Sunday, November 13, 2011

In Praise of a Progressive Tax

I support a progressive tax because I think it’s fair. Fairness presumes equality of opportunity. Unfortunately, in real life, true equal opportunity does not exist. Some people get ahead by having rich parents get them into good schools, knowing the right people, cheating, or just by getting lucky. That doesn't mean you should give up. There are many opportunities available to all of us, and the harder we work, the more likely we are to be successful. But it does mean that just because someone makes more than you, they didn't necessarily work harder than you. That's okay, life doesn't have to be perfectly fair to be good, but the way to make it more fair is to provide more opportunity to everyone.

If rich kids go to better schools than middle class kids, they'll be better qualified for the most desirable jobs. We can provide opportunity by providing a quality education to everyone, and by keeping good colleges affordable.

Sometimes someone from a poor family will be pressured to get a job immediately instead of going to college because their parents need the money or because of an illness in the family. Without proper treatment, medical conditions can prevent someone from working or going to school. We can minimize these types of situations by providing social security, so that no children will have to care for their parents who didn't save for retirement, or became disabled, and through Medicare and Medicaid, so that poor families will receive medical care enabling each family member to go to school and work. Pell grants help make college affordable. Strong police forces can reduce the crime rate and gang presence in poor neighborhoods.

These things help provide opportunity, and we have to pay for them through taxes, but why should it be a progressive tax? I base my entire morality on promoting human well-being.1 If a multi-millionaire pays an extra 100,000 in taxes, that means ten middle class families can save 10,000 each. I think the increase in quality of life experienced by those families is more than would be experienced by the multi-millionaire, so we should do it because it increases the total quality of life, as long as the millionaire is still fairly compensated for his economic contributions.

How do we judge “fairly compensated?” I don’t think the market outcome is necessarily the fair outcome. Do CEOs get paid more than the workers because they contribute more, or because they have more control over how compensation is determined? It’s hard to say. I propose another method of determining what is fair compensation: if the tax rate is too progressive, then many people will lose the incentive to work more, and overall economic output will fall. Historical data shows that even a much more progressive tax than we currently have does not seriously impede economic growth.2 That means the high-earners are showing, by their actions, that they consider the additional compensation a sufficient incentive to work, even if it’s taxed at a higher rate.

I’m not anti-capitalism, I’m just saying that capitalism is the means, not the end. Capitalism provides incentives to produce, so it’s very effective at producing high-quality goods and services, and fairly effective at providing jobs. It also has its shortcomings. The structure of some markets leads to inefficient outcomes, so we need regulations. For example, we need to prevent monopolies from abusing their power to crush competitors, and we need financial regulation to keep banks from getting too big. The free market also goes through cycles, so we have a central bank to enact counter-cyclical action to prevent (as much as is possible) recessions and depressions. The basic point is that capitalism is a means toward providing goods and services and jobs to citizens, not an end in itself. People who have so much faith in the market that they think the market outcome is the fair outcome need to take an economics class and pay attention to market inefficiencies.

All the evidence I’ve seen indicates that a more progressive tax will create a society with more equal opportunity, and thus more fairness. Citizens would be, on average, better off than with a flat tax. A flat tax would lead to a society with a few super-rich people, and many poor people. I support a more progressive tax system.

1 I’m currently reading “The Moral Landscape,” by Sam Harris, on the subject. The basic thesis is presented pretty well here.

2 See Paul Krugman.


gavinomics said...

First. I share your desire to improve human welfare. Since I care about human welfare, I support free trade and free enterprise.

To be objective, one must separate arguments about moral intention from arguments about causality . Any policy should not be judged by its hoped-for results but must be judged based on its process characteristics and results in reality.

I believe that your picture of the rich and poor is inaccurate. It is making a judgement about abstract statistical categories (rich, poor, etc.) while ignoring flesh and blood human beings.
According to IRS data which tracks flesh and blood individuals over time, 90% of the poor (e.g. those who in the bottom 20% for income brackets) find themselves in the upper income brackets after 8 years time. If I remember correctly, the data says that 80% of those at the bottom income bracket move to the top income bracket in the same time. This makes sense since the inexperienced young generally start out at the bottom and slowly move up as they gain more experience.
Therefore, the conclusion that a flat tax would not " lead to a society with a few super-rich people, and many poor people" is incorrect, since the assumptions about rich and poor are incorrect to begin with.

