I guess the "redistributor in chief" accusation coming from the McCain campaign is getting to me. It's been a long time since progressive taxation has been attacked as socialist. I guess the gloves are off. So, perhaps its worth examining the flat tax supporters' "fairness" argument.
The fairness argument, in a nutshell, claims that the flat tax treats all tax payers alike, while the progressive tax unfairly burdens high earners in comparison to low earners. Is this correct?
At the risk of sounding dismissive, the answer is "no."
First, with regards to specific levels of wage income, everyone is already taxed at precisely the same rate as everyone else. A person with a taxable (wage) income of $20,000 is taxed at exactly the same rate as a person with a taxable income of $50,000, $100,000 and $500,000,
on all the taxable income that they share in common. The first $20,000 of a six or seven figure taxable income is taxed at the same rate as the entire $20,000 of a $20,000 taxable income.
The same is true for every other taxpayer at every other level of income. For every dollar of taxable income that any taxpayer shares with any other, their tax rates are identical. Thus, a flat tax already exists with regards to comparable incomes. Taxpayers are treated equally by the progressive tax rate schedule on all (wage) income they share in common. That is,
they are treated equally to the extent that they are equal.Thus, in reality, flat tax proponents are not urging us to treat "all taxpayers alike." They can't be, for this is something we already do. Flax tax proponents are actually urging us, on grounds of fairness, to tax higher levels of wage income at the same rate as lower levels.
Tricky tricky. :)
The real issue, then, is whether fairness requires us to tax higher levels of income at the same rate as lower levels of income? Does it?
Again, the short answer is "no."
There are at least two arguments suggesting that progressive tax rates are fair in a more compelling sense than the simple "percentage uniformity" that flat tax proponents rely upon. The first concerns the fact that those with higher incomes are benefiting more from our system of cooperation than those with lower incomes. Progressive tax rates simply shift some of the burden of sustaining the system upward, onto those who are benefiting more from it, and off those who are benefiting less.
This "higher benefit/higher ability to pay" conception of fairness, reflected in progressive tax rates, is far more defensible than the pure percentage uniformity conception embodied in a flat tax. After all, if I benefit more from our system of cooperation, how can it be unfair for me to contribute more to its upkeep, when "more" merely refers to a slightly greater percentage of my higher level of benefit?
The second argument concerns the well understood feature of money's "declining marginal utility" ("DMU"). DMU is a fancy term describing the fact that each additional income dollar contributes less to a person's well-being than the previous income dollar, up to a point where additional dollars offer no utility at all. That is, up to a point where "its just another buck."
DMU implies that extracting dollars from those with relatively low incomes harms them more than extracting dollars from those with relatively high incomes. This is because the goods that individuals purchase with non-discretionary income are more important than the goods that individuals purchase with discretionary income, in terms of their (and their family's) well-being.
Thus, in order to balance the (real) disutility that taxes impose on taxpayers, which the Republicans are constantly bemoaning in their worries over the tremendous tax burden on American families, a progressive tax is a necessary condition of fairness. Without a progressive tax, the real disutility of taxpaying falls most heavily on those with the smallest taxable incomes.
And this argument ignores the fact that capital gains, which are the main source of income for the wealthy, are taxed at far lower rates than most wage income.
So give me a break on this "progressive taxation is socialism" crap.
Joe H.