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.