Back in October, I responded to a reader's proposal for a flat income tax with this defensive of progressive tax rates with the following argument:
Progressive tax rates are not punishment of success. They are recognition of the proportionately greater ability to bear the burden of a higher tax rate when you are rich. Think of it this way: suppose you make $30K and I make $300K. You and I need about the same amount of food, water, clothing, and shelter. Maybe because I indulge my tastes and need fancier shoes for my fancy office where I make my $300K, I spend four times as much on my "necessities" as you do. Suppose your necessities cost you $25K, meaning I spend $100K. Now impose a flat percentage tax on income, say, 10%. You pay $3K; I pay $30K. We pay our taxes and our necessary bills, and you have $2K left for beer and skittles and emergencies; I have $170K left. The flat income tax takes 60% of your cushion; it takes 15% of mine. A progressive tax more fairly cuts into the utility we each enjoy from our wealth [CAH, comment, Madville Times, 2012.10.23].
A rich man in doubt whether to spend a shilling on a single cigar, is weighing against one another smaller pleasures than a poor man, who is doubting whether to spend a shilling on a supply of tobacco that will last him for a month. The clerk with £100 a-year will walk to business in a much heavier rain than the clerk with £300 a-year; for the cost of a ride by tram or omnibus measures a greater benefit to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The benefit that is measured in the poorer man’s mind by the cost is greater than that measured by it in the richer man’s mind [Alfred Marshall, Principles of Economics, London: Macmillan and Co., Ltd., 1920, Book 1, Chapter 2, paragraph 13; downloaded from Library of Economics and Liberty, 2013.02.17].
Corak ties this idea of relative marginal utility to progressive tax rates:
Economists judge the functioning of the tax system in a number of ways: certainly the system should not be administratively cumbersome, and it should, to the greatest degree possible, not cause individuals in a well-functioning market to change their behaviour. It should also treat equals equally. Finally, the tax system should raise more revenue where it will cause the least pain. And this last concern, when coupled with Marshall’s reasoning, suggests that tax rates should be progressive: as income increases, the greater the fraction that should be paid in taxes.
And this simple lesson from an economics textbook written a hundred years ago is one reason why the rich don’t want to talk about inequality, and the 99% do [Miles Corak, "Why the Rich Don’t Want to Talk about Inequality, and Why the 99% Do," Economics for Public Policy, 2013.02.01].
South Dakota can't even turn its grossly regressive income tax on banks into a flat scale, let alone something progressive. Our commitment to protecting the rich with regressive taxes is so deep that even a good Democratic legislator who recognizes the economic and moral superiority of an income tax feels the only viable option for rectifying South Dakota's fiscal strangulation is to increase our regressive sales tax.
Regressive taxes are not fair. Neither are flat taxes. South Dakota should get with the economic program and implement progressive taxes.