat or consumption tax due to lack of voluntary willingness to be taxed? And how is the estate tax justifiable? It only exists as relatives want their share and are willing to pay any tax just to get ‘something for nothing’.
A progressive tax code is not only efficient, it is fair when all participants are subject to equal understanding and enforcement of the code. checking power and privilege is an essential function of a liberty loving society. Fair is a social contract, it doesn’t last as a perscription for individual autonomy.
Disagree. Checking POLITICAL power and privilege is an essential function of a society based on liberty. Yet using the blunt instrument of government to suppress economic liberties is antithetical to liberty. This includes economic liberties that permit or enable disparities in income and wealth.
I’m not familiar with a progressive tax that does not permit considerable disparity of income and wealth and I would not defend such a tax. I guess I see the progressive tax not so much as a check on economic power but as a test for economic power. The progressive tax helps to ensure that our nations economically powerful citizens (at all levels) are those with excellent leadership capabilities and are not primarily lucky, scrappy, or well connected. In the absence of a progressively challenging test the more economic power one accumulates the easier it becomes to accumulate, economically powerful citizens are not as worthy of their power as they are when subject to a progressive tax. Political power and economic power are not different species, power is power, uncontested power at any level is not conducive to the associational liberty of a society.
Inadequacies of an allegory on tax wars among the economic classes
The Hagopian “parable” oversimplifies matters. Many work hard, to the best of their abilities and do not have little disposable income. Others who had greater help, greater abilities, and greater work effort generally will have more disposable income. Thus, the wealthier easily can afford to pay higher taxes, whereas taxes are truly burdensome to the working poor. Moreover, it is axiomatic that many elected officials at each level of government and in each branch of government develop beneficial arrangements for the wealthy and economically powerful, sometimes at the detriment of the salaried worker. The highways, railways, seaways, and airways, safety first responders (police, fire, emergency), the military, the justice system, and many other features of infrastructure in myriad ways are set up so as to most strongly benefit and protect commerce. There seems to be a fundamental, philosophical difference about what constitutes “fairness-and-justice” with regard to taxes needed from individuals and groups of individuals versus benefits derived from those taxes. Hence, in my view, we need a concise, albeit comprehensive discussion, comparing for all categories of individuals at each socioeconomic scale, profession, and geographic region 1) all taxes, user’s fees, and hidden, “passed along” costs, 2) direct and indirect infrastructural benefits from governmental actions and 3) factors such as luck of birth, native abilities (and disabilities), effort, and external factors out of the individual’s control.
Oops, there was a double negative typo in the prior post, but I am sure you know what I meant…
How does one explain the role of effort. How is it that some, in spite of not being gifted, born to the right parents, well educated, or lucky, find a way to become successful. Again and again we hear the stories of immigrants who came to America in search of opportunity. These people through hard work and persistence build successful businesses providing a better life for their families. To suggest that wealth is strictly a function of fate is a slippery slope leading to redistribution of wealth policies that have not produced tangible results. Instead we have increasing public debt and a populace that increasingly believes that they are “owed” most of what we used to think we needed to “work” for.
At what point does the attempt to manage the inequities of fate place too much power in the hands of the few in Washington? The framers of the constitution wanted a distributed government to prevent the consolidation of power to rulers who did not live near the people and therefore did not understand their needs. They also were concerned with the consolidation of power fearing that any group who became the majority would use that power to tyrannize the minority. We seem to have concluded that the rich don’t pay their fair share. What’s fair?
How much is enough? Should 99% of Bill Gates’ wealth be confiscated under the premise that he didn’t earn it or doesn’t need it? That it was luck that provided a windfall and therefore this should be confiscated and re-allocated to those less fortunate?
While the logic may work for some, this introduces other concerns. If we confiscate the majority of his income, and assets, would we in effect be making him an indentured servant to the people? Is this not the type of tyranny the framers were concerned about?
Perhaps there should be a limit on the amount (absolute dollars or percentage of earned income) a “rich” person must pay. This would allow them to pay their fair, but unequal, share and be able to enjoy the fruits of their labors without further governmental intrusions, or limitations, to their constitutional rights.
Continuing to attack the productive class when they are already carrying the majority of the economic burden of government is an unsustainable situation. Ever dollar removed from the hands of a private citizen and placed in the hands of government is a dollar that could have been invested in a business or donated to a worthy cause. The decision to do so would be done at a local level with the availability of future investment in the business, or charity, subject to the private citizen’s scrutiny. It is this factor of local control and oversight that is lost when we allow government to become the primary allocator of resources.
Government’s do not efficiently allocate capital, or other resources, as it is not their primary focus. The primary focus of the political class is to stay in power and this causes them to do things that most rationale people would not do with their own money.
For this reason, attempting to manage the inequities of fate through activist taxation policies will never be successful.
Agreed. And should we ever develop that perfect method for discerning the relative contributions of luck and effort on a person’s income, are we willing to allow the earnest hardworking millionaire to pay little tax and tax heavily the lazy hobo?
Our system of government was created to protect individual liberties, not to curtail them. We’re getting it backwards lately.
Sales tax is not regressive – it doesn’t burden the poor more than the rich. It is a flat rate independent of income, and so is neutral if we suppose that consumption is equivalent. Though those with more money may well consume more and thus be liable for more sales tax. Or, low-income high-consumers may lose a proportionately larger portion of their wealt has sales tax. But these are not functions of income/wealth – only of consumption.
