With the recent partial extension of the Bush Tax Cuts our income tax rate is now more progressive than it has been in several decades. However arguably the idea of progressive taxation is based on a faulty theory, is counter to the philosophical basis of taxation and takes attention away from a real conversation about disparities in tax burdens.
Progressive taxation is based on the idea that because the wealthy benefit more from our society they should pay a higher percentage of their income in taxes. Conversely, the poor benefit less from our society and so should pay a lower percentage of their income in taxes. But really it’s just the opposite – all economic classes do benefit from democratic capitalism, but it is by far the poor that benefit the most. Without democracy the poor in most countries lead truly horrific lives. Non-democratic countries are far less likely to have a safety net, allowing many of the poor to live in abject poverty with starvation a very real possibility. Without the rule of law the poor are far more likely to be abused by the state and even by the rich.
Many of the protections built into our system – welfare, public education, the protection of laws, voting rights – are specifically designed to protect the poor from the harshest outcomes and to give them the ability to effectively participate in our society. The wealthy see their lives improve under democracy as well. But the poor, because we remove the possibility of starvation and being arbitrarily killed by the state or their richer fellow citizens, realize a far greater comparative gain.
Progressive taxation also runs counter to the philosophic justification for taxes. Taxes are a payment for the services that government provides, not too different from paying for a shoe shine or somebody to mow your lawn. The primary service of government is to provide the infrastructure necessary for our economy to function, whether roads or access to power or insuring that our banking system is honest. The government has very little impact on whether or not citizens use these services profitably – whether a taxi driver makes money or loses money, the streets the government provides are the same. And the government’s costs don’t go up or down depending on the success of the citizen using the service – the cost of the road doesn’t increase because some taxis use it profitably. Progressive taxation, at a basic level, seems unfair to me – why should some people be asked to pay more to use the same service that is provided to others at a lower price?
From a societal standpoint we should want everybody to pay taxes. A primary responsibility of government is extending equality of opportunity, giving people the knowledge and tools they need to pursue their economic lives. Understanding the economics of our modern world, understanding that everything has a cost, is part of the knowledge that any person needs to be economically self-directed. Not having poor people pay taxes for the services they receive distorts their understanding of economics, of costs and value, and arguably makes it harder for them to understand and negotiate our modern economy.
Also, government is a finite institution – there is only so much it can do. We should want everybody to pay taxes so that they understand the trade offs inherent in expanding the role of government. When people think something is free they are far likelier to both ask for more and be careless with what they receive. Making everybody pay taxes is one of the ways that we can protect against over-expansion of government responsibilities.
And the last argument against a progressive income tax code is that it detracts attention from the real issue of taxation parity. Income tax is only one of the many taxes that we pay. Other forms include capital gains taxes, Social Security and Medicare taxes and sales taxes. Even with progressive taxation, the wealthy pay a smaller, and in some cases far smaller percentage of their overall earning in taxes. If you look at the percentages of income paid by people of different income levels, it graphs as a bell curve. Many poor people pay very little or nothing in taxes, the middle class pays a relatively high percentage, and the wealthy pay a smaller percentage.
The focus just on the income tax rate and its progressivity distracts us from having a needed conversation about equitable tax distribution. Everybody should pay taxes, and everybody should pay the same percentage of their earnings. This includes the wealthy and the poor.