Last updated on 2013.02.17
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].
Mark Thoma links to Miles Corak, who cites Principles of Economics, Alfred Marshall's classic textbook, to explain why I'm right:
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.
NO WAY!
Way.
So the state should tax us more because their current taxes are regressive?
I don't think so.
No, the state should scrap its regressive taxes and replace them with progressive taxes.
That would be fiscally unwise. When we had the next economic downturn, income tax revenues would drop and the state would be forced to make draconian cuts to balance the budget.
That would finally force the state to live within its means - instead of being the whining federal welfare queen that it is. It would force the state to also do long range planning, yah know, like families and businesses.
MB seems to be making totally unsupported assertions.
If the GOP tax bunkum and mythology we get fed in SD were anywhere close to correct, we would have South Dakota covered with good clean industry paying good wages and a rock candy mountain in every back yard.
Even with all the breaks for corporations, Republicans feel duty bound to bribe corporations to move here. They hire out-of-state groups and pay them ridiculously to recruit workers to SD even if the GOP other propaganda tells us that thousands of responsible. intelligent people should flock here auto-magically.
I keep wondering if those who spout nonsense do it because they are remarkably ignorant, remarkably uninformed, or because they think average South Dakotans are so ignorant and stupid we will swallow any kind of BS they spread.
The state depends on a steady income stream. When the recession hit in California, income tax revenues dropped like a stone. Our state tends to spend every dollar it can. If there is too much left over then special interests scream that we need to spend the excess. If we were to go to a state income tax, our reserves would need to significantly increase so we could weather the next recession smoothly.
Except, Michael, for the nearly $50 million surplus in the state budget that the governor announced in July 2012. That's $50 million of funds regressively taken from South Dakota taxpayers, rich and poor. The impact, naturally, was and is greatest among our state's residents who have the least. Meanwhile, government-funded programs that could have helped them had to do without $50 million that simply sat unused in a big burlap sack in the governor's office in Pierre.
You seem to forget that the state constantly receives sales tax revenue every month. They estimate what the revenue will be more than a year in advance. They will be conservative in their guesses.
The ultra wealthy get around the income tax and estate tax with tax-exempt foundations.
If you combine an income tax with a rainy day fund expended when revenues fall, arguments about the higher volatility of revenues collected through an income tax evaporate. States with income taxes (or sales tax, for that matter) get into problems by spending every cent of tax dollars in good times.
Rainy day funds -- bingo! I wonder, Donald: would it be wise to set thresholds that allow us to touch the reserves only when certain economic indicators drop and that would require us to put X amount in reserves when those indicators perk up?
Flat Tax. And Tax All for All, not just All for Some. But tax them flatly.
The danger with a progressive tax is that every deduction, exemption, and credit enacted becomes regressive in nature. A flat rate--usually very small with no exceptions, deductions, or exemptions is the most fair and consistent way of raising revenue.
Ah, but Charlie, that flat rate automatically fails to tax the rich proportionate to the utility of the money they keep. That's exactly the point that I was making to Grudz in October and that Marshall was making to readers in the 1920s. Nothing says that a progressive rate scheme has to include exemptions and deductions and credits that favor the rich... just as nothing says that a single tax rate applied to all payers would not also be subject to the pressures that produce those exemptions and deductions and credits.
In a perfect world, I would agree with a progressive tax. But with the situation as it is now, things are quite backwards and getting worse. I'm also enough of an independent to not fully support "social engineering" of the tax code by special interest of any right or left leaning. Providing basic and strong resources like roads and education to our citizens requires steady, consistent, and reliable funding. Measures like property tax levies to help with local roads and infrastructure and levies on gross revenue to finance education seem reasonable even if it's just a flat rate.
Youve not read the fairtax.org Corey.
If you make 300k and I make 25k with the 10% fair tax I would prob not pay any or much. That tax gives both of us living expense deducts and you would pay on 275k as an example.
.
Since when have we found a politician who wouldn't spend the rainy day fund at every opportunity? We need to learn to operate as private business, always within our means.
I should add the fairtax.org is based on a flat 10% sales tax over and above basic living expenses.
It brings all dollars into play, unless they are spent outside our country, from illicit to mob to those defrauding the IRS.
That's still a flat tax, Les, and that still fails to recognize the different marginal utility that a tax system should take into account to demand equal sacrifice from all payers.
I know that some flat-tax proposals include basic cost-of-living exemptions, which sort of acknowledges the progressive-tax principle. Even if we say that that the first $20K or $30K that people need to feed their kids and pay the rent is non-taxable, we still need a sliding scale of rates (maybe 5% on $30K to $60K, 7% on the next $40K, 10% on the next $100K, 15% on the next $800K, 30% on income above a million?) to make a truly fair tax, according to Marshall's principles.
