Issue Report: Progressive tax vs. flat tax

Should there be a progressive tax system or, for example, a flat tax?

This is a straightforward question of fiscal policy – should people who earn more pay direct tax (tax on income) at a higher rate or not? Where progressive tax rates operate, different rates usually apply for different bands of income. For example, the first $5000 of income might be tax-free, the next $20 000 of income might be taxed at 20%, income between $25 000 and $50 000 at 30% and any income above $50 000 at 40%. Sometimes the top band of income has been subject to a very high tax rate (e.g. over 70%), as in the UK in the late 1970s. “Progressive” describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence disproportionately to those with a higher ability-to-pay. The term is frequently applied in reference to personal income taxes, where people with more disposable income pay a higher percentage of that income in tax than do those with less income. It can also apply to adjustment of the tax base by using tax exemptions, tax credits, or selective taxation that would create progressive distributional effects. For example, a sales tax on luxury goods or the exemption of basic necessities may be described as having progressive effects as it increases a tax burden on high end consumption or decreases a tax burden on low end consumption respectively. The opposite of a progressive tax is a regressive tax, where the tax rate decreases as the amount subject to taxation increases. In between is a proportional tax, where the tax rate is fixed as the amount subject to taxation increases.

Equality: Does progressive taxation uphold principles of equality?

Progressive taxation makes all citizens sacrifice equally

John Stuart Mill wrote in 1848: “As a government out to make no distinction of persons or classes in the strengths of their claims on it, whatever sacrifices it requires from them should be made to bear as nearly as possible with the same pressure upon all…equality of taxation, therefore, as a maxim of politics, means equality of sacrifice.”[1]

Progressive taxation affords individuals equal opportunity.

One idea behind progressive taxation is to level the playing field so that the wealthy don’t hold an iron-grasp of economic opportunity. Rather, a progressive tax system aims to enable the poor to climb the socio-economic ladder.

Progressive taxes violate principal of equality before the law

James A. Dorn. "Ending Tax Socialism". CATO Institute. 13 Sept. 1996

“A progressive income tax violates the very heart and soul of the Framer’s Constitution of liberty. Our constitutional democracy rests on the principles that individuals are equal under the law”

Progressive taxation wrongly aims for equality of outcome

Progressive tax systems wrongly aim to combat inequality in people’s circumstances, aiming to produce greater equality of outcome. The main problem with this is that it does not apply a strict principle (such as equality under the law), but rather engages government in the subjective and impossible act of balancing individual rights with an effort to produce equal outcome.

Socialism: Is progressive taxation compatible with capitalism?

Progressive taxes are not socialism or "spreading the wealth"

Judith A. Klinghoffer. "'Spreading the Wealth' is NOT progressive taxation". Political Mavens.

“Conceptually there is a major difference between progressive taxation and “spreading the wealth” socialism. Progressive taxation assumes that the richer should pay more of the government’s expenses than the poor. It does not mean that it is the role of the government to redistribute the wealth to reduce the wealth differential between rich and poor.”

Progressive tax systems recognize income is partly a collective good

"For progressive taxation, or against being against it". amerikanbeat. 11 Nov. 2008

“Wealth is a privilege for which the state is largely to thank. There is the related criticism that being ‘taxed more’ is a ‘punishment for being successful.’ Again, this is a natural enough way to look at it, if you aren’t thinking hard. Warren Buffett used to say that he could never have become a billionaire in Bangladesh. And he could only be one in the U.S. due to a whole network of conditions not of his making, and for which the government is largely to thank.”

Progressive taxation is socialist wealth redistribution and state theft

"Immorality of Progressive Income Tax". The Frugal Libertarian (Libertarian). 14 Oct. 2008

“I am certain that most people would agree that stealing would not be considered a moral act, even if what was stolen was given to someone who needed it more than its original owner. Imagine someone walking into your home and taking $10,000 off your table, walking out the door, and giving your $10,000 to someone else. There are few who would stand for this, but every year we allow the federal government to essentially do the same thing with little more than a grumble on tax day. We would fight off a burglar in our home, but do nothing to fight off the government burglar who pilfers from our coffers.”

