Progressive Taxation
Dunkirk-Fredonia Observer
October 19, 2020
A progressive tax is a tax in which the
tax rate increases as the taxable amount increases. Using 2017
IRS numbers, the National Taxpayers Union reports that the
top 50% of all taxpayers paid 97% of all individual income taxes, while the
bottom 50% paid 3%. Making matters worse is the fact that the top 1% paid a
greater share of individual income taxes (39%) than did the bottom 90% (30%).
The rich also paid a higher percentage of their income (top 1% paid 27% of
their income) compared to the middle class (top 10% to top 25% paid 11% of
their income). As usual, the poor free rode on the others’ labor (the bottom
50% paid 4% of their income). Corporate taxes follow a similar pattern.
Here is another way to see how incredibly
progressive taxes are in the United States. If we split taxpayers up into
quintiles by income (0-20%, 21-40%, 41-60%, 61-80%, and 81-100%), a 2016
Congressional Budget Office report found that first three quintiles get more in
government transfer payments than they pay in taxes. That is, they make money
off of the tax system. The fourth quintile pays only 8% of its income in taxes
once government transfers are subtracted from their taxes. It is the fifth
quintile, upper middle class and rich, that pays a high rate.
We might evaluate these taxes in terms
of fairness or goodness (making the world a better place). First, consider
fairness. As University of Colorado philosopher Michael Huemer points out,
progressive taxation is unfair. He notes that if five friends go out to dinner
and later receive the bill, no one would suggest that the person with the most
money should pay for the everyone else’s dinners or even most of the cost of
their dinners. Instead, the friends would insist that each person pay the cost
of his own dinner. Fairness, then, requires that a person pay for his cost.
If we apply this sense of fairness to
taxpayers, Huemer notes, we should eliminate progressive taxation. The poor likely
cost more and should thus pay more than the rich. The poor get free or subsidized
food, housing, medical care, and schools as well as welfare. They also cost
more because there is more crime in poor areas. If taxes cannot be a flat
amount (for example, $10,000), then they should be a flat rate (for example,
25% of income).
The rich might benefit more from the
government – because they have more valuable property to protect – but this is
irrelevant. The restaurant goers would not think one friend should pay for
others’ dinners merely because he enjoyed his dinner more. In any case, given
the crimes rates in poor areas, it is unclear whether the rich benefit more
from the government than do the poor.
The rich likely deserve their income at
least as much as do the poor and working class. On average, rich people
contribute more economically to their fellow man than do others, which is why
the market pays them more. On average, they had to sacrifice more to develop
their skills. They also work noticeably longer hours than do others. Hence,
they are therefore at least as deserving of keeping their money as are the poor
and middle class.
People sometimes argue that the rich
have a greater ability to pay taxes than do other groups and, hence, they
should pay more. However, an argument is needed as to why a greater ability to
pay should result in a duty to pay more. Huemer notes that because the ability
to pay depends on wealth, not income, the ability-to-pay argument would suggest
that the US replace the income tax with a wealth tax. Yet, few leftists argue
for such a replacement. And, returning to the restaurant analogy, the friends
would not think it fair to stick the wealthiest friend with the bill.
Second, progressive taxation likely makes
the American people worse off. Progressive taxation transfers money from people
who benefit less from a given amount of money (for example, $10,000) to people
who benefit more from it. This is diminishing marginal utility. However,
progressive taxation also reduces the incentive for the rich to engage in
productive activities such as starting new businesses, expanding existing ones,
or investing their money in other people’s businesses. The rich invest and save
at higher rates than do others. In the long run, productivity is more important
than diminishing marginal utility. This is especially true given that
government skims off a lot of the money that is being transferred and spends it
on itself. Worse, the government often transfers money in ways that make things
worse (for example, by subsidizing fatherless households). Because economic
freedom correlates with happiness, income, and political freedom, lowering
taxes on the most productive citizens would probably make the American people happier,
richer, and freer.
In general, then, progressive taxes would be replaced with
a flat rate, if not a flat amount. It would also be better to transfer some of
the taxes the rich currently pay to the poor and middle class. In a democracy,
when some people can vote themselves other people’s money, irresponsible
spending is sure to follow. Joe Biden’s fevered spending dreams are a case in
point.
