Morality? Tax system? How could one possibly marry these two concepts in a diary title? Below the fold, I hope to convince you that this is no shotgun wedding.
Sam Harris, in his excellent book, The Moral Landscape, advocates a scientific view of morality: he maintains that we should strive to maximize human well-being (more precisely, the well-being of sentient creatures). It is difficult--I would argue impossible--to reject this principle.
Sam Harris is an atheist, and this might alienate some Kossacks. I suggest that you ought not to be alienated. Reflect instead that Harris is neutral with respect to religion; he doesn't favor any religion over another. Can we say the same about any of the current Republican candidates? In spite of being godless, I think Sam Harris' vision of morality is more sensible than the Republican vision, which seems to be mainly concerned with sexual and reproductive behavior.
I propose that this represents the first principle of a democratic government. Indeed, the Preamble to our Constitution pretty much sets this as the basis for our government. If you read the Preamble closely, it defines, in effect, the well-being of the people as the highest good. This was a radical departure from the philosophy of government at the time; it proclaimed government by We the People.
So, how does Harris' thesis relate to taxation? Tax theorists define fairness in two ways: horizontal and vertical. It's easy to agree on horizontal fairness. Taxpayers of similar income should have similar taxes. And while we sometimes frequently fall short of that goal, we agree on the principle.
But vertical fairness is quite another story. What tax structure is fair to both the $1 million earner and the $40,000 earner? What principle can we put forth to make that judgment? Shouldn't both taxpayers pay the same tax? Both get the same benefit from government, so they should pay an equal amount. If the government needs $3 trillion to operate, then each of our 300 million citizens should pay $10,000. It's only fair. So, the family of four with an income of $40,000 should pay $40,000 in taxes.
If this were a game, like the board game Monopoly, this tax policy would be perfectly and arithmetically fair. Everybody would have an exactly equal chance, and if you had to pay your entire income in taxes, you would obviously lose the game. But when dealing with human beings and their lives and livelihoods, this leaves something to be desired. Such a tax system would not maximize the well-being of citizens. It would be immoral.
Of course, nobody has seriously proposed such a tax, and there is good reason for this. People--even Republican type people--intuitively understand that real life is not a zero sum game like Monopoly. Everybody who talks about taxes from a theoretical point of view realizes that ability to pay is a paramount consideration. Even flat taxers are actually proposing a two-bracket graduated tax. (The first bracket generally has a marginal rate of zero.) To steal an old punch line, "We are just haggling over the price."
How can we determine "vertical fairness"? As we have seen, there is no obvious arithmetic solution as there is with Monopoly. There is no set of principles that tells us how many brackets there ought to be, or what the marginal rate ought to be for each bracket. There is a very large number of possible solutions; how can we identify the best one?
Every human activity has moral consequences; levying taxes is no exception. When taxes fund services for the general public, they (usually) increase the net well-being of citizens. But as we saw above, taxpayers with differing incomes can expect to pay differing levels of taxes. How should we determine those levels?
The last $1 million earned by a wealthy person--say, a Bill Gates or a Warren Buffet--Produces less human well-being than does the last $10,000 earned by a middle class worker. If you subscribe to the notion that we ought to maximize human well-being, then it would follow that we ought to tax the billionaire at a much higher rate than we tax a middle class worker. Each dollar that a middle class worker pays in taxes is a dollar that she would otherwise spend and enjoy. This isn't true for the very wealthy.
You might think this would lead to the conclusion that we should set tax rates at such a level that the very wealthy give almost all their income to the government, but this would be short-sighted. At some point, increasing taxes on the rich would start to diminish the net revenue, but we are nowhere near that point.
We know that the best solution must be one that produces the revenue we need. To begin with, we ought to recognize that determining the amount required ought to be a separate issue from determining how to raise it, but there will always be some interplay between the two. How do we settle competing opinions? For example, the top quintile of income might object to a social program that mainly benefits the bottom quintile. How should we determine whether we should adopt it or not? We do that simply by determining if it works toward maximizing the well-being of citizens as a whole. This is the arena in which political give and take ought to operate.
