18 May 2017
Taxes Should Not Be Progressive
The Tax Code Should Not be Progressive
May 1, 2018
Donald Trump has unveiled a new tax plan. It cuts the number of personal income brackets from seven to three: 10%, 25%, and 35%. The plan lowers the top rate from 40% to 35%. It also reduces business taxes from 35% (the highest in the Western world) to 15% and reduces the rate for small businesses that constitute their owners’ personal income from 40% to 15%. In addition, it eliminates the 40% death tax (estate tax) that rich people pay.
The left immediately criticized the plan because it unduly benefits the rich. The Tax Policy Center estimates that the plan would increase the after-tax income of the top 1% far more than it would the middle class and poor. This criticism assumes that the tax code should be progressive, that is, it should tax those who make more money at a higher rate than those who make less. But why think this?
One reason to be skeptical of progressivity is that that businesses normally charge a flat fee. For example, Burger King charges the same price for a Big Mac to the rich and poor. The same is true for the sellers of cable TV, sneakers, massages, and Toyotas. No one thinks this is wrong or unfair. Whatever justifies a flat fee for these goods and services likely justifies a flat fee for government goods and services.
If anything, the poor should pay more because they use more services. The Heritage Foundation’s Robert Rector and Jason Richwine report that in 2010, the average household headed by a person without a high school degree received $35,000 of taxpayer money (benefits received minus taxes paid). In contrast, the average household headed by a college graduate paid out $29,000 in taxes (again, benefits received minus taxes paid). An analogy would be if a poor family of nine insisted that they pay the same percentage of their income to Burger King as a rich family of three despite the fact that the former ate five times as many burgers. It is unclear why the business world should have flat fees, but the government should not.
Taxes should not be progressive because the poor are more deserving. Depending on the theory, deserved income is a matter of the degree to which someone works harder or longer, contributes to others’ well-being, or sacrifices to produce things. The rich work noticeably longer hours. The Free Exchange column in The Economist reports that by 2005, college-educated people worked on average two hours more per day than those without a high-school diploma. More than one out of four of the former worked more than 50 hours a week, a much higher percentage than high-school dropouts. Princeton’s Mark Aguiar and The University of Chicago’s Erik Hurst found that college-educated people have noticeably less leisure time than their non-college-educated counterparts. I do not know, though, if the rich work harder or face more pressure at work.
The rich also contribute more to others. Standard economic theory holds that in the free market those who make more money contribute more to others’ lives than those who make less. This is why customers pay more to buy their things and why firms pay more for their labor. A chief financial officer can improve or worsen a large corporation’s efficiency by tens of millions of dollars. A low level clerk doesn’t have such an impact.
Sacrifice is hard to measure but it likely tracks things like the degree to which someone put off having an income to go to school, waited until she was married to have children, had less leisure time, etc. The rich made more of these sacrifices than did the middle class who in turn made more than did the poor.
Here is another way to look at who deserves what. The Brooking Institution’s Ron Haskins points out that for people who do three things (finish high school, get a full-time job, and wait until age 21 to get married and have children), 75% will be middle class and only 2% will be poor. For most people, this is not too much to ask.
The progressive tax rate is sometimes defended because the poor need taxpayer money more than the rich. That’s true. But if the poor are going to be given taxpayer money that they neither earned nor deserve, it is better that it be given out as welfare or, perhaps, subsidized housing, food, medicine, etc. rather than disguised as a tax return. Disguising welfare as a tax return makes it less clear the degree to which some people are carrying others. This is not good as it makes it harder for voters to assess whether taxpayers are doing too much or too little. By analogy, if a poor single mother were allowed to use your credit card, it would be better for both you and her if it was clear how much she was spending rather than commingling your and her spending.
The U.S. tax code is very progressive. Here is one way to see this. Economist Mark Perry using a Congressional Budget Office study of 2013 taxes found that the bottom 60% of U.S. households received more in federal transfer payments than they paid in federal taxes. The top 20% paid for this transfer plus almost all other costs of running the government. They did so because they pay a much higher percentage of their money in taxes than every other group, far more than even the upper middle class (households with 60-80% incomes).
There is an issue as to whether the progressive income tax even benefits the poor. There is good reason to believe that flatter and lower taxes (especially lower business taxes) would create economic growth that would benefit the poor and middle class more than would higher taxes. Still, even if this were not true, there is nothing right, fair, or just about a progressive tax.