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HomeEconomyTaxation as Social Justice

Taxation as Social Justice

In March 1932, Collier’s Weekly ran an article titled “Tax Everyone But Me,” which included an instance starting with “Congress! Congress! Don’t tax me” instead of the sing-song: “Don’t tax you. Don’t tax me.” 

At the end of the year, and again at the opening of 1933, the hotel rooms and lobbies of Washington were crowded and swarming with citizens who had come to play, in paraphrased adult form, an old game of their childhood:

Congress! Congress! Don’t tax me. Tax that fellow behind the tree.

This is (apparently, according to Quote Investigator, the origin of the now better-known, “Don’t tax you, don’t tax me, tax that man behind the tree!” Most people think that taxes are important, and the government “needs” more revenue. Of course, if you really believe that, you are free to make donations (seriously, there’s a web site for that!). What people actually mean is usually some version of that “tax someone else!” sentiment quoted above.

How much tax should be collected, and who should pay it? Why? Let’s think about this.

Taxation as Prudent Policy

Generally speaking, taxes can have only one of two broad purposes:

1. “We” want to reduce the amount of the thing being taxed

2. “We” want to increase the revenue that “we” want to spend on good things

I have put “we” in quotes, because I’m not going to talk about the political process by which tax policy is decided. (If it’s majority rule, then we need to consider the Meltzer-Richard argument). Regardless, using some rules or procedures, a decision is made. But the reasons we impose taxes are contradictory, or maybe just in tension. Taxing externalities, according to the wisdom of economic orthodoxy, is a way to reduce pollution, smoking drinking alcohol, and so on.

But in taxing to raise revenue, we want to minimize the effects on the amount of the thing being taxed. Income is good, and we want people to have more, not less. So when we tax income, we are hoping that income will be reduced only by the amount of the tax. Of course, there is some negative impact—distortion—on income from the negative incentive effects, but reducing income is a side effect, not the main objective.

For taxes whose goal is to raise revenue, there is some effort to “minimize distortion,” in fact. 

Seriously, that’s important. We tax things if we want revenue, in which case we’d prefer not affect the amount of the thing, which introduces distortions. OR we tax things we want to go away, things we hate, and we don’t care if there is any revenue at all, because we don’t like the thing being taxed.

Now, consider some alternatives, in terms of their likely distortion. Remember, I’m focusing on minimizing distortion because I’m assuming income, and wealth, are good things, and we don’t want to reduce them more than we have to.

1. Head tax—each person pays a fixed amount. Obvious, this is the least distorting tax, because there are no incentive effects, just a price of membership, like paying dues for a club. 

2. Sales tax—this tax is ad valorem, meaning that it is strictly proportional to spending. It’s (say) 6 percent of the four dollars you spend at Starbuck’s, or the same 6 percent of the $50,000 you spend on a new car. 

3. Income tax—a proportion of your income, the same percentage, regardless of the amount. 

Well, no, not really, at least in the case of an income tax. Most income taxes are modified in two important ways, allowing deductions from the income to which the tax rate is applied, and imposing different rates at the margin on different income levels. A “progressive” income tax is one that imposes higher marginal rates on progressively higher levels of income. What would be the rationale for doing that? Is it fair? Do we want less income, or less wealth? Or are we still using “progressive” taxes to raise revenue?

In a previous essay in this space, I talked about “Tuh” the security dog. It’s not much more expensive to protect a big house and nice car than it is to protect a small house and an old car; it’s certainly not proportionally more expensive, where it takes 10 percent to protect the small house and 15 percent to protect the large house.

The implication must be a third reason to tax: Fairness. In addition to wanting less of the thing, and wanting more revenue, “we” are also concerned with relative fairness. (Sorry for the quotes, but they have to be there). To put it simply, this notion of fairness dictates that the wealthy should, as a matter of morality, pay more, even though it does not cost more to provide the wealthy the services that are being promised in exchange for the tax.

Taxation as Social Justice

Where does this moral intuition come from? The most common justification is something like “a fair distribution of burden.” A “head” tax means that we take total spending, divide by N, and that is your tax bill. You have all done this, at a restaurant—“Let’s just split the bill!!”—and it is an obvious low-cost solution to the problem, rather than negotiate, or argue, over who pays what. The drawback, or so goes the argument, is that equal taxes are not equal burdens, because the ability to pay differs substantially between the very poor and the very rich. We sometimes illustrate this problem with the parable of “The Widow’s Mite,” from the Gospels of Luke and of Mark.

