Wednesday, January 25, 2012

Progressive Taxation Is Just, and the Left Should Say So

Mitt Romney released his tax records yesterday, and his effective tax rate last year was only 13.9% -- $6.2 million paid on $42.5 million in income -- a rate less than most people who earn their income through, well, earned income rather than labor-free capital gains, which is cash acquired from owning stock and other paper investments. The fact that Romney pays less tax than me and almost every other hard-working non-millionaire is a launching point for two arguments:
1) A just and fair tax system is one that is very progressive, not flat.  A progressive income tax system is one where rates increase with higher levels of income, so that hypothetically someone making, say, $20,000 a year might pay 15%, someone making $100,000 might pay 30%, and someone making $1,000,000 might pay 70%.  A steeply progressive system was what the United States had from the end of World War II until the Reagan Reactionary Period set in and we embarked on 30 years of flattening income tax rates. We even made a special low rate capital gains category for stock coupon-clippers that created a regressive tax system where a wealthy scion of a connected family like Romeny pays less than regular working people.  
Conservatives have always aimed to achieve that regressive system.  One of their ploys has been to argue for a flat tax, usually around 15% or so, because on the surface it seems just: everybody should pay the same amount, that’s fair, right?  Except for something that economists call “marginal diminishing utility of income,” which is a fancy way of saying that each individual dollar is worth more for a poor person than a rich one.  A fair distribution of burdens attends to well-being, not to money income, strictly speaking.  Money is only a means to well-being, not well-being itself, and money contributes less to well-being the more of it you have.  If you’re making $20,000 then you have to carefully budget each dollar for rent and food for the kids and other basics -- each dollar really makes a significant contribution to your survival.  As your monetary income rises the basics start to be taken care of, so you can now afford a car payment and college for the kids and to move to a better neighborhood.  As income grows further the value of each dollar is less important to meeting basic needs, and you can add some comforts to your life and start splurging on luxuries like vacations and outings to a ballgame.  If you’re one of the lucky ones making millions, literally all your physical needs and social expenses are simply taken care of, and you can use money for superfluities -- you can spend money just to make more money, or to indulge in things like running for public office without worrying about the financial consequences to your personal life.  In other words, taxing a poor person takes food from their mouths; taxing a middle-income person takes away education or improvements to the front yard; taxing a rich person takes away things that are completely unnecessary.  Therefore graduated tax rates that rise with income are more fair and just than a flat tax, because the aim of progressive taxation is to impact well-being roughly equally for everyone, not to impact monetary income itself equally.  
The conservative counter-argument to this is the trickle-down one: they say high tax rates discourage investments and diminish job creation. This would in turn decrease the tax base and reduce revenues. Except that the optimal tax rate for high-income earners turns out to be 76%, not the low 15% rate of the capital gains tax. Empirically a progressive income tax would not only be more just it would also balance the budget.
2) The fact that Mitt Romney pays taxes at a lower rate than most Americans is a golden opportunity to press for a sane and just tax system, and it would be smart politics too, so normally one would expect it to be a huge issues in the 2012 campaign.  But I fully expect the centrist liberals WILL COMPLETELY FAIL TO TAKE ADVANTAGE OF THIS OPPORTUNITY TO MAKE THIS ARGUMENT, which failure will diminish their chances of winning this and future elections, as well as completely forestall any chance of implementing a fair tax system, or of balancing the budget any time soon.

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