Andrew Sullivan writes:
And I oppose punitive or "progressive" taxation, because it means the government discriminates on the basis of personal success. If we’re all taxed at the same proportionate rate, the successful still pay far more into the public coffers than the unsuccessful. They’re just not penalized even further by a higher rate. If you want to help the disadvantaged, and I do, then focus government spending on programs that help the under-privileged. But don’t penalize work. And don’t defend unequal treatment.
There are several reasons to oppose a progressive tax, but Sullivan’s isn’t one of them. Contrary to Sullivan, a progressive tax is not ipso facto "punitive." The gap in Sullivan’s thinking is marginal utility — and it’s real gap, which he must traverse.
Here, the theory of marginal utility essentially says that a dollar’s value to you depends in part on the number of dollars that you have. The first dollar you earn is very valuable — if it’s all you have, it’s enough to get a snack and keep from starving for the next few moments. The 1,000th dollar you have (or expect) is less valuable: you’re likely no longer in danger of starving, and you can probably also afford a place to sleep. The 100,000th dollar is even less valuable: you have the necessities — food, shelter, clothing — and you probably have a bit of excess for a car and vacations and a bit ‘o fun. The millionth dollar is even less valuable to you: your life is likely already quite pleasant (in a material sense); the issues are now investment for the future and luxury goods.
What changed in the course of your accumulation of dollars? The dollar’s nominal value remained the same. The dollar’s value to you, however, slowly and steadily decreased with accumulation. The last dollar you earned (or inherited) was worth far less to you than the first dollar you earned and inherited.
Progressive taxation takes advantage of marginal utility to impose a lower tax on the dollars that are very valuable to you (the first few) and a higher tax on the dollars that are less valuable to you (the last few). From the perspective of the real value of the dollars to you (as opposed to their nominal value to you), a progressive tax is actually less punitive than a flat tax, which taxes your more- and less- valuable dollars equally.
Now, there are reasons to say, "to Hell with marginal utility; a dollar is a dollar." But, if you haven’t addressed the marginal utility argument for progressive taxation, you haven’t addressed the argument for progressive taxation. You’re a ship passing at night with your lights off; you’re a guy who doesn’t understand the value of a dollar.
Nice one von.
But as I know you’ll be asked, let me be the first…what are the reasons to oppose a progressive taxation system?
The laugh is, whatever methodology for increased taxation on the successful, that all dissipates with any attempt to relax the burden of taxation at any point, attempting to deal with change, possibly lower government spending. Marginal utility becomes inverted to the point not only of releasing lower levels of income of all tax responsibility, but to reward many for lack of success, or then, therefore, redistributing income. And don’t ignore the consumption side, for example, small business attempting to grow and hire. Slick concept for goods and services, a little more hairy when discussing earnings. The threshold of diminishing returns could also be framed to taxes collected and programs created, when is enough too much, marginally speaking. This argument is as old as Robin Hood.
Nor has Sullivan read his Rawls …
Find me one person who is discouraged from success by progressive taxation.
One person.
Actually, I know for a fact that Andrew Sullivan has read his Rawls. He has even taught his Rawls. (We were TAs together once, oddly enough.) Why he chooses to ignore it is a mystery.
(We were TAs together once, oddly enough.)
Oh, that *cries* out for story hour…
The laugh is, whatever methodology for increased taxation on the successful, that all dissipates with any attempt to relax the burden of taxation at any point, attempting to deal with change, possibly lower government spending.
I have no idea what you’re saying here, blogbudsman. Could you please clarify?
Under Sullivan’s theory, is it discriminatory for the government to means-test Medicaid and Section 8, or to provide lawyers for poor defendants but not rich ones?
(We were TAs together once, oddly enough.)
I know how this goes: you gradually drifted apart, had a fight one day, one of you fell into a lava pit and, though surviving, required a full-body life-support system rendering the wearer even more terrifying with a fierce death mask-style helmet and harsh mechanical breathing.
Redistributing wealth, blogbudsman, is a necessary, although not much appreciated, part of a capitalist democracy. What some may consider “reward[ing] many for lack of success” others rightly see as maintenance costs.
In other words, unless you want to see a rise in crime or the rise of “benevolent” dictators, you’d better have some sort of saftey net systems in place. Of course, such systems should be matched with tools to help push folks back into the workforce, but states with ineffective or no safety nets, like Peru, for example, illustrate that letting the wealthy keep all that they want thereby leaving the poor to fend for themselves will increase crime against both the wealthy and the government.
It’s a balancing act…and as we saw during the Clinton years, the best way to reduce crime, unwanted pregnancy, and many of the other ills of society is to have a strong economy that offers the vast majority of people gainful employment…even if some of them have to work for the government.
Sully is actually Darth Vader?
That explains alot. Not this, but still alot.
Adding my own petty autobiographical notes on dear Andrew. I had dinner with him in London many years ago and then worked out in the same gym when I lived in DC…he looks like he’s eaten about 50 million donuts since them.
No great stories, alas. He was smart, funny, charming, and opinionated, as you would expect.
No great stories, alas. He was smart, funny, charming, and opinionated, as you would expect.