And he called unto him his disciples, and saith unto them, Verily I say unto you, That this poor widow hath cast more in, than all they which have cast into the treasury:

For all they did cast in of their abundance; but she of her want did cast in all that she had, even all her living. (Mark 12:43-4, KJV)

The point of the parable is that the widow had more faith, because she gave all she had and then depended on God to provide for her. But it does also illustrate the problem of difference in burden: Ability to pay matters.

But then that suggests the value of a “flat tax,” where everyone pays an equal proportion. If I order twice as much food at the restaurant, or drink twice as much expensive wine, I should pay twice as much. If I have twice the income I pay twice as much tax. If I have 10 times as much income, I pay 10 times as much tax. The problem is that this has nothing to do with the benefit received by the rich or the poor, but depends only on ability to pay.

All of which leads to the main question, one that is difficult to answer using analytical principles: Are the wealthy paying “their fair share?” The government provides (supposedly) “public goods,” something we all value. But if we all receive the same benefit from government, why should some pay more than others? We have allowed that payment might be proportional, though it is unlikely that a family with 10 times as much wealth receives 10 times the benefit of government action. Should the wealthy pay more than the same proportion, a so-called “progressive” tax? 

An example may help: Let there be a proportional tax, and a standard deduction for the first $10k of income. One family makes $20k in income, and the other makes $100k. The (flat) tax rate is 25 percent.

Tax bill for poor family: ($20k income -$10k standard deduction) X 25 percent tax rate = $2,500

Tax bill for wealthy family: ($100k income -$10k standard deduction) X 25 percent tax rate = $22,500

The wealthy family has 5 times the income, but pays 9 times as much tax. And that’s with a proportional income tax! Already, the wealthy are paying a percentage, making the system “progressive.” Is that enough? Is that fair?

The usual answer among the fairness priesthood is “no.” The reason is that the wealthy still have a lot left. It’s a bit like the famous Willy Sutton quip that the reason he robbed banks is “that’s where the money is!” (Okay, he didn’t say that, but I’m pretty sure that AOC did, at the Met Gala.) And that’s right: the poor family lives on $7,500, and the wealthy family enjoys $78,500. If “we” need more revenue, we should take it from who that’s got more, right? It seems only fair.

That’s what I mean when I say that we have come unmoored from the two traditional motivations—discouraging bad behavior, and raising revenue in ways that don’t distort the economy—for taxation. The new fairness movement wants to use taxation as a means of achieving “social justice,” and the cost is not a consideration, because this is no longer an issue of public finance. The goal is not to raise raise revenue so we can support the poor; instead, the US is pursuing the simpler goal of eliminating private concentrations of wealth.

This impulse is hardly new. It can be heard in the hit 1971 song by the rock group 10 Years After, “Change the World.” The song contains a command: “Tax the rich—feed the poor—’Til there are no—rich no more.” Have you thought about that? Shouldn’t it be, “till there are no poor no more”?

The problem is that many people on the left want to define wealth—and also poverty—as a relative, rather than absolute, concept. If poverty is an absolute concept, as it is sensibly defined in development economics, then poverty is something that can be defined clearly, and can be eradicated. But if poverty is a relative concept, it is a problem forever: the poorest 20 percent will always be in the lowest quintile of the income distribution

The 10 Years After song is a deep insight into the mindset of envy that motivates many on the left. The problem is not poverty, the problem is inequality. So the problem is not to make the poor prosperous, but rather to take money away from the wealthy.

This is not a conjecture, but is something one can directly infer from the rhetoric of progressive politicians. As I already noted, AOC didn’t wear a designer gown that said, “Feed the Poor!” She doesn’t really care about poverty; her goal is to end wealth. 

Perhaps the clearest example occurred in a Democratic presidential debate in the runup to the 2008 election. Then-candidate, and of course later president, Barack Obama was asked by moderator Charlie Gibson if Obama would raise taxes, even if it meant reducing revenue.

Some analysts reacted that this was a dumb question. The so-called “Laffer Curve” does demonstrate that for high tax rates (certainly approaching 100 percent, for example) cutting taxes may raise revenues. But our income tax rates don’t seem to be at that level (though they have been, in the past).

Still, the point is that candidate Obama accepted the premise of the question, and answered in clear language. He said that it was worth raising taxes on the very wealthy, even if revenues fell, “for the purposes of fairness.”

Wait…Even if we lose revenue? The Obama objective was not to tax the wealthy to raise funds to end poverty. He was arguing that wealth, like pollution, is a negative externality. Fairness requires that the nation tax wealth, and high incomes, so we can get less of those toxic things. Taxation has been taken outside the realm of public financing of government expenditures, and moved into the domain of social justice, governed not by real fairness, but by simple envy.