You said, " If a multi-millionaire pays an extra 100,000 in taxes, that means ten middle class families can save 10,000 each. I think the increase in quality of life experienced by those families is more than would be experienced by the multi-millionaire." This statement makes 2 main mistakes:
(1) it ignores the unintended consequences of increasing tax ratesIncreasing tax rates often decreases tax revenue. There were 4 times in the last 100 years where decreases in tax rates actually increased tax revenue. (Coolidge, Kennedy, Reagan, and G.W. Bush) Again, policies must be judged by there actual results, not there hoped-for results.
(2) it assumes that just giving money to middle class families will actually help them. Money given away by the government is not spent as wisely as money earned. It also causes dependency and feelings of entitlement.

You rightly point out that the market is not always fair and they do have cycles. No one is arguing that the market is perfectly fair. To be objective, one must always ask the question, "Compared to what?" Is a more regulated economy really more fair compared to a free economy? Across the world, we see the same trend—the poor are voting with their feet to enter markets with less regulation. Has regulation mitigated the business cycle? Evidently not. The increased regulation has made the cycles worse. The current recession is evidence of this.

If you want to improve human welfare, then promote free trade and capitalism. It is not perfect, but it is the best way so far discovered to improve the welfare of the ordinary citizen. All the evidence I am aware of suggests that more regulated markets in general decrease fairness and aggravate market failures. One must always judge any policy on the merits of actual process characteristics—not on hoped-for results.

Bennion said...

That was a great comment, and I'm glad you made it so that we can discuss some of it.

I should clarify that when I talk about the rich, I'm really referring to the top 1% or 0.1% of earners, not the top 20%. Not very many people ever move into the top 1%, and I think getting there is a lot more dependent on who you know or luck than getting in the top 20%, which I think you can work yourself into.

I think my conclusion is correct: that is, as our tax rates have gotten flatter, the percent of income taken home by the top 1% or 0.1% has dramatically increased, while the bottom 80% have seen incomes grow much more slowly:

I think tax increases decreasing revenue is a conservative myth, but that will explode into a long discussion, so let's leave that one for another day.

I wasn't saying take the money for the millionaire and give it to the middle class families, I was saying raise the millionaire's taxes so the middle-class families can keep their earned money.

The current recession was caused by a housing bubble, which was caused by the deregulation of the housing markets. This was best explained by a book I read recently, 13 Bankers. I'll do a blog post on this soon, then we can discuss it more.

I do strongly support free trade and capitalism, but appropriate regulation in certain markets is also important.

Sorry to put off answering your points for now, they just demand more full answers that I can give later in fuller blog posts. I'll get to them soon!

gavinomics said...

You know what is somewhat ironic? I remember talking with you in Cambodia about classes to take at BYU. You recommended Dr. Kearl's economics class. I took it on your recommendation. Now studying economics is one of my favorite pastimes.

You and I share a lot of values. We both value intellectual inquiry, careful examination of facts, as well as empirical objectivity. I want to also share political and economic values with you as well. I want to convince you of the moral and consequential arguments for a bottom-up approach to the economy (as opposed to various top-down approaches).

Of course if you have better arguments then I will convert to your beliefs, but because of your recommendation to take Kearl's class years ago, I am a vigorous consumer of economic knowledge. I own over 50 volumes on economics (ultimately thanks to you). I am well aware of the arguments that you have presented. But, I want to share with you the economic facts and fallacies that I am aware of and my inferences of those facts. Hopefully I can respond in the next few days once I have a few minutes to spare.

Bennion said...

I do remember that, I still think Dr. Kearl's class was very eye-opening, even though I've become a pretty liberal economist.

I'd like to have a good conversation about it, and do some research to make sure I'm on solid ground, but we'll probably have to wait a bit until I have a little more free time for the research. I'm definitely looking forward to it though!

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