Let's take a moment to examine a typical issue in the light of this principle. There is a current proposal to raise taxes on the very rich in order to offset a 2% reduction in payroll taxes. How should a rational government evaluate such a proposal? It's really quite simple: we should ask if it adopting the proposal would increase human well-being in this country.
We should summarily reject any rhetoric that employs such phrases as "class warfare", or "income redistribution" or "other people's money" or "confiscatory". If the proposal results in an increase in human well-being, then it should be adopted; this is nothing less than a moral imperative. Slogans and sound bites are a poor substitute for doing what is right.
We should, of course, consider arguments such as this: taxing the rich takes money out of the hands of job creators, and is therefore counterproductive in the long run. This argument is easy to dismiss simply on the basis of recent history. When job creation was sorely needed, the wealthy simply sat on their wealth. Indeed, they could not do anything else because demand had dried up. The "job creator" theory might sound plausible, but it fails in the light of evidence.
The above is only an example, but one that is uncluttered by considerations of how it might affect the incentive of the lower income group. The well-being of the wealthy whose tax is being increased is scarcely affected at all, at least in terms of creature comforts. They are unlikely to be forced to substitute hamburger for lobster, or cotton for silk.
On the other hand, the well-being of the lowest four income quintiles is arguably increased by 2%. If anything, their incentive to work has been enhanced, since they can now enjoy 2% more of what they earn. Most of the money represented by that 2% will be spent immediately, not only enriching the lives of those who spend it, but also increasing the net demand for goods and services, and therefore adding to the economy as a whole. Even the rich, at least those who are not blind, can see that.
The reason that it increases net demand is that the wealthy, by and large, would not have spent that money had they kept it. Instead, they would have used it to increase their net worth. The evidence for this assertion can be found in two graphs.
The first graph shows the historic top marginal rates. Note that starting in 1980, the top rates were cut in half.
The second graph shows the income of the top 1% in relation to both productivity (the green line) and the income of the rest of us. How does this relate to net worth? In 1982, the first year that the Forbes 400 list was published, the last person on the list--the 400th richest person in the country--had a net worth of $75 million, or $174 million in 2011 dollars. Today, the 400th richest person has a net worth of slightly more than $1 billion. So, the rich are indeed getting richer. Far from being job creators, the very wealthy are, in fact, wealth hoarders. And they are very good at it.
The tax policies of the last 30 years have failed. Under a rational tax system, all of us would be sharing in the productivity gains. Looking at this graph, it's clear that the top 1% enjoy almost the entirety of our productivity gains. Their well-being is scarcely enhanced at all by their increased wealth, while the well-being of the 99% would be greatly enhanced if their incomes more closely tracked the green line.
All workers contribute to productivity gains, not just the 1%. We have created a system under which the 1% have an enormous advantage over the 99%. This graph (which most Kossacks have seen before, BTW) clearly demonstrates the immorality of our present economic system.
It is revealing to note that contrary to the propaganda of the right, the existence of very high marginal tax rates has little or no bearing on the nation's prosperity. From 1945 to 1980, marginal rates were 70% and above. During that period, we had periods of incredible prosperity, and periods of economic downturn. Since 1980, with much lower marginal rates, we have had periods of incredible prosperity, and periods of economic downturn. The only difference is that since 1980, the fortunes of the top 1% have increased dramatically at the expense of the 99%. The evidence clearly shows that higher marginal income tax rates enhances, rather than diminishes, the net well-being of the American people.
I don't advocate Socialism--at least not yet. Properly managed, I think a free market economy can serve us well. However, managing a free market economy is not a trivial task. Among the trends that diminish our well-being as a society, I would point to three closely related trends: the rise of the 1%, the increase in the political power of Corporations, and the decrease in the influence of the labor movement. Fixing our broken tax system should be one of three national priorities.
This, then, is the argument for a progressive tax system. The evidence is clear that it enhances the net well-being of Americans. We need not apologize for the weight of the evidence, nor for the actions that the evidence suggests. What we do need to do is to work towards eliminating regressive taxes, and replacing them with progressive taxes. This is what is best for the country. Progressive taxation is moral; regressive taxation is immoral.