As the campaign came down the home stretch, the focus turned to the economy, and much attention was paid to the respective tax plans of the candidates. That McCain's trickle-down nonsense was able to find a voice of support outside of corporate boardrooms gives insight about the prism through which we view our lives as a nation. It wasn't just Joe the Plumber, and it didn't stop with the election. I've heard several people comment about their concerns now that Obama has won. It's generally something along the lines of "Why punish people for being successful?" Those more callous and brazen may phrase it differently: "I worked hard for my money, why should you take it away and give it to someone who didn't?"
Recognizing that the discussion is not simply about individual tax returns, but about economic philosophies and frameworks through which we view our nation and world, I have set out to answer these questions (since I keep hearing them)--or more accurately, to show why they are misguided.
Upon discussing progressive income tax structure (higher taxes for higher income), one often hears: "Why punish people for being successful?" We should also recognize that the discussion is not one about individual tax returns, but about economic philosophies. One posits that money is the only thing in this world worth striving for, and that markets work the same way in this world as they do in Econ 101 textbooks. But reality is more nuanced and complex, and naturally, more difficult to explain. Thus, philosophies based on the real world will be less prone to consensus; but still ultimately more useful. So, some things I hope may be useful to impart if you happen to come upon people with similar questions in the course of your life:
- It's not a punishment. If you make 300,000, and your friend makes 70,000, you will not be thrown in jail (unless you came by that 300,000 by illegal means, but lets ignore that since it's not relevant). You will not be put in the stocks. You will not be flogged. In fact, you will still bring home more money than anyone who has less income than you--having more money doesn't sound like punishment to me. "But," you say, "They're taking more of MY money!" Well, here's the thing. You know all of those forms you sign when you start a new job? Well one of those says, "I agree that the government has a right to some of the dollars I earn so they can keep doing the things that allow this job to exist, including making dollars exist in the first place." I mean, it's not in those exact words, but trust me; that's what it says. And if you're now wondering whether you're getting shafted...you're not. It's a good deal. You don't want to build, maintain, and repair roads all by yourself, do you? (-maintain a clean water supply? -test all your food to make sure it's not dangerous?) No, that would be incredibly inefficient (yes, even more inefficient than the government). Well, taxes it is, then.
- Let us dismiss with the idea that a higher tax rate automatically equates to more taxes paid. Between deductions, loopholes, and complex accounting, the super rich actually pay a lower percent of their income in taxes than the middle class do. Ask Warren Buffet. In November 2007, he issued a bet to the Forbes 400, that he would pay any of them a million dollars if they could prove they paid a higher percentage of their income in taxes than the average of their receptionists. No one collected that million. One of the reasons is that much of their income is taxed as capital gains, which is taxed at 15%, rather than earned income. Despite a higher tax "rate", the wealthy still pay less of their income in taxes. And even without such disparities--even if you closed obvious tax loopholes and taxed capital gains at the same rate--the wealthy will always have both influence and resources at their disposal that the average person does not. Also, those with more disposable income will always find ways to hide/invest/reallocate that money, since it doesn't need to be spent on food, shelter, transportation, healthcare, etc. Add influence and resources to the natural advantage of simply having enough money that you have to figure out what to do with it, and you've already got a stacked deck. So, let us shed no further tears for the poor, unfortunate among us; those wealthy few who make many times more money and still pay less taxes.
Ok, we've gone over why higher taxes on higher income is not a punishment; let's go over what it is. It is recognition of at the reality that we do not have a free market economy; the only basis for the claim of a progressive tax being "unfair". Despite what neo-liberal economists have claimed for decades, we do not now, nor have we ever, had a free market economy—and most importantly, we will never be able to. Any philosophy which relies heavily on the abstract principles of the market to lead to the best outcomes is simply intellectually lazy. We can see this reflected in several ways:
- Any hypothetical well-functioning market includes the assumption of perfect knowledge of everything, and this level of knowledge is unattainable. Every transaction, every cost (not just those on a balance sheet), every potential benefit would be known to every consumer. Everyone would know what companies pollute, or have unsafe labor practices, or simply inflate the quality of their product or service—and each consumer would take all of these things into account with every purchase. This level of information and awareness is not only unattainable, but undesirable to those most able to provide it: our corporations and financial institutions. If everyone else understood what they were doing, they wouldn't make NEAR as much money, or they'd be forced to put in real effort to do things the right way. A company ruining groundwater creates the need for government spending to clean it, plus healthcare costs of those drinking it before it is exposed, plus the opportunity cost of not having that water source clean and available for use. But, companies are not required to calculate these costs and put them on their label or website. Disturbingly, they are not even expected to take them into account when they make business decisions.
