Progressive taxation is neither fair nor good

Stephen Kershnar
Progressive Taxation
Dunkirk-Fredonia Observer
October 19, 2020

             Presidential candidate Joe Biden announced that on day one, he would repeal President Donald Trump’s 2017 tax cuts and raise taxes another $500 billion by closing loopholes. He plans to spend some of the money on making college, medical care, and pre-K education cheaper, if not free, for many people. He would also lavish money on schools, paying for new guidance counselors, nurses, and psychologists as well as higher pay for teachers. This proposed spending orgy raises the issue of whether it is fair or prudent to ratchet up taxes on the rich and upper middle class.

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.