Progressive Taxation
Friday 25 June 2004 - Filed under Essays
Dan has been commenting profusely on my blog (which I appreciate!) and keeps taking issue with my point of view on taxation. Rather than respond in some comment hidden deep within the site, I thought I’d write my response here.
The whole taxation issue is a debate of degree. I know of no Right-wingers who go so far as to say we should not have taxes. American obviously needs taxes. The issue is this notion of progressive taxation. If, for example, there is a flat $100 tax on something and I make $10k/yr and you make $100k/yr, the $100 is a much greater percent of my income than it is of yours. This is a regressive tax. If we change it so the tax is 1% of our income, then I pay the $100 but you have to pay $1000. Now we are both paying the same percent of our income. This is a flat tax. A progressive tax is when I pay 1% of my income and you, because you make more money, pay 2% of your income. This is a progressive tax and I would pay the $100 and you would pay $2000.
The argument against regressive taxes is that they end up hurting the most those people with the least. They also don’t raise much money — in our example the regressive tax raised $200 vs. $2100 raised by the progressive tax.
The flat tax makes a lot of sense. There are two main reasons, in my opinion, why the progressive tax is justifiable given the seeming logic of the flat tax:
1. It raises more money. In our example we raise an extra $1000 from a progressive tax vs. a flat tax.
2. It puts a larger percentage of the tax burden on those people who can most afford it. The richer you are the less your lifestyle is impacted by taxes. If you pay 30% of a $20,000 income, you are barely getting by on $14k/yr. If you pay 40% on $100,000 you still have a comfortable $60k/yr to live on. So you make 5 times as much as the other guy but live on 4 times as the other guy. That doesn’t sound so bad to me.
Think of it like this: if we had a regressive tax, the tax would have to be so huge that it would probably be greater than the poorest people’s total income and would be a rounding error for rich people. We would make a large percentage of the population destitute if we did that and the rich would be paying a miniscule percentage of their income.
With a flat tax, no one could be taxed more than they make, but the taxes would still have to be fairly high on the poorest people. With a progressive tax you can generate the revenue you need while still allowing poor people the opportunity to become not-poor. This is not altruism — it’s an economic strategy to keep our economy strong by getting as many people participating in it as possible. The more poor people we turn into middle class people the easier the tax burden will be on everyone.
A couple more points:
1. I don’t believe that progressive taxation creates any disincentive to create wealth. More is still more and you can have whatever lifestyle you want. As a friend of mine once said, I look forward to the day that I have a million dollar tax bill.
2. Neither is progressive taxation an incentive to be poor. Being poor sucks and no one disagrees with that. No rich person would choose to be poor to avoid a tax bill. This is a fundamental test of fairness — how would I want it if I were the other guy?
3. The level which our government spends should be predicated on our needs and goals, not our ability to raise money. Progressive taxation should not be an incentive for government to be wasteful or to grow beyond our collective ideas of our needs and goals. The argument should not be valid that we shouldn’t tax progressively because it encourages spending.
Bottom line: we should tax progressively because it is fair. It puts most of the cost on those who have benefited most and who will be impacted by it least. It is a tactic to fuel economic growth by turning people who are tax burdens into people who are tax payers. Any strategy which puts more of the tax burden on the poor ultimately hurts the rich, too, because we hobble our biggest potential of economic growth.
Image how this American economy would thrive if we had a 0% unemployment rate and a 0% poverty rate. We could all pay less taxes because we’d have more people paying and less taking.
Finally, to paraphrase the late great Paul Wellstone, we have an anti-welfare agenda in this country when we need an anti-poverty agenda. Not only because it makes economic sense but because it is the right thing to do. In the richest nation in the world, no one who works full-time should live in poverty.
2004-06-25 » lolife
27 June 2004 @ 12:13 pm
First of all, I want to thank you for bringing up the subject of progressive taxation like this. I agree it’s an easier way to discuss the subject. Second, I want to tell you that I think we are largely not talking about the same thing when we discuss the progressive tax structure we all live under today. I do not begrudge the poor for not paying taxes. Like you, I do not see the point in having someone pay taxes when they cannot possible subsist on what they earn. This is illogical and pointless. Where I have a problem is the large percentage of the middle class that I also subsidize. This is where I look at our current tax system as a tyranny that unfairly parts me from my money for nothing better than my being a member of a smaller voting bloc. Unless you are able to convince me that the bottom 75% of taxpayers are, by definition, poor, then its going to be hard for me to accept that its my responsibility to partially or wholly pay for their government services.