- A free market only results in the best outcomes for all if the playing field is even and functions with the same rules and outcomes for all; this is clearly not the case. It's not even within the realm of possibility. The playing field is not even, and not everyone starts out with the same opportunities/advantages. Even worse: Those who start out in a more advantageous position tend to continue receiving advantages and opportunities that others do not. Wealth is accumulated and passed on from generation to generation. If your parents were rich, you get to start out rich. Do we really want to be a country where we accept that financial security is a birthright for some and an unattainable dream for many more?
- Income is not directly proportional to hard work (or even smart work, or even touted "market demand"). Regardless of the form it comes in, executives are often compensated on the order of 10,000% (and up) more than their employees. Are we really willing to believe as a nation that the executives work 10,000% harder, are 10,000% smarter—or even 10,000% more valuable—than the people who actually perform the tasks that make their company run? In any case, it is often not the market deciding what executives will be compensated, but the executives themselves (as they sit on the boards of each other's companies). So the "what the market will bear" argument as justification for astronomical disparities of income and wealth is a poor one on two counts. And I would be surprised to find even executives willing to state publicly that they work 10,000% harder or are 10,000% smarter than their employees, never mind the government officials and media enablers who attempt to justify lower taxes for those who least need them.
- Earned income is preferable to capital gains for the economy as a whole, yet we reward money profited significantly more than money worked for. Our economy is really just a huge, super-complex system of exchange based on the premise of mutual benefit. You pay money, you get food, a house, etc. You get a paycheck in exchange for doing something that someone needs or wants done. If someone has paid you to do something, it stands to reason that you have most likely either contributed to the production of something of value, or performed a desired service/task. Capital gains are simply profits from having disposable cash. They do not provide anything of inherent value; at best they allow someone else to provide something of value--through investment. Unfortunately, very often they fail to provide even this indirect benefit to the economy.
- In our current financial system, capital gains are often not the result of true investment, but of betting correctly—"speculating": short selling, hedge funds, securitizing mortgages/consumer credit/student loans, credit default swaps and really, most all of what goes on every day on the exchanges. Almost all of the transactions that occur on Wall Street every day are driven not by a belief that a business is good and worthwhile investment, but by a desire to maximize personal gain. We can see this just based upon the enormous number of transactions that take place. Personal profit is the all-consuming priority. 'Buy low, sell high' is not investing--it's speculating. Spending money on education, on new infrastructure, on research--these are investments. Thus, the more complexity you add, the more ways there will be for those in the know to game the system and take without putting anything in. This is undesirable to the rest of the economy; there is no mutual benefit. These unbalanced transactions do not help the economy to grow. They hurt the economy—especially in conjunction with loose tax rules and creative financial instruments available to the wealthy—by ensuring accumulation of wealth among those who already have it. Thus, capital gains should be taxed in the same way as normal income--with steep progression so small investors simply trying to get a return on their money so they can retire before the age of 90 are not treated the same as the market giants who game the markets and take (not make) millions upon billions. A tiny per-shares-transaction cost would additionally curb rampant speculation and encourage actual investment, without adversely affecting average individuals.
So, while some would posit that a progressive tax is inherently unfair, I would say the facts point to the opposite: any tax structure that is not steeply progressive is incredibly unfair, as each subsequent dollar is easier to obtain than the one before it. Even the rich will tell you themselves: "The First Million is the Hardest." There must be diminishing returns on the accumulation of wealth, or we are not a country dedicated to justice and equality at all. And, not only is a progressive tax required for fairness, but it makes the economy stronger by helping to ensure that more people have a reasonable amount of disposable income.
As becomes evident when you get into the details, a discussion of the progressive tax is really a discussion about economic philosophy as a whole. Taking a closer look, we see that complaints about the progressive tax are the result of the corporatist view of the world where money is the only focus. Money is the only thing of any value; all else is ignored. The corporation was designed solely to maximize profits through the efficient externalization of costs. It should not be a surprise then that we are inundated with this view, given the prevalence corporations have taken in our world. To this point, there has been a strong movement of attempting to fit our lives and government policies to the cash-centric mathematical models. Especially of late, this movement has been very successful. If we wish, we can give in to this view, and discard all else in life as valueless. But I think we're better than that. I really do. So, instead of trying to make our lives better reflect flawed, abstract economic models, we should try to make our models of economics better reflect the lives we live and want to live.