In Defense of a Progressive Tax System – Redux 2021
This post is before my time of writing at Angry Bear. It does fit in nicely with the need for reasonable economics of our times and I noticed its popularity growing . The author of this piece is Kash, one of the originators of AB. This is a rehash which has seen rising popularity.
If you consider when this was written, it was on the precipice of the 2008 collapse when both Wall Street and Main Street were ready to fall into a depression. While the Fed’s Bernanke did his magic with two other international leaders, Wall Street was thrown a life line by Main Street to save it and themselves from the resulting economic damage Wall Street and the politicians created (see Senator Dorgan’s speech and The Messenger wore a Skirt.
“when capitalism works, it is the ideal system because in allocating resources in this manner, the market is actually allocating resources in the manner that most benefits society as a whole.”
__________
In Defense of a Progressive Tax System, Kash, December 2006
If you’ve been reading this blog for a while, and spend time in the comments to the post, what follows might be familiar to you. I remember posting bits and pieces of it in comments to posts by PGL and Angry Bear back before I wheedled my way into their midst.
I believe in a progressive tax system and I believe in a progressive tax system because I believe in capitalism. Capitalism is based on the idea that resources flow toward those who have the greatest marginal use for them, not through government edict, but through the Invisible Hand of the market. If I build a better mousetrap, under ideal circumstances, mouse-trap connoisseurs will flock to me, giving me money and hence encouraging me to build more of the same. It will also encourage others to innovate and build even better mouse-traps. The flip side of this is that those who benefit the most from something – in this example purchasers of fancy mouse-traps – will pay the most for that service.
Adam Smith went a step further – he pointed out that when it all works, capitalism is the ideal system because in allocating resources in this manner, the market is actually allocating resources in the manner that most benefits society as a whole.
(Of course, it doesn’t always work that way – information is not always perfect, externalities abound, crime is rampant, market power creates its own distortions, and of course, there is also fraud and other crime to wreak havoc in the market.)
And while the government operates outside the market in many ways, under ideal circumstances, government services should be provided and paid for as much as possible using the same approach as private services – those who benefit the most should pay the most. What are the services the government provides? Ideally, at a minimum, it sets rules and enforces them and protects the country from foreign invasion (e.g., the Canadian hordes). In plain English, the government is responsible for ensuring that society doesn’t break down. Oliver Wendell Holmes put it better:
“Taxes are what we pay for a civilized society”
If government goes away, you have Somalia.
So who benefits the most from the existence of government? At first glance, one might say the poor. After all, in many instances, they receive transfers from the government. Perhaps in a free-for-all, the rich would simply let them starve.
But a second glance gives you a different set of winners and losers. Consider a janitor who lives in downtown LA, and an investment banker who lives in Bel-Air. The government provides a lot of services to the investment banker that are not used by the janitor. For instance, it prevents the janitor from driving off in the banker’s vehicles. (It doesn’t need to prevent the banker from driving off in the janitor’s vehicles, if any.)
In fact, the government is the first line of defense for most of the investment banker’s property, as most of it is held in intangible form; bank accounts, stock certificates, etc., only have value as long as society is maintained. Now you might say – well, even if the government disappears, Bank of America will maintain the value of its clients’ accounts. Sure, they’ll have an incentive to do so, but what ensures that every programmer who now works for Bank of America doesn’t simply steal from B of A clients is fear of jail, which means, the government.
The janitor has no shares of stock, and maybe a couple of hundred bucks in the bank. Most of his property is physical and sitting in his rented apartment; he (and a baseball bat) is the first line of defense for his own property.
Well, the stockbroker has physical property too. What about the boat he keeps at Marina del Rey, or the second home in Aspen? Again, those (or his ownership of those) are defended primarily by the government – he and his baseball bat are located too far away to keep out interlopers. Sure, he might pay private security to watch those items, but if government ceases to exist, the $10 an hour rent-a-cops (not the security companies, the employees) will be living in his second home and his yacht. Heck, they’d probably chuck him from his Bel-Air home while they’re at it. Nobody’s going to steal the janitor’s apartment; first, because it isn’t his (he rents it), and second, why steal from a poor man when you can steal from a rich one more easily?
And so far all I’ve written about is protection. This could be a really long post, and I could write point out other ways those at the top benefit more than those at the bottom. As an example – anyone think the janitor has more political power and access to elected officials than the investment banker, and anyone think power and access doesn’t buy you something?