Regarding fairness – ability to pay is irrelevant to duty to pay. Discriminating on the basis of ability is unfair. Though if we suppose that it is not unfair, then it remains to be established that the discrimination should be against teh rich and not against the poor. Perhaps those least able to pay should be the focus of attention. Why not?
Finally, luck and effort, or merits in general, are irrelevant. We cannot reliably or feasibly measure how much whatever trait has contributed to wealth or poverty in all individuals subjected to taxation. We cannot either formulate a general rule that does not result in injustice; if we justify, through some notion of desert, high taxes on the lucky but not on the diligent rich, then we must decide which is which – and that is impossible. The null hypothesis is that every person is equally liable. The question, then, is simply as to what is truly equal – a flat-rate tax, or a flat tax? Progressive taxation is certainly not equal or fair.
Fairness is not the only important aspect of tax policy, but it must be the first. We should maximise effciency and productivity within bounds of what is fair – progressive taxation is not. If there is no fair tax policy that can meet the public spending plan, the solution is not to impose unfair policies, but to rectify that plan so that it fits within realistic bounds set by what is fair.
In response to Meg above (4th comment). Her comment discusses Diminishing Marginal Utility. While this is true, that utility diminishes, neoclassical economists have decided that it is impossible to compare utility between different people and so “2 from 10” is less than “1 from 5” (in her example) is false. Now, I am strongly opposed to neoclassical theories as they are based upon very unstable assumptions. But it should still be understood that the Diminishing Marginal Utility Law discussed is not an appropriate argument in this case. Using this argument opens the door for a Kaldor-Hicks (Potential Pareto Improvement) Efficiency Argument that is very troubling if the “losers” aren’t compensated like the law says they “hypothetically” will be. And they never are.
No big deal, just wanted to add why DMU has been skirted by the mainstream and how using it as an argument isn’t quite as strong as you would think.
The Tax System Explained in Beer
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this…
The first four men (the poorest) would pay nothing
The fifth would pay $1
The sixth would pay $3
The seventh would pay $7
The eighth would pay $12
The ninth would pay $18
The tenth man (the richest) would pay $59
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20″. Drinks for the ten men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.
And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
“I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man,”but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!”
“That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.
Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.
RATIONALE FOR PROGRESSIVE INCOME TAX
Lane wish I had seen your work earlier is it time to pick up this thread and other forums?
We support a progressive income tax, not simply because the rich have more money. We expect more taxes from the rich because their income is in large part due to their good fortune of working in greatest country ever known – the USA.
Don’t think redistribution of wealth. Think fairness in the returns from our common investment in creating and maintaining the American money-making machine. It is a machine built by all of us. A progressive tax system allows the rich the fun and glitz of working where they choose while distributing a share of their income, built on the great nation that we share, and where we, the People are their partners and shareholders in the USA.
To understand this, try to imagine the huge salaries, bonuses, and retirement packages, common to the wealthiest in the US, being received in Bhutan, Chad, or Paraguay. The super-wealth in the USA exists because the USA provides the means for super opportunity for property, industry, and the protection of wealth, accumulated by investment in it.
The typical CEO can only claim a marginal part of the responsibility of the company’s success. Steve Jobs, Thomas Edison, and Walt Disney are exceptions that prove the rule. Leadership studies of other chief executives support the general rule. Other top performers – generals, sports figures, coaches, movie stars and moguls – recognize the limits of their roles in organization and strategy to success on the battlefield, the playing field, and the screen.
What else, then, might account for the huge difference in salary in the corner office and on the loading dock? Compare the CEO of a national delivery service and that of its drivers. Does one work longer hours? Does one have greater personal risk? Greater financial risk? Who gets the golden parachute? Does one actually produce goods and services that add to the cumulative, national wealth substantively and not just by manipulation of economic systems and institutions? (The super rich enjoy a growing share of the nation’s pie without expanding the pie and often, shrinking it. Higher income inequality leads to slower economic growth.) Are CEOs that many more times shrewder, smarter and more talented? Is it harder to recruit a successful CEO than a driver? Are most high salaries largely attributable to allies on the compensation committees of their companies? Is a key difference how compensation potential is strengthened by the macro USA – where wage earners’ jobs can be sent somewhere else, but for CEO’s the sky’s the limit? What company’s ever outsourced it top management?
The GOP wants across the board tax cuts in all rates from the lowest to the highest and tax shifts that provide above par benefits to the wealthiest. They insist upon it while claiming to have the best interests of all taxpayers at heart. It’s time to smoke them out!
Cut taxes for everyone (rich and poor) by reducing with tax credits or first tax bracket rate reductions that affect the first dollar they earn, not the next Millions. Pursue a long-term goal of having no tax on the first $50,000 of taxable income – near our national median income. How many wealthy people do you know that pay any tax on the first $50,000 that they earn, anyway?
Everyone, rich and poor, benefits. Cutting the rate in the lowest bracket gives each tax payer the same tax savings as any other. More money to spend by the rest of us will increase the income of businesses and produce greater returns for their owner. A rising tide is still critical to lifting all boats. Helping to raise the lowest boats actually helps to keep the tide for yachts rising!