The Dilemma of Progressive Taxation

The issue of tax is a difficult one because equally important principles pull in different directions. A tax system should be fair and progressive; that is, it should not be more burdensome for poorer people. It should take the most from those who have the most to spare. Yet you also want a tax system that raises sufficient revenue by encouraging (or at least, not discouraging) the productivity that creates the money to be taxed.

Following the fair-tax view means taxing disposable income at a much higher rate than the income that barely covers food and housing. That suggests a steeply progressive income tax, starting at zero for people making less than poverty-level income and rising gradually to something like 40 percent for the richest two percent of people or so. (If the tax cuts passed under President Bush expire, the top marginal rate will be close to 40%.)

But the competing view warns that higher marginal tax rates discourage businesses from making job-creating investments. I’m more likely to make an investment if I get to keep 90 percent of the profits than if I only get to keep 60 percent. In a high-tax environment I might decide it’s not worth it to put that capital at risk. You could complain that this argument caters to people’s greed, but that complaint does no good in practice. If we care about raising enough revenue for a social-welfare-oriented government, we have to make sure we’re not discouraging the very wealth creation that makes such a government possible.

You can believe (as I do) that right-wingers exaggerate higher taxes’ discouraging effect on productivity, and still appreciate that higher marginal tax rates affect incentives. If I get to keep more from making an investment, I am more likely to make that investment. It would seem naïve and wishful-thinking to argue that marginal taxes can be raised toward 100% without reducing wealth-producing incentives.

But this logic creates a problem for the fair-tax view. If higher marginal taxes discourage productivity, resulting in less wealth for everyone, we should perhaps not only enact a flat tax, but a downright regressive tax code, perhaps by taxing earned income (above a poverty threshhold) at a flat rate while taxing capital gains and dividends less or not at all. Encourage people to get richer by making it a tax liability to remain poor. This is the extreme case, of course. It’s very unlikely to happen, although the very conservative people who dominate the Republican Party would gladly move us in that direction.

For example, a state may decide to attract a large company to set up shop there by offering a lower tax rate. If the state fails to do so, the company may take its business – and its jobs – to another state. The logic of this argument leads to the elimination of tax altogether. States can keep competing for business by lowering taxes until there are no taxes left. Indeed, states could even pay companies to come to them.

But since governments still need revenue, they will have to raise it by taxing people who lack the political clout to resist it. It’s harder for a working-class family to move to a lower-tax state. Nor can they very well avoid the sales taxes that conservatives prefer over progressive marginal taxes on income and assets. The advantage of taxing poorer people is that it’s harder for them to avoid the taxes. So even though you’re taxing people who don’t have much money, you’re still taxing enough people to make revenues significant in the aggregate.

If you believe, as many appear to, that our government spends far too much on social welfare programs, you could resolve this dilemma by cutting taxes across the board, leaving just enough revenue for things even the hardest-nosed conservatives agree government must do. If you believe, as I do, that social welfare policy should err on the side of generosity lest we engender a society of fantastic wealth for the few amid grinding poverty for the many, we have to find another kind of balance. In the next post, if I can find the energy, I will explore ways of doing that.  

Cut Government Spending -- For Other People, Of Course

It seems to be conventional wisdom that balancing the budget will require some combination of spending cuts and tax increases. There are still those on either extreme who like to think that we can spend as much as we like, or cut taxes as much as we please, without compromising fiscal soundness. But more prudent minds understand that getting what we want without going bankrupt will take some kind of sacrifice.

The problem is that not enough people appear willing to make that sacrifice if they’re the ones affected by it. The mostly-older folks rallying at Tea Parties rail against out-of-control spending, but try cutting their Medicare and Social Security and then see how eager they are for smaller government. Republican leaders warn about growing debt from increased social spending, but try getting the defense hawks among them to go along with significant cuts in new weapons systems. Conservatives insist they want less dependence on government, but try cutting the mortgage-interest tax deduction that amounts to a massive subsidy for middle-and-upper-income people.

To be sure, America’s social support for the elderly, a world-dominant national defense, and widespread home ownership are worthy priorities. But they are also among the biggest costs to government. If we are serious about minimizing deficits, we are going to have to go after areas where the greatest spending is done.

Much rhetoric about excessive government spending focuses on programs that help the poor. But much federal spending benefits more affluent people. Social Security and Medicare are not limited to the poor; many tax write-offs benefit middle-class people; more examples could easily be cited. It’s easy to pontificate about how poorer people should help themselves and depend less on the state. But it’s only honest to consider the many ways better-off Americans benefit from government too, often at great cost. In seeking to reduce that cost, there are better places to start than cutting benefits for those who are already struggling to get by, while continuing to cut taxes for the wealthiest people.