In any case, the services one gets from the government increase with one’s assets. But these services increase more and more rapidly as one’s assets increase. (With protection – the more wealth you have, the more of that wealth is in intangible form or, if physical, not something to whose defense one can contribute.) In a fair and capitalist system, therefore, taxes should increase with wealth, and they should be progressive, increasing proportionally to the services provided by the government. Now, we don’t tax based on wealth, but rather on income that is a proxy (however poor) for wealth.
I note that the Bible of capitalism, Adam Smith’s Wealth of Nations, says the same thing:
“It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”
In other words… Smith felt that the tax system should be progressive.
(As an aside: Its possible you clicked on the link, scratched your head, reached for your well-worn copy on the bookshelf, thumbed through it, and said to yourself – but how does this quote come from Book 5 of the Wealth of Nations when there are only three books?
Well, it turns out that the copy you have, bought at the bookstore, is a bit short. See, the folks who love to quote Adam Smith, and who call themselves capitalist – the ones who work at Cato or Heritage – they only like what’s in the first three books. Booksellers cater to book buyers, so your copy only has the first three books.
More on some of what Adam Smith was about courtesy of Mark Thoma.
The adamsith.org link is broken. I found a pdf of all 5 books at iblio.org
https://www.ibiblio.org/ml/libri/s/SmithA_WealthNations_p.pdf
Hey moderator, where is my “add link” button?
Now the formatting bar is back.
Second from the right. It looks like a chain link. The far right one eliminates links, The second on the right allows you to add a link. I will fix the broken link too.
By the way, it is “Mister Moderator,” Mr. Arne. 🙂
Mister 75441, I would have sworn the whole formatting bar was missing, but I cannot recreate the issue.
Arne:
Stuff happens at times. Not sure why. All I know is I liked Kash’s post, it is still relevant, and it has been read multiple times recently.
fixed the Adam Smith link. Thank you
Here is another aspect of capitalism that I observe which leads me to believe that the financially successful should pay more taxes than less so.
Business owners seek to reduce costs. This includes worker salaries. However, workers are also consumers. So, by reducing costs each business owner is harming his customers. Since the advantage of paying workers less is more direct than the disadvantage of having poorer customers, each business owner will justify acting (in part) against his own interest. While this is an example of the tragedy of the commons, I doubt you will see many libertarians citing it. Capitalism can be assisted by encouraging business owners to make decisions that help their customers in the aggregate.
When the government “provide[s] for the common Defence and general Welfare” of customers it is helping business owners be successful. Educated, healthy customers who can use roads to acquire products generate more demand. Success, then, is a good indicator of the benefit the business owner is receiving from the government. Taxation based on success makes sense.
Shorter Arne: The middle class and working class are the job creators. Econ 101.
As for libertarians, they are the apotheosis of solipsism, the political philosophy of middle school boys and arrested development.
need for reasonable economics of our times
“
~~run75441~
the problem we now face is WTF. we Face WTF and “say whuut”. as we leave the realm of the reasonable but drift deeper and deeper into the realm of the unreasonable we must band together, stand up for simplicity and the sustainable. we must, perhaps even fight for these improvements.
“
Smith felt that the tax system should be progressive.
“
~~run75441~
believe it! even the Romans who believed in so much Freedom also had censors to limit damage caused by destructive freedom. Inequality can be very a destructive freedom to individuals and to the Republic. we have the best Pentagon in town and part of its power comes from the superior equality that Americans have. communist do not have this kind of equality. Stalin murdered 30 million of his political enemies. we don’t have that kind of inequality.
but we need more equality. we need a Universal minimal income to catch those who fall through the cracks. how can we pay for this Universal minimal income? we can pay for it by more efficiency within our financial system. we need full Reserve banking, deflation, and laws that eliminate politicians who buy votes with other people’s money.
we need to stop taxing production but start taxing real property. when you tax real property you still have the same amount of acres and square miles in this country as you had before the tax was levied; but when you tax production, it’s inputs and its outputs you get people fired, people fired with a negative multiplier effect. it doesn’t make a damn bit of sense to tax the payroll, the corporation, or the capital gains. it makes plenty sense to prevent inflation by taxing golf courses, theme parks, and mansions.