Capital is created on assumption of ownership; contrary to progressivism

Capital is created in the first place only via the assumption made by individuals that they can create and own that capital. Progressive taxes diminish this idea, assuming that the capital created by individuals is not entirely theirs.

Progressive taxation exceeds limited powers of government

Edwin R. A. Seligman. "Progressive taxation in theory and practice". American Economic Association. 1894

“Time was when the progressive tax would not have been accepted as equitable even by a majority of the poor. Traditional equity required that taxes should be levied proportionately, not progressively. This was in accordance with the belief that’ a man’s property, or his income, was an index of deserving achievement, or of value contributed in the market place to society. True, some men inherited their property or incomes—but that was something to be handled or regulated under laws of inheritance. In any case the erosion of time could be counted on to take care of the inefficient use of inherited fortune—“shirtsleeves to shirt-sleeves in three generations” expressed the common wisdom in this matter of luck in the choice of one’s parents.”

Wealthy: Is a progressive tax system fair to the wealthy?

Progressive taxes protect poor, don't punish rich

Robert J. Shapiro. "Flat Wrong: New Tax Schemes Can't Top Old Progressive Truths". Washington Post. 24 Mar. 1996

“The point of progressive taxation is not to penalize those who succeed, but to protect those who have not.”

Wealthy benefit more from system, so owe a greater tax debt

George Lakoff and Bruce Budner. "Hidden Truths Of Progressive Taxes". Tom Pain. 16 Apr. 2007

“Ordinary people just drive on the highways; corporations send fleets of trucks. Ordinary people may get a bank loan for their mortgage; corporations borrow money to buy whole companies. Ordinary people rarely use the courts; most of the courts are used for corporate law and contract disputes. Corporations and their investors — those who have accumulated enough money beyond basic needs so they can invest — make much more use, compound use, of the empowering infrastructure provided by everybody’s tax money.[…]The wealthy have made greater use of the common good—they have been empowered by it in creating their wealth—and thus they have a greater moral obligation to sustain it. They are merely paying their debt to society in arrears and investing in future empowerment.”

Rich pay bulk of taxes because they earn bulk of national income

Robert J. Shapiro. "Flat Wrong: New Tax Schemes Can't Top Old Progressive Truths". Washington Post. 24 Mar. 1996

“Affluent people pay the bulk of federal taxes not because the system is sharply progressive, but mainly because they earn the bulk of all the income subject to tax.”

Progressive taxes benefit public, which benefits the wealthy

George Lakoff and Bruce Budner. "Hidden Truths Of Progressive Taxes". Tom Pain. 16 Apr. 2007

“An important point often lost in this debate is an appreciation that the common wealth, which our taxes create and sustain, empowers the wealthy in myriad ways to create their wealth. We call this compound empowerment — the compounded use of the common wealth by corporations, their investors, and other wealthy individuals.”

Existence of corporate subsidies helps justify progressive taxes

Michael Parenti notes the “whole basketful of handouts” given to the business class “from federal, state and local governments…[B]illions of dollars in start-up capital, research and development funding, equity capital, bailout aid, debt financing, low-interest loans, loan guarantees, export subsidies, tax credits, and other special favors.”[2]

Progressive taxes unfairly punish the rich and successful.

It is unfair to punish people for succeeding in society. They should be rewarded for succeeding, or at least left to reap the benefits of their success.

Progressive systems unfairly force rich to pay bulk of taxes

David N. Mayer. "Wealthy Americans Deserve Real Tax Relief On Principle". Ashbrook Center. October 1999

“The tax-cut debate has focused attention on the issue of fairness, and all Americans should seriously question whether the federal income tax is really “fair” at all. Under its so-called “progressive” rate structure, a minority of taxpayers in the upper income brackets are forced to pay the lion’s share of federal income taxes.”

