Wednesday, February 6, 2013

What's your rationale for progressive taxes?

What's your rationale for a progressive tax? I see two general categories:

  • People should pay back to society in measure of their benefit from society.
  • People should pay back to society in measure of their ability to do so.
Both call for people to pay more taxes as they earn more money, but I'd argue that they imply two very different tax structures.

The first, people should pay back to society in measure of their benefit from society, implies a regressive tax. The tax paid on each additional dollar should be lower than the previous. Why? Because marginal utility from income falls. To wit: Warren Buffet has not benefited proportionally more from society than I have, so he should pay proportionally lower taxes than me. 

Perhaps more suggestively, people benefit from income increases in two basic ways: higher consumption and greater security. The greater component by far is increasing consumption, so paying back to society proportional to your benefit from society implies a consumption tax. Consumption taxes are widely held to be regressive.

The second, people should pay back to society in measure of their ability to do so, implies a progressive tax. The tax paid on each additional dollar should be higher than the previous. Why? Because, again, marginal utility from income falls. Warren Buffet loses proportionally less than I do when his after-tax income falls, so he should pay proportionally more in taxes.

Note that this does not consider other benefits and costs of taxes. The progressivity/regressivity of the tax code should depend on effective marginal rates, marginal incentives, the importance of investment, deadweight loss estimates, and so on.

The moral of the story: Be careful of your justification for your preferred tax structure. If you want people to pay back because they've benefited, you're implicitly arguing that you want poor people to pay proportionally more than rich people, because poor people benefit more relative to their income than rich people.

1 comment:

  1. I would argue the opposite on your first premise actually. Warren Buffet's life is absolutely dependent upon society, in that, without society there would be nothing for him to invest in. I will add, I do respect Buffett as he is one of the modern oligarchs if you will that attempts to redistribute his wealth and doesn't protest taxation; however, nevertheless benefiting from society isn't necessarily receiving welfare, but benefiting is inclusive of any method by which prosperity is only possible through a social structure. Simply, everything aside from complete individual autonomy is benefiting from society; therefore, its the extent that must be measured. Warren Buffet has been able to a large extent to accumulate a massive fortune through beneficial interaction within a society, and therefore this logic that proportional by benefitted is regressive has a fundamental flaw because of its narrow scope of what is "beneficial of society".

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