Also I want to address a perception that right wingers want no taxes. Right wingers, as seen in the USA at least, only differ in the amounts that are taxed and where the money will be spent. Even Libertarians who say the just want someone to deliver the mail, guard the borders and stay out of their lives will have to acknowledge the need for some taxes to pay for these reduced government services. Only an anarchist could possibly advocate a system with no taxes since no government is possible without some minimal level of funding.
I want to point out that I have never suggested a regressive tax and I also do not favor a regressive tax. Like you, I believe this is wrong and ineffective. I have no problem at all with paying more in aggregate taxes in some proportion to my extra income earned. If I earn 10 times as much in income, I have no problem paying 10 times as much in taxes of even more than 10 times as much. I just do not want to pay 50-65 times much in taxes for earning 10 times as much in income. As such, I have no problem with the strictest definition of a progressive tax. My problem is with the progressive tax we live under today.
Even my proposed flat tax is effectively progressive since it has an income deduction for anyone. For example, lets say you have 3 people. The first earns 10,000 dollars per year, the second earns 50,000 dollars per year and third earns 100,000 dollars per year. Lets also assume for the sake of argument that the poverty line is 10,000 dollars per year and this poverty level is the deduction all taxpayers receive. Finally, lets assume a flat tax rate of 20%. Our first person would earn 10,000 and pay no taxes. His effective tax rate is zero. Our second person would earn 50,000 and pay taxes of 8,000 giving him an effective tax rate of 16%. The third guy earns 100,000 and pays 18,000 in taxes. His effective tax rate is 18%.
In this example, there is still a “progressive” element in the flat tax, but its far more equitable. In this example, the guy in the middle is paying more and that’s my point. I do not mind the guys near the poverty level getting a free ride. Like you, I believe this is the decent thing to do. I just have trouble understanding how 50% of our taxpayers are at this level and are justified in receiving the free ride. I also fail to see how the next 25% of taxpayers are justified in paying less than they receive. In practice, the middle guy from my example would pay much less in taxes and the top guy would pay much more. That’s my beef. The middle class who have their discretionary income subsidized by a “soak the rich” mentality.
If we were just talking about the small degrees of difference in your example, then I would be all for it. Heck, my flat tax proposal is more in line with the parameters you outline than the actual system in place. Trust me on this one. My degree is in accounting. I worked for a CPA for 1.5 years out of school and went through 2 tax season with him. I prepare the payroll for my company and I know what people are paying at several different points along the line. What we have now is a system where the upper class pay for the poor and pay for much of the middle class. What we have now is a system where people like my self are asked to subsidize the discretionary income of the middle class. That’s the problem and that’s the point that is hard for me to think of as equitable.
As for your point about a progressive tax system not creating a disincentive, I think you are oversimplifying it. In your benign example, it would be hard to argue that any disincentive is created. In the real world with the system we all live under, it does create a disincentive. I pay 5 to 6 times as much in taxes for every dollar earned as do my employees. Its not me paying 40% while someone else pays 30%. It’s a matter of me paying 50% while they pay somewhere between 8% & 10%. Sorry, but that’s not equitable.
Once again, its all a matter of degrees. At what point, is it not worth the effort for some young entrepreneur to start their own business? At what point is it not worth it to sign a personal guarantee on a 200,000 dollar note at the bank, work late, worry and wonder if your are going to make it? At what point is it easier to just take a check from someone else and not take the risk. Think about these questions long and hard, because people like this young entrepreneur are the ones who create an awful lot of the new job in this country. At some point you kill the milk cow and then there is no more milk for anyone. New jobs decrease and the income earners who are so much fun to soak decrease in numbers too.
I never said a progressive tax structure was an incentive for someone to be poor. My argument is not really with giving the poor a free ride on taxes. Its about giving the middle class too much of a free ride on taxes. I do think it’s an incentive for the middle class to remain ignorant about the political process and apathetic about the choices our elected representatives make.