Good thread in general, but in comments Georgism is a little out of date. Capital gains and games is at the root of the financialization which lead us to all those pesky firm consolidation problems, the dis-economies of scale as it were. Too big to fail is too big to be broadly beneficial, but there is far more than that from disparate power to robbing employees of benefits via mergers and entering into global supply chain price arbitrage schemes that introduce so many new points of failure to economies. On progressive taxation though, then +1.
Joel: “Shorter Arne: The middle class and working class are the job creators. Econ 101.”
No. Entrepreneurs (capitalists) are the job creators. But they only create jobs if they think there is demand. The middle class and working class are the demand creators. My study of feedback loops was in the mechanical engineering department, not in Econ 101. I get Joel’s point, but I don’t think most freshmen do. To say that eggs are egg creators because they create chickens is going too far.
Entrepreneurs do not need demand to exist in order to create jobs. They only need to think it exists – or even believe they have an idea (such as the iPod) that can create demand. They can simply believe that because they like food that they can run a restaurant. If government looks out for demand creators it increases the gain of the worker-as-customer feedback and therefore benefits business owners.
I agree with most of this…I need to say that because you are not going to believe what I say next:
BUT making “progressive tax” into a religious icon can be destructive of the very “welfare” you hope to create.
Social Security works because it is not a “progressive tax” in the way, I am afraid, most educated leftist economists think of progressive tax, It is instead a “flat” tax with a very progressive payout structure. It works because the workers can say “I paid for it myself.” And “the rich” pay no more for it than it is worth to them as insurance against becoming not-rich unexpectedly.
Mindlessly chanting “regressive tax, regressive tax..” because the rich do not pay “in proportion to their income” or even in “progressive proportion to their income” is like complaining that the rich do not pay for bread in proportion to their income.
No doubt there would be a certain cosmic justice if the rich did pay for everyone’s bread…and this system works in “primitive” societies where everyone is “family”…because everyone shares in good times and bad… but it does not work in complex industrial societies… so we need to think past simple minded political slogans, even if they are our own.
and I even agree with Joel about Libertarians, speaking of simple-minded political slogans.
and yes, i do believe in progressive taxation in general.
and i prefer to think of Social Security as “not a tax” but as a way for working people to pay for their own retirement safe from inflation and market losses and some kinds of personal bad luck… that is, it is an insurance policy, managed by the government but not paid for by the government. and yes it has to be mandatory for the same reason traffic laws have to be mandatory.
[actually, in America the rich do pay for everyone’s bread in the sense that we do have welfare programs, paid for by the richer taxpayers, that attempt to keep people from starving.
but also to keep people from “cheating the system”…collecting welfare that they do not qualify for by need.
that “cheating the system” problem with welfare…is what makes worker paid social security necessary… it is not welfare and there is no way to cheat it, so no need for all the buraucracy and politics associated with welfare.
again, all of this is ignored by the people who chant “regressive tax, regressive tax, awk” every time they demand “expanding” Social Security, by which they mean making the rich pay for it…exactly what Roosevelt insisted on Social Security NOT being/ [hint for my former friends who think FDR “always intended to expand” Social Security… he was thinking of medical insurance, unemployment insurance, including farmers and other workers not included in the 1936 version… he was NOT thinking of turning it into the dole by pretending a “dedicated tax” was the same as “worker paid.”]
@Coberly,
I am with you on FDR and Social Security, but when you say “this system works in ‘primitive’ societies where everyone is ‘family’…because everyone shares in good times and bad… but it does not work in complex industrial societies,” then that assumes facts not in evidence. Communalism sort of worked in a bastardized fashion in both the old Soviet Union and PRC before state capitalism replaced socialism. The bastards in both cases were the privileged communists party members that were effectively just aristocrats in cheap suits. Communism and socialism in any form thus far attempted has still been just another elitist statist cabal.
Theoretically at least, then regional anarcho-syndicalism might be a better model. My favorite line from the Wiki on it is “Reflecting the anarchist philosophy from which it draws its primary inspiration, anarcho-syndicalism is centered on the idea that power corrupts and that any hierarchy that cannot be ethically justified must be dismantled.” Woop, woop.
https://en.wikipedia.org/wiki/Anarcho-syndicalism#Contemporary_times
Ron
I was more worried about you citing Sweden…or even America, as we do have a kind of thee”rich feed everyone” welfare system. It does show however the weakness and ugliness of welfare (which is necessary) compared to “worker paid insurance.”
It’s hard for me to write with ads blocking my ability to see what I am writing. In any case try not to take me too literally. Life is too complex to be summed up in a blog comment, and I don’t know everything anyway.