Cop-out.
Just like me, in other words. Just add on an urbanely witty intellect, and you can’t tell us apart.
Oh, and me: only a few hundred thousand doughnuts.
Edward, let them eat cake. I’m kidding, really. Maintenance is one thing, heck I’ve been through phases in my life where a helping hand from both family and government maintained equilibrium until I was able to stabilize. But to campaign against evil tax breaks to the rich to placate the unfortunate who can also vote seems disingenuous. And “…the best way to reduce crime, unwanted pregnancy, and many of the other ills of society is to…” encourage, support and promote the sanctity of marriage and strength of family. Oops, wrong thread. Anyhoo, devices intended to overtax one section of society to the great benefit of another deserves serious argument.
But to campaign against evil tax breaks to the rich to placate the unfortunate who can also vote seems disingenuous.
Wha? That makes no sense either. Could you please explain this, too?
the best way to reduce crime, unwanted pregnancy, and many of the other ills of society is to…” encourage, support and promote the sanctity of marriage and strength of family.
er, tell that to Tony Soprano.
Nicely put.
Everyone always says that Andrew Sullivan is smart. I find him annoying, atrocious with numbers, lazy, and too quick to jump to conclusions and demonize everyone who disagrees with him. Maybe there’s another side of him that I haven’t seen, but that’s my opinion.
Von, ten out of ten for this post. I just read Sullivan’s fumbling tax logic before jumping to ObWi to clear my head. While I’m not an economist, I lived for ten years with an economics professor who had a PHD in economics AND had an accounting certification, and enough rubbed off on me to know Sullivan’s talking bunk.
Thanks very much for a much-needed posting on it.
Question then – when lowering taxes (which in my mind SHOULD be done if you are running at a surpluss or even a projected one!) – should one only lower them for the lower-middle incomes and ignore the higher tax brackets?
Does the sense of fair play go both ways?
“Every tax is to the person who pays it a badge, not of slavery, but of liberty. It denotes that he is subject to government, indeed, but that, as he has some property, he cannot himself be the property of a master.”
“The subjects of every state ought to contribute toward the support of the government in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the state….. [As Henry Home (Lord Kames) has written, a goal of taxation should be to] ‘remedy inequality of riches as much as possible, by relieving the poor and burdening the rich.'”
–Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776)
Goddamn pinko bleeding heart librul.
On the subject, here’s a link to a lecture on “Can the Left and Right both claim Adam Smith”, with Gordon Brown, the UK Chancellor of the Exchequer, as a speaker:
http://www.ed.ac.uk/events/lectures/enlightenment/adamsmith.html
blogbudsman: And “…the best way to reduce crime, unwanted pregnancy, and many of the other ills of society is to…” encourage, support and promote the sanctity of marriage and strength of family.
The government has no business whatsoever promoting the “sanctity” of anything. Sacraments are and always should be purely the domain of religion.
Promoting strength of family and marriage, on the other hand, is a reasonable role for government. Lets start by taking off the books legislation that prohibits or hinders monogamous, unrelated, consenting couples’ ability to get married and raise families. And lets ensure that men and women have as much control as reasonably possible over when they have children and how many they have. This means comprehensive family-planning education and affordable access to health care, including contraceptives.
Oops, wrong thread. Anyhoo, devices intended to overtax one section of society to the great benefit of another deserves serious argument.
Put me down as against overtaxation. Glad we have that settled.
This argument for progessive taxation runs smack into the problem of interpersonal utility comparisons. Without adressing that idea (which is not overly difficult to do in this context), your argument will persuade few who are strongly opposed to progressive taxation.
Traditionally, I think the response is, “utility is a function of strength of interest, and the reason I have more money is, I’m more interested in it.” But I think there’s a better argument for progressive taxation made by Paul Krugman in his essay, “An Unequal Exchange”.
I may be misrendering it, but he argues that if you track income against percentile of income distribution, the line slopes strongly all the way up. Which means that the 100th richest person (by way of example, not his demonstration), is enormously richer than the 101st richest person. Since we are suspicious of claims of meaningful distinction in merit between people who sit right next to each other in scoring (say SATs of 1550 and 1560), the big gap in income seems to indicate that there is a lottery aspect to a lot the income that people earn. If a lot of income, particularly at the high end of the scale, is lottery winnings, it is harder to argue that progressive taxation is robbing them of what they earned through special effort.
I’m rendering it really badly, I can see, but I suspect some people here have read the essay and may know of good refutations of it. I’d be very interested in knowing what those critiques are. And to the extent anyone knows, I’d be particularly interested if someone has looked at the income distribution and computed the option value of working hard, and whether it still suggests greater returns than anticipated.
(Believe it or not, English is my first language).
Thanks.
gromit – “no business whatsoever promoting the “sanctity” of anything.”
Maybe so, but it can throw roadblocks in front of the judiciary branches from legislating morality. And I’m with you, the men and women who marry and have families should get as many incentives as God’s green earth can withstand.
SCMT: You seem to be conflating “income” and “wealth”. Not saying that’s invalid, just that the two don’t necessarily go hand in hand. And since income tax is the topic at hand, I’d think income would be the focus in relevance.