While your third point looks great in theory, its just not realistic. Sorry. I do not mean to offend, because you seem like a decent guy. Still, there is no way for politicians to behave the way you described in point #3 unless you make them accountable. Since the politicians will not be held accountable until the voting public has a reason to care and the voting public will not care until they feel some of the pain, I think we come back to my argument that the middle class ought to pay for more of their own bill for government services used.
While I like your dream about us all paying less in taxes, because unemployment is at 0%, this just won’t happen. I guess this is another place you and I part ways because I do not think we can tax the rich enough to finally solve everyone else’s problems. It just doesn’t work that way. Primarily because the government cannot fix all problems. We cannot fix the world by just making the government big enough to tackle all of the world’s problems. Sorry, but its just the wrong tool for the job. Of course some government involvement is needed (such as regulation on industry and commerce), but I suppose we will differ once again on matters of degree. : )
4 July 2004 @ 10:56 am
I’m still confused why you feel the the middle class does not pay its share. First of all, by definition, the middle class is the middle of the bell curve and by far represents the most people. I’m not quoting actual stats here but my guess is there are maybe 10% you could call “poor” and 10% you could call rich and the other 80% is the middle class. They pay far more dollars as a group than anyone else. They also tend to pay a “retail” rate in taxes because they don’t have teams of accountants figuring out how to set up tax shelters. I just saw a report recently about how the richest people in this country tend to pay a smaller percentage of their income in taxes than the middle class because of the vast ways they can shelter income from taxation.
We could argue a lot of the detail here but it seems to me we largely agree that progressive taxation is ultimately a wise way to keep our country fiscally strong. I agree with you that there has to be limits to the degree which we can tax even the richest people in America. My motivation here is really to say that rich people seem to spend way too much time bitching about and avoiding taxes. People act like the very worse thing that can happen to a dollar is to have it go to the government and I believe that is anti-American.
25 November 2004 @ 3:16 pm
I believe that there are essentially 5 classes:
Bottom 20% of population by income = lower class
2nd 20% = lower middle class
3rd 20% = middle class
4th 20% = upper middle class
top 20% = upper class.
If we are willing to claim that the top 10% of Americans are “upper class” and 80% are middle class, that leaves 10% as lower class. I offer the following commentary:
from the website: http://www.justpeace.org/structures/squeeze.htm
“The Organization for Economic Cooperation and Development notes that the U.S. has the most inequitable distribution of income of all the industrialized nations and the middle class is in serious decline; the international bankers are worried about social and economic problems in the U.S. (Dubois 43). The Economist writes that since the 1970s, economic inequities have mushroomed. The top income quintile is doing great, the bottom quintile is declining (not in numbers, but in income). The conditions of the poor are described as “bad” (34). A survey of 26 industrialized nations (the Luxembourg Income Study) found that the gap between the wealthiest 10% and the poorest 10% is greater in the United States than any other country except Russia (Wallechinsky 6). In 1970, the lowest quintile had 5.5% of the national income; in 1990, that group had 3.7% — a 33% decline in 20 years (Haughton and Schwoyer 88). The Gross National Product rose 33% (in constant dollars), 1975 – 1985 (Bayer 45). The December 1995 Commonweal magazine, using Federal Reserve data, reports that between 1982 and 1994, nonfarm labor productivity increased three times that of the rate of real hourly compensation. Manufacturing productivity rose by 37%, wages and benefits remained flat. The ratio of the compensation of CEOs to the average worker in 1974 was 35 to 1; now it is 150 to 1. Using Council of Economic Advisors data, the article found that the real income of men with high school educations dropped 21% between 1979 and 1990. During 1983 to 1992, the top 1% of households net worth increased from 34% to 42% of all household wealth; the bottom 80% dropped from 18% to 15% (the top 20% in 1989 controlled 85% of all household wealth). The only other comparable era of wealth concentration was 1922 to 1929 (12-13).”
H. J. Hardy
18 November 2008 @ 2:29 pm
Well said Lolife. I think it is very important to think of progressive taxes in terms of how it enhances economic liquidity and capital flows. That is, it puts more money in the hands of people that will spend it, if given the opportunity, instead of keeping it in the hands of people that will lock it in a safe or simply invest it (which is important, but less stimulating to economic growth). You may want to have a look at Debatepedia and its pro/con article on progressive taxation, which actually quotes your article.
http://wiki.idebate.org/index.php/Debate:_Progressive_tax_rate#Yes