Is the tax system progressive?

A recent article on “Economists View” suggested – I think – that it was not progressive or at least not progressive enough. The most cogent response was from ‘Irreverent Comment’ who rightly bemoaned the paucity of debate. While I heartily agree with that notion I found a few of the ideas lacking. My comment is listed below.

Is the tax system progressive? BJ Feng, cynicalone and rbm411 all directly make my point (and better said no less). This graph and paper use one set of distinct numbers in an attempt to disprove a second set of distinct numbers. At best it is disingenuous, more likely it is an intentional use of disinformation in a political polemic.

Irreverent Comment provides the most incise criticism. That is, for so rich a topic the debate is incredibly poor. One critique however, is the use of utility of incremental income/wealth as a justification for a specific tax policy. I have no clue what the income utility is for someone transitioning from a deca-millionaire to a centi-millionaire. I do know what it was for my wife and I to transition to millionaire (very singular) status. Visually it was transitioning from an 8 year old 19 foot center console boat to a brand new 35 foot flybridge sportfisher. The incremental utility was incredible. At the same time our taxation rate and tax monies paid were incredible as well.

A second critique is the dismissal of a flat tax by (a) defining it as the so-called “fair tax” and then (b) suggesting that if absolute equality is the goal then it is fair to “give” the same income to everyone as it is to “take away” the same income. This concept fails on multiple levels. First of course, government does not “give” income but government does take taxes. The former is ostensibly based on individual effort while the latter is based on the police powers of the state.

I also take great issue with arbitrarily defining “flat tax” as the mis-labeled “fair tax”. My definition of a “flat tax” is a flat tax rate applied equally to all income. Thus a 10% flat tax rate for the $50,000 earner is a $5,000 tax while for a $1,000,000 earner it is $100,000. The tax rate is the same (e.g., flat) but the taxes paid could be considered progressive.

But to the biggest issue raised, why is there such a paucity of ideas in the debate? As a “RedSt8r” I’m as tired of tax cuts as the Republican solution as I am of tax hikes as the Democratic solution. This could and should be a debate rich in ideas. One highly suited to an economics blog but which is sadly lacking.

My first question is: what is the purpose of a tax system? Is it strictly to raise public monies to be used for constitutional purposes (national defense, highways, etc.)? Or is the purpose of a tax system to correct whatever issue(s)- economic, social or otherwise – the political majorities feel need correction? Are both purposes valid? Why?

What is a progressive tax system? Is it limited to an increasing tax rate dependent on income? Would a fixed tax rate that raised increasing amounts of tax monies based on income be considered progressive? Should a progressive system consider earned versus unearned incomes differently?

Should “wealth” be taxed in lieu of or in addition to income? Why do Warren Buffett and Bill Gates support an estate tax (a wealth tax) while simultaneously moving almost all of their wealth outside the reach of an estate tax? Do their actions conflict with their speech regarding the political validity of a progressive tax system applied to wealth?

Can a flat tax be progressive? Yes, in the sense that it takes a progressively larger amount of money from those with larger incomes. No, in the sense that “X%” is the same regardless of income. Which is the correct view? I posit that there isn’t one. The issue can only be resolved in a political debate. When will the economists start the debate?

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One Response to “Is the tax system progressive?”

  1. redst8r Says:

    This comment by “Curt” regarding the same article I’ve commented on is exceptionally well done. As a small business owner I concur that our taxation system – based on income not wealth – is seriously and grievously imbalanced towards the wealthy and against the middle class in general and the small business owner/entrepreneur in particular.

    I recommend this comment.

    http://economistsview.typepad.com/economistsview/2009/04/just-how-progressive-is-the-tax-system.html?cid=6a00d83451b33869e201156f258e39970c#comment-6a00d83451b33869e201156f258e39970c

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