Not saying this is common, but it is possible to accrue enormous wealth without earning an enormous income. Case in point: Mark Cuban and Todd Wagner.
Can Adam Smith’s time be equated with ours? Shouldn’t we be doing things a tad bit differently than them? Finding quotes like that are great fun, but hardly relevant. Yeah, I know, I’m the one who said ‘give them cake’, but I was kidding urinal, I really was.
I don’t agree. The government is not chartered with legislating morality via the tax code.
Great. Now we’re going to show up under a google search for urinal cake.
Superb explanation, Von. You convinced me. Which wasn’t difficult, considering I was at the head of the line of the already utterly convinced.
Ditto on Praktike’s comment. Bill Gates and Warren Buffet would be working at minimum wage today (or lower)if they LIVED the current Republican world of incentive (etc.) And Larry Kudlow would be slumped in a doorway somewhere muttering about the evil government’s failure to properly incentivize him.
Here’s the thing, though. I hope this explanation is an example of Von’s gentle advice to the Democratic Party about how to frame and explain hitting the ground. Maybe a few percent of the electorate will see the light and then we’ll have a completely different “mandate”.
But I’m not hopeful. Sullivan, for example since his name was brought up, won’t buy it. He looks at his first dollar, his last dollar, and the dollar right in the middle, and all the little ones in between and says they are all mine and the government can’t have them.
And that’s that. Go count the number of volumes of Ayn Rand versus, say Adam Smith or Rawls or the Marx Brothers, for example, at the local bookstore, and you’ll see why.
So, if Sullivan is not convinced by Von’s argument, send him back over to me for my argument, which is “Shut up, and pay your taxes”, which is not an argument but is the answer his argument deserves.
He’ll like those taxes on gay marriage certificates I plan on giving him in all 50 states. Because they will be exactly equal to the taxes on heterosexual marriage certificates. Are there taxes on marriage certificates? Well, there should be. I don’t expect a little tax to disincentivize Mickey Rooney’s serial married life.
Just saying: Von’s argument deserves to win the day.
I also want a very big tax levied on nouns converted to verbs like “incentivize”. However, I pledge never to pledge clunky, hard to pronounce email handles like “blogbudsdman”.
Or “thullen”.
“pledge never to pledge…”???
Yes, that too, in addition to pledge never to tax….
So Slartibartfast, wouldn’t a modified flat tax (a not so flat tax) be right up your alley. I’m truly undecided at the moment. My kids are grown so my exemptions are limited to me and my lady. In the same breath, a heftier sales tax based on consumption seems to have merit. You get all your money, sans SS. And then you pay as you can afford to buy. Probably future threads. I don’t know, I’m listening.
I sure like John’s “Shut up, and pay your taxes” argument. If there’s one thing I can’t stand, it’s whining about how much money the gov’t takes away. Buncha wimps.
Which reminds me of an old joke. A liberal is someone who looks at half a glass of water, and says that it’s half full. A conservative looks at the same glass and says “Who drank half my water?”
A few years ago, I was reading an interview in my local Canadian business magazine. It was with the founder of a Vancouver software development company who had, thanks to NAFTA, opened a US branch office just across the border. He was talking about the better business environment in the US, how much lower taxes were, and generally how awful the Canadian tax burden was. When asked if he’d be moving the whole company to the US, he said that, sadly, no, his employees didn’t want to move because there were better social services in Canada, less crime, less pollution, better schools, and universal healthcare.
As this guy obviously couldn’t add one and one to get two, I was wondering how on earth he managed to have a successful company.
You seem to be conflating “income” and “wealth”. Not saying that’s invalid, just that the two don’t necessarily go hand in hand. And since income tax is the topic at hand, I’d think income would be the focus in relevance.
Distinction sans difference. Especially since the current tax code, as well as several proposed tax schemes, address wealth. The flat tax schemes in particular would permit the very wealthy to avoid taxes altogether or significantly reduce their tax exposure.
So, we have a wealth tax? No surprise, but this is a new one on me.
And I’m “John”.
As commenter Dave alluded to, there are philosophical reasons for opposing progressive taxation having to do with the illegitimacy of interpersonal utility comparisons. Diminishing marginal utility of money does imply that, for any one fixed person A, the 100,000th dollar A earns will be worth less to him than the 10,000th dollar. It does *not* follow that, for two people A and B, A will value his 100,000th dollar less than B values his 10,000th. There is no reason to assume that different people’s utility-of-money functions decrease at the same rate or from the same baseline.
For other first-principles arguments against progressive taxation, see e.g. David Friedman, _Hidden Order_ or _Law’s Order_ (I forget in which of these he addresses the issue, but it’s one of them); or David Kelley, _A Life of One’s Own: Individual Rights and the Welfare State_.
For some pragmatic arguments against progressive taxation, see Friedrich Hayek, _The Constitution of Liberty_, which has a whole chapter on the topic. His points include:
1. progressive taxation distorts relative rewards for different classes of services leading to inefficient resource allocation;
2. progressive taxation results in higher long-term effective tax