The rich do not necessarily benefit more from taxes/system

David N. Mayer. "Wealthy Americans Deserve Real Tax Relief On Principle". Ashbrook Center. October 1999

“there is no correlation between the amount of taxes an American pays and whatever benefits, if any, he receives; indeed, a wealthy person may get fewer government services than a poorer person.”

Flat tax fairly has wealthy pay proportionally more in taxes.

It is unfair that people who earn more should pay at a progressive rate. Even on a standard rate, they already pay more tax, because they have a higher taxable income. Therefore progressive tax rates are a form of double taxation, as higher earners pay tax on more income, and then at a high level. This is further unfair to them since high earners are the least likely group to benefit from much taxpayer-funded activity e.g. welfare.

The wealthy pay more taxes, but aren't given more voting power.

Justice in representation. Economic equity is sometimes used to argue against progressive taxation, on the grounds of representation being out-of-proportion to taxation: While the top 5% in income in most countries pay over half the taxes[22] they only have 5% of the voting weight. This argument can be reversed into the plutocratic case that if tax is to be progressive it should be accompanied by greater say in elections for those who contribute most.

Progressive taxes are unfair to the short-lived high earner

Basketball players, for example, make substantial incomes for around eight years. They are taxed, during this period, as if this was their constant, long-term income, which means they are often left having to find other jobs later in life.

Progressive tax systems open door to unfair tax avoidance

Progressive taxes are often so complicated and with so many loopholes that the wealthy are able to evade their obligations. As a result, they end up paying a smaller rate than other, less wealthy citizens. A Flat Tax would eliminate this unfair tax avoidance and force the wealthy to pay their full burden.

Dollar utility: Does each marginal rich dollar have less utility?

Progressive taxes recognize each wealthy dollar has less utility.

If the utility gained from income exhibits diminishing marginal returns, as many psychologists assert (see Weber-Fechner law), then for the tax burden to be shared in a utilitarian way the tax-bill must increase non-linearly with income.

Progressives wrongly assume wealthy dollars have less utility

Friedrich A. Hayek. "Taxation and Redistribution". The Constitution of Liberty. 1960

[One argument’s] basic conception is that of the decreasing marginal utility of successive acts of consumption. In spite of, or perhaps because of, its abstract character, it has had great influence in making scientifically respectable what before had been admittedly based on arbitrary postulates.[…]Modern developments within the field of utility analysis itself have, however, completely destroyed the foundations of this argument. It has lost its validity partly because the belief in the possibility of comparing the utilities to different persons has been generally abandoned and partly because it is more than doubtful whether the conception of decreasing marginal utility can legitimately be applied at all to income as a whole, i.e., whether it has meaning if we count as income all the advantages a person derives from the use of his resources.”

Tyranny of majority: Is it wrong to call progressive taxation this?

Calling progressive taxation "tyrannical" is inappropriate

Carl Henn. "Taxation without exacerbation". Letter to Washington Times. 30 Mar. 2008

“Many of the richest people support progressive taxation, which provides some argument that progressive taxation isn’t tyranny, but rather a policy option with which Mr. Rahn disagrees. To call these tax policies “tyranny” is sloppy. Why is it important to correct sloppy thinking? Because sloppy thinking has consequences. Revolt may be an acceptable response to tyranny. It isn’t an appropriate response to mismanagement. Inflammatory rhetoric does not promote reasoned public debate.”

Progressive taxation is a form of tyranny of the majority

James A. Dorn. "Ending Tax Socialism". CATO Institute. 13 Sept. 1996

“If we let constitutional principles be eroded by majority rule, in the name of social justice, then both freedom and true justice will be lost. Progressive taxation is not a virtue but a vice. It presumes that the property rights of the wealthy are not as sacred as the property rights of the poor and that the values of the majority are superior to the rights of the minority.”

Progressive taxes cause class warfare to pass tax burden

If groups or classes feel they can pass the tax burden, at a higher rate, to other groups, they may seek to do so. This creates class warfare.

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