Wednesday, January 5, 2011

Progressive Taxation

A recent poll showed that over 60 percent of Americans think that the government should tax the rich in an effort to reduce the budget deficit.  Polls also consistently found that a majority of Americans wanted the Bush-era tax cuts for the wealthy to expire.  Conservatives, inexplicably, won that battle in their larger war against progressive taxation.

So with all the recent talk about taxes, I wanted to try to explain why liberals, and a majority of Americans generally, support a progressive tax scheme.  A progressive tax is one where the tax rate increases with taxable income.  So a person making a smaller salary pays a smaller percentage in taxes than a person making a larger salary.  Currently in the US, we have a progressive federal income tax that ranges from 10% for the lowest income earners to 35% for the highest marginal rates.

Mainstream conservatives typically oppose a progressive tax for moral reasons.  They argue that it is unfair to tax the wealthy at higher rates just because they have a lot of money, that it is a form of class welfare, that the poor are getting off easy, and that it disincentivizes hard work.  These arguments miss the point.
As a starting point, let's look at tithing, which is a conservative's dream flat rate of 10% for all.  Tithing is nothing like taxation, of course, and an analogy between the two is fundamentally flawed for that reason.  Tithing is a spiritual commandment, and is a matter of faith, unlike taxes which are a matter of public policy.  But it provides a nice, simple example of what I want to talk about.

Lets say there are two people, Person X makes $1,000 per month and Person Y makes $10,000 per month.  If they both pay 10% tithing, X pays $100 and Y pays $1,000.  It is tempting to say that since X and Y pay the same rate it is equally difficult or easy for them to pay, that their burden is equal.  That, however, would be wrong.  X makes very little money and thus a higher percentage, probably approaching 100%, of her income goes towards needs like rent, food, clothing, utilities, etc.  X's tithing check comes at the expense of items she needs, but will sacrifice nonetheless.  Y's 10%, on the other hand, will come almost exclusively from money she was going to use for savings, luxuries, and non-necessities.  It is much harder for X to pay 10% than for Y.

Tithing, then, in my opinion, is disproportionally more beneficial to the poor who gain greater blessings because it is a greater sacrifice.  The wealthy, again in my opinion, had better seriously step up in fast offerings if they want similar blessings, because the more wealthy a person is the easier the law of tithing becomes to keep.  There are plenty of scriptures that warn the wealthy that their wealth is a hindrance to their righteousness, and I think tithing was specifically set up to test how generous the wealthy will be with their money beyond the strict minimum required by tithing.

So for taxation, you can see why a progressive scheme is favored by liberals.  For another example, say that the we all agree that a nation of three people, for simplicity, needs $10,000 for its government to function properly.  Three people, A, B, and C, make $10,000, $30,000, and $60,000 per month respectively.  How should the tax burden be divided?  If there was a flat rate of 10%, A would pay $1,000, B $3,000, and C $6,000 and they'd get there.  But, again, this is actually a disproportionate burden on A who makes less and has a much more difficult time making ends meet under this scheme than B or, especially, C.  In this situation A actually has a higher tax burden.  A progressive tax of 5%, 10%, and 11% evens out those burdens.  You'll see that A had her tax burden cut in half and to make up for it C only had an increase of one percent.  This is more fair to everyone.

There are, of course, other reasons to support a progressive tax system.  The wealthy have increased access to influence and power, and thus more ability to shape public policy to their benefit at the expense of the poor.  Progressive taxation can even out that inequality.  There is also a persuasive argument that the wealthy receive greater benefits from the government, such as the protection of property rights, defense and security, infrastructure, and market regulation, than the poor and thus should shoulder a greater tax burden to support societal order.  Wikipedia has a nice rundown of the pro and con arguments.

What is overstated is the amount of animosity and hatred felt towards the wealthy, and the use of progressive taxation to punish them.  Some people no doubt feel this way, but the best and most useful arguments for progressive taxation do not rely on emotions or retribution.  Progressive taxation is a sound rational policy.

In fact, despite all of the hand-wringing about raising rates on the wealthy and the detrimental effect it will have on the economy, this is the least progressive tax system we've had since the Great Depression.  Throughout the steady economic growth of the 40s, 50s, 60s, 70s, and 80s the marginal tax rates were typically in the 70-90% range, instead of the 35% we have now.  During the Reagan era the top marginal rates were around 50%.  Here's a chart I think I've probably posted before from that link above.

Pres. Obama and Congress were wrong, from a public policy standpoint, to extend the Bush tax cuts for the wealthy.  In two years the best thing to do for the country would be to let them expire and properly redistribute the tax burden.  The tax system in America needs to be vastly simplified and more progressive.  I don't want to necessarily go back to a 90% marginal rate, but we've certainly gone too far in the other direction.


Architect said...

Taxation is not a free will gift, it is assessed with a threat of jail time/death. High taxation harms the poor most in multiple ways. It decimates charities. It absolves those with means from their responsibility to the poor. It makes it more difficult for the poor to save. Those with means spend less (on services and items) when the governments take more. It mis-allocates scarce resources. Think about your own investment options. If you had one million dollars ready to invest, would you invest in real estate, gold, stocks, government bonds, private sector bonds, improved education for yourself and/or your children, better living conditions, experiences or paying extra taxes? If the government has high taxes it limits your options.
Why does our current government need more money, when it has higher revenues than just about any other time in history? Why is our government spending growth so out of control? We already have the largest military hardware stash in the world. We already have national rail, highways, telephone, water distribution, electricity, oil pipelines, parks, trails, and ports. I see the present thirst for money as only so that it can be moved to favored groups and campaign contributors. Well, if you want to give away money, you should earn it, not take it by force from those that already have it.

tardfinger said...

Here is a link to one of my blog entries on the purpose and justification for higher taxes on the wealthy.

This isn't even the complete logic for it this issue though. I am a dentist and small business owner. Higher marginal taxes inspire me to spend my money instead of hoarding it. The poster above implies that high taxes stop the wealthy from being charitable. The reverse is true. High taxes inspire me to be more charitable because I won't pay taxes on anything I donate to a charity. I also am more likely to pay my employees more, give them benefits like health care, and also more likely to invest in my business and buy more expensive equipment because anything I spend, I don't pay taxes on. Thus, higher tax rates are not necessarily designed to collect more in taxes. They are designed to make the rich not hoard their wealth though which defies Lockean natural law. Higher marginal tax rates on the wealthy makes them either invest it, donate it, or give it to the government to invest or give. Lower rates just let the rich get richer. It is provable as well. I have other blog entries on that idea. But for now, need to run for my next patient has arrived finally (late though...)

Jacob S. said...

Thanks, tardfinger (which I really like to say now). There are plenty of good public policy reasons, beyond the simplistic idea that we like to punish wealth, for progressive taxation, and yours is a great example.

Architect, tardfinger addressed the charity issue. I agree with you that America needs to balance its budget, and I think most liberals would agree as well. We felt that economic stimulation was more important than a balanced budget a year or two ago, but once the economy is back on track a balanced budget and deficit reduction should be a priority.

So this post was not about raising taxes and giving the government more money, as you seem to think. It is about how to properly allocate the tax burden, which is in a more progressive system than we have now.

As for taking taxes by "force," we live in a democracy where, on issues like taxation, majority rules. We elect representatives to carry out our wishes. This is not an issue of force or theft, it is an issue of public policy and if the majority feel it should be changed, they will elect a majority of representatives to carry that out. If the tea partiers get a majority of Congress and the White House they will no doubt implement the policies that you suggest. We will see if that is what America wants.