Progressive Taxes

An essential feature of good citizenship is paying one’s fair share toward the maintenance of the common good. Determining what constitutes a “fair share,” though, has been a point of contention throughout history. Superimposed on questions of individual responsibility are issues of allocating economic resources between the public and private sector.

A recent New York Times editorial titled “A Dearth of Taxes” noted that the United States has apportioned comparatively fewer resources to the public sector, collecting just over 28% of gross domestic product as taxes.

That rate was one of the lowest among wealthy countries — about five percentage points of G.D.P. lower than Canada’s, and more than eight points lower than New Zealand’s. And Danes, Germans and Slovaks paid more in taxes, as a share of their economies.

This would be good news if it could plausibly be attributed to our increased productivity, favorable trade balances, or a burgeoning budget surplus. But, alas, Bush’s war in Iraq continues to strain our budget. Despite the president’s lower tax mantra, somebody will have to pay the piper, and it looks increasingly like it will be the poor and middle class.

Robert Reich, writing on the logic of taxing the rich, notes that the wealthiest of our society have reaped the rewards of recent changes in the U.S. tax policy, and should be called upon to pay their fair share.

Taxing the super-rich is not about class envy, as conservatives charge. It’s about the nation having enough money to pay for national defense and homeland security, good schools and a crumbling infrastructure, the upcoming costs of boomers’ Social Security (the current surplus has masked the true extent of the current budget deficit, but it won’t for much longer), and, hopefully, affordable national health insurance. Not to mention the trillion dollars or so it will take to fix the Alternative Minimum Tax, which is now starting to hit the middle class.

He continued this line of thought in a subsequent post on fair tax burden, relying on a notion of “equal sacrifice” to rationalize a proportionately higher tax burden on the wealthy (that is, a progressive tax structure):

Equal sacrifice means that in paying taxes, people ought to feel about the same degree of pain – regardless of whether they’re wealthy or poor. This means that someone earning $2 million a year ought to pay a larger portion of her income in taxes than someone earning $20,000 a year.

Asking the rich to share the suffering of the poor seems a bit ludicrous and, despite Reich’s intentions, smacks of class envy. More importantly, it is a bad way to frame this issue. Characterizing taxes as a “sacrifice” almost compels a utilitarian approach to minimizing suffering through continued tax “reform.” In fact, the rewards of our society fall disproportionately on the rich. It might be said, then, that rather than equalizing sacrifice, the goal is to achieve parity in our return on investment. That is, taxes represent investments in infrastructure, a high quality work force, and a strong defense; the returns on those investments will be shared by all, but obviously be of greater value to those with the largest capital investment in our economy.

Reframing income taxes as investments is not sufficient. In fact, taxing income is counter-productive, unnecessarily complicated, and subject to abuse and manipulation. It would be far preferable to replace our archaic system of federal revenue generation with a tax on consumption. Earlier this year, Maya MacGuineas, in an article titled “Tax Consumption, Not Work,” posted at the New America Foundation, wrote:

By replacing the payroll tax with a national and progressive consumption tax, the United States could stimulate job creation, higher wages, and higher levels of personal saving at the same time, all in a revenue-neutral manner. Families would pay taxes on what they spend each year, rather than on what they earn. Higher levels of spending would be taxed at higher rates, encouraging saving, strengthening the economy, and increasing the overall progressivity of the tax code.

Not to mention the elimination of an immense bureaucracy in the Internal Revenue Service, a vast reduction in money wasted on tax accountants and lawyers, less reliance on “voluntary” payment of taxes, a reduced level of Congressional manipulation of spending and investment, and a shift of the basis for business decisions from tax consequences to true economic benefits. And, of course, the virtue of providing disincentives for over-consumption and incentives for savings and capital formation. Rather than expound on the virtues of such a fair tax plan, readers are referred to groups like Americans for Fair Taxation.

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