I often wonder, during discussions about tax policy, why some people don’t understand the logic behind progressive taxation. There are really, to my mind, three statements:
- The government requires some revenue to perform the functions that its citizens require of it.
- There exist certain necessities a person requires to live, and these necessities cost a certain amount of money to acquire.
- A citizen’s success or failure to accumulate money takes place in the context of the government, and so the successful, who benefit disproportionately from that context, are justly charged a disproportionate share of their personal income to support that government
I don’t plan to expand on these points here. If they are true, and I believe they are, then progressive taxation is perfectly fair and appropriate. We can debate the truth of each in the comments if you like.
All of the above follows on my reading this intriguing article on the Washington Post website, wherein the author writes:
According to Forbes magazine, the world is enjoying a boom in billionaires. Twenty years ago there were 140 billionaires. Three years ago there were 476. This year there are 793.
We all know the wealth gap is growing. The author of this piece, after some comical tangents, concludes with this pretty insightful paragraph:
Okay, fine. But if it’s all about winning, wouldn’t (say) half as much money be just as much winning, as long as everybody else in the game had half as much money as well? If Icahn is right, a stiff tax on billionaires ought to have no effect on the fragile incentive structures of billionaires, as long as it is applied to all billionaires equally. I’m not advocating such a tax. I am, though, suggesting that the exquisite sensitivity to the incentives of rich people that dominates our tax policy may be overwrought.
He refers to the general idea that wealthy people have become so by providing excellent goods and services that many people like, and they deserve their compensation, nay, the compensation is required to motivate young entrepeneurs to create great things. I agree with those ideas in principle, but it is a question of scale. From the Economist:
Recent higher profits are part of the explanation for higher pay. But there is a longer-term trend at work. In 2004 the ratio of chief executives’ compensation to the pay of the average production worker jumped to 431 to one from 301 to one in 2003, according to “Executive Excess”, a recent study of 367 big American firms by the left-leaning Institute for Policy Studies. That is not quite a record: in 2000 the ratio reached 525 to one (see chart). In 1990 the ratio was 107 to one and in 1982 a mere 42 to one. This year’s numbers seem certain to show the gap widening still further.
Clearly, top earners aren’t hurting that much. Were the big ideas in 1982 really only one-tenth or so as good as today’s big ideas? I don’t think so.
The problem is that absolute modes of thinking have replaced situational ones. It is, we are told, always good to cut taxes, and always bad to raise them. High executive pay is always good, while cutting costs by lowering worker pay is also always good. The truth is that our economy is very complicated, and not at all suited to these analyses. Any economist will tell you that there are times when raising taxes is called for, just as there are times to cut taxes.
Of course, the President really isn’t helping anyone understand the finer points:
the economy appears to be strong and getting stronger. And the fundamental question that those of us in Washington have to answer is, what do we do to keep it that way. How do we make sure, one, we don’t put bad policies in place that will hurt economic growth? A bad policy is to raise taxes, which some want to do. There are people in the United States Congress, primarily on the Democrat side, that would be anxious to let some of the tax relief expire. Some of them actually want to raise taxes now. I think raising taxes would be wrong. As a matter of fact, that’s why I think it’s important for us to have certainty in the tax code. That’s why I’d like to see the tax relief made permanent.
No evidence is presented as to why raising taxes would be bad policy, or why making the tax cuts permanent would be good. Given that we are in debt, and that our debt is increasing, it seems like a good time to start trying to at least talk about getting some more revenue for the government. Apparently the President could care less about such a conversation.