My Post-election Rant

I have this idea – admittedly, perhaps a naïve one – that our representatives in legislatures should be, um, representative; that is, representative of the population. The people who make our laws should be in many senses similar to us, such as in socioeconomic and cultural background. They should represent a broad perspective on what life is like for the people they claim to represent.

So when I look at the portraits of the leading Republicans about to take over Congress and see nothing but white male faces (basically, people just like me, only a generation or two older and a lot richer) I doubt their ability to represent an increasingly diverse country. Somehow this concern about lack of diversity – lack of representation of women and minorities in the highest positions of power – is taken by the right as a form of prejudice. How dare anyone doubt that these privileged men with excellent pay and benefits and great pensions can faithfully represent the interests of people working for barely more than minimum wage and no benefits or sick leave?

For leading conservatives, though, even having empathy for such folks – especially if you’re a judge! – is dubious. Empathy may lead to making laws and policies that cater to the most disadvantaged in our society, causing the people to become spoiled and lazy. As a Republican lawmaker said not long ago, if you feed a stray cat, it keeps coming back for more. (Yes, he was comparing poor people to stray animals.)

If mere empathy for the disfavored in society is a dangerous thing, how much worse the suggestion that members of traditionally disfavored groups – minorities, women, minority women – might actually deserve proportional representation in government! Oh, the humanity!

Presumably the wealthy white men about to resume their control of Congress really have the best intentions toward serving all Americans, including those least privileged socially and economically.  But clearly they have failed to convince very many people outside of their demographic that their intentions are sincere. The Republican victory of last week relied heavily on the old and the white.

Lack of diversity is not an easy issue to address. Some may be content for elite institutions in business, academe and government to have very few women or minorities at the top, as is still the norm. But even for those who accept that this norm is not desirable, the solutions are not obvious or simple. Should we say, for example, that the government should have 50 percent women and 25 percent minorities? Such a radical policy would seem unlikely to generate the necessary support.

But an aspiration need not be an official policy. Where quotas have been mandated, controversy is understandable. It is absurd, however, to contend that discrimination by race is the same morally whether it is done to promote opportunities for minorities or to prevent them. Yet that is exactly what Chief Justice John Roberts said in ruling that a school district could not use race as a factor when deciding students’ school placement in order to promote more diverse schools: “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.” For the chief justice, discrimination that promotes a more diverse student body is no better than discrimination that excluded blacks from white schools before integration in the 1950s. This is such an outrageous contention that I cannot find the words to describe it. If you have sound reason to reject policies designed to increase school diversity, that is one thing. But if you don’t appreciate the difference between Jim Crow laws and affirmative action, you have no business in government, let alone on its highest court.

Lest I be misunderstood, I do not deny grounds for disagreement among reasonable people about affirmative action, or indeed any policy designed to help historically underprivileged people. Nor do I believe that the Republicans about to resume control of the House of Representatives mean any harm to underprivileged citizens. But people can hardly help representing the interests of those who supported them; and, in doing so, neglecting the interests of others. Republicans certainly represent (more aggressively than their rivals on the left) the interests of people with a lot of money. It is naïve to pretend otherwise. People living from paycheck to paycheck are not overly concerned about the tax rate on capital gains or inherited estates worth more than a million dollars, tax cuts that have long been high on the Republican agenda. It is hoped, of course, that by making the rich even richer, everyone else will benefit too. We’ll see, I guess.

When President Obama and the Democrats ran everything, there was concern that what is called the business community was being maligned and neglected (despite the small-business tax cuts the president signed into law). Wealthy Americans, it was alleged, were being unfairly attacked. Perhaps so, but they had the resources to defend themselves. With Republicans back in charge of the House, those neglected are likely to be those less able to defend themselves.    

Intro to a Left Conservative

Left conservative? Well, I believe in hard work and discipline. I believe kids are best reared by two parents. I believe students should address teachers as “Sir” or “Ma’am” and follow their directions without asking “Why?” I think schools should rediscover the virtues of rote learning, drill, basic skills, and an emphasis on content knowledge instead of teaching kids all about format and expecting content knowledge to follow naturally (it doesn’t). So I’m conservative.

But I also believe it’s a bad idea to let wealth become so heavily concentrated that a small fraction of the population gets to control political and economic policy while a majority with only a nominal political voice struggles to stay afloat. I think it’s a bad idea to let big industry essentially do as it pleases with minimal regulation. I think we’re doing ourselves no favors letting carbon dioxide build up in our atmosphere until the resulting climate changes become too severe to prevent catastrophe, all because we think we’re entitled Americans who shoudn’t have to make sacrifices for the sake of our environment. I think it’s unjust to expect workers to toil without the benefit of a unions to bargain for better wages and working conditions. So I’m also left.