Arne: Entrepreneurs do not need demand to exist in order to create jobs.
If the definition is correct, they kind of do need demand: a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so.
Without demand, they are just being creative. Artistic is you will. Following their path of curiosity.
I don’t deny that one’s creative endeavor could lead to something that creates a demand resulting in an ongoing exchange of some form of money for the created product. But, it’s still about the money, it’s business and without the qualification of “business” one is not an entrepreneur. Without the customer, one is not in business.
To follow your own train of thinking, if an entrepreneur is creating demand when none exists, are they not “demand creators”? Are those demanding the product not driving the need for the entrepreneur to hire employees thus job creators?
Yes, an egg does not directly create an egg but would we say a chicken does not create a chicken? Of course not. The only issue here is where one decides the starting and end points are. It only sounds wrong to say an egg creates an egg because we don’t equate an egg as conscious life while we all accept the chicken represents a living entity.
yes, power corrupts, but when you have powerful corrupt enemies you need the power of organization and unified command to fight them off.
the only approximate good answers to this that I have seen are or descend from the New Deal which created countervailing powers in government to limit the criminality of business, and the damage from accidents of economics, war, pestilence, and even early death. We seem to have lost or be losing what was gained by the New Deal, which we shoud have expected from politics as usual. And I don’t see the people rallying to save themselves from organized gangs of criminals in suits.
Well, the 1% strongly favor an income tax set-up that keeps their income taxes to a minimum.
After the Supreme Court and the Citizens United decision, and the ascension of Trump, they got their way, as they usually do. What to do? What to do?
Maybe, put the GOP out of business?
The Heritage Society says…
https://www.heritage.org/taxes/commentary/1-chart-how-much-the-rich-pay-taxes
Those earning over $218K per year (the top 5% inclusive) earn 37% of all income and pay 60% of all income taxes. So of course they are entitled to 60% of all political power. Though it seems they could easily afford to pay 80% of all income taxes.
https://www.nytimes.com/live/2021/07/20/business/economy-stock-market-news/democrats-take-aim-at-a-business-tax-break-included-in-trumps-2017-overhaul
Dobbs
I am all in favor of the rich paying their fair share…which means a progressive tax for general government activities.
But I get a little worried by sentiments like “put the GOP out of business.” even if meant humorously, it is too close to what “the left” seems to be advocating. the current GOP probably should be put out of its misery because it seems to have become a danger to democracy if not to human civilization. but to the extent that they represent,, or represented in the past, the interests of “the rich,” they are a legitimate part of “democracy,” which is not, and cannot be, rule of the poor by the poor for the poor. The poor outnumber the rich, and if they were capable of ruling, they would have no trouble doing so. Since, as we know, power corrupts, we should be grateful that there is a countervailing force that prevents us from … becoming corrupt. Besides that, “the rich” (maybe not all of them) are human beings and deserve to have their human rights respected.
Of course their own drive for power is not self-limiting..at least not since they learned to act collusively…so we need to provide the countervailing force to their own drift toward absolute corruption. That is easier, and saner, if we don’t talk in absolutist terms that scare them to death.
saying they pay 60% of the taxes so they deserve 60% of the power is like my saying my prize bull earns 60% of my farm income, so he deserves 60% of the power.
i am more or less happy to let the rich enjoy their ill gotten gains…but not to the extent of buying the government.
In a society where wealth can purchase political influence,
wealth will be used to secure political influence.
Maybe we should put a stop to that.
https://www.bostonglobe.com/2021/07/20/metro/back-earth-heres-how-some-people-are-reacting-bezoss-trip-space/?event=event25
dobbs
money has always ruled politics. people don’t or can’t do anything about it …once they have let it go on too long. except get out the pitchforks.
don’t mean to counsel despair, but judging even from Angry Bear, who should know better, people will not act except to shout bad names from sidelines…at each other.
I don’t see a new Roosevelt on the horizon.
There has been renewed talk about Packing the (Supreme) Court.
Almost always an idle threat. Why wouldn’t it be this time?
However, that’s what it would take to overturn Citizen’s United
and eliminate the political power of corporations and their
boards of directors.
Dobbs
I do not believe overturning citizens United would eliminate the political power of money. Money always finds a way. Always has. Always will.
There is some chance the people will find a way to limit the power of money, but don’t count on it.
note “limit” is not “eliminate.”