Different sacrifice Corey?
.
The successful folks I know I have sacrificed their whole life to become just that.
.
I have family members who haven't and they have experienced the leisure I'll never know. So tax me more for the product of my life and you would have them strip my estate as well.
And even under a progressive tax rate system, rich folks still experience more leisure and comfort than poor people. Success and luck still have their reward. But the progressive tax structure generates more revenue to maintain public services with less pain for all payers.
You are speaking of under 10% that are truly "rich" who experience leisure while poor might be described as Mitts 49%. It looks to me like there are two ways to find leisure and one has little effort to get there.
.
That leaves the other 41% to pay the lions share? You also don't mind the fact that over two trillion(2010) went unreported in the underground economy. This money moves into the economy as purchases which could be flat taxed.
Why is the assumption that a progressive tax has to be riddled with exemptions? Those arguing against the progressive tax seem to be actually arguing against deductions to that tax. Are loop hole deductions really intrinsic to a progressive tax system?
Republicans have spilled many millions of gallons of ink and billions of pixels proclaiming that Obama's recovery plan has not worked, but then turn around and express support for the increased sales tax that recovery generated and what an awesome system that regressive aid to the very rich is..
Cory,
I'm going to throw a zinger out there. Taxes are a means to an end. If we accept we desire more equitable outcomes, then logically we need to focus on how we're spending what we garner from the populace, rather than just on how we take it.
Comparison of Worldwide Tax Code Progressivity
How nifty is that? The most progressive countries (in outcomes) have the most regressive tax codes.
Wayne,
You should have quoted this paragraph from your link:
"Basically, all of the progressivity of our fellow developed nations’ welfare states comes on the spending side. They spend a whole lot more on transfer programs, education and health services, and other initiatives that are redistributive in impact. We, by contrast, tax progressively, and then spread the money around in a less progressive fashion."
It's unlikely that the US would ever spend at the same levels or on the same programs as the Europeans. There's nothing that I saw in the link that implies that regressive taxes and regressive spending would produce progressive results.
LK,
You're absolutely right - regressive taxation does not inherently lead to progressive outcomes... but neither does progressive taxation.
It's in the conscious decisions of how we spend our tax revenues that has the most effect on outcomes, rather than how we gather the revenues in the first place. It's interesting to see how countries with stable (though regressive) tax policies are able to make better strides at reducing inequality than we are.
Then again, most of those countries are not bearing a considerable share of the costs of maintaining global peace. I would like very much if we could slash our defense spending to reappropriate it towards social wellbeing programs, but that would require the rest of the developed world to seriously contribute to protecting their (and our) interests in the world.
Maintaining global peace?
.
Yes, there is a high cost in maintaining reliable international resources for the corporate empires Wayne.
I agree with the conscious decisions made in expending more so than the different practices of collection Wayne. The selling of any collection plan put to good use, quiets the discomfort of giving, whether by progressive or regressive tactics.
We can spend $2.4 billion equally well whether we get it from regressive or progressive taxes. But we can spend it in better conscience if we get it by more fair means.
The author of the article I linked disagrees, Cory:
"UC Davis’s Peter Lindert has argued in his book “Growing Public” that European social democracies were only able to develop the programs they did because they used efficient consumption taxes that didn’t lower growth as much as progressive income taxes, particularly those on capital income. European countries needed tax systems that could raise a lot of money without hurting growth, and only regressive consumption taxes fit the bill."
Corey, you just don't seem to understand. With business exemptions, I pay roughly 1/4 of what my children pay in taxes. I spend everything I make (flat tax cash flow) and they spend much less due to the gov taking up to 30% of what they make and those government dollars don't make the seven turns in local economies or honest GDP as well.
.
We just as well join our 49% family, get under big mothers breast and turn it all over if we get much more progressive.
Wayne, that is a fascinating set of charts, one that could knock my thesis back on its heels. Do we see a similar pattern here state by state? Do we find South Dakota's regressive tax system correlating with reduction in income inequality relative to other states?
And if we're choosing means to agreed ends of shared prosperity, then the paragraph LK highlights reminds us that we need to spend more to redistribute that wealth, however we manage to get that wealth.
Reading that article gets me wondering: do the regressive systems remain more stable because they put a greater burden on the less politically powerful poor? Does our progressive taxation system have trouble delivering the goods because they provoke stronger Koch-Brotherian minority backlash? And if that's the case, is the solution to copy European regressive taxing and higher spending? Or is the solution to mobilize the lower classes against consumption taxes and fight harder for the more moral and economically sensible (in Marshall's terms) progressive tax rates?
Re: State Breakdowns - I wouldn't know, Cory. I would speculate that we're not terribly progressive in our distribution of tax revenues, so we're not really reaping the benefits of the stability inherent to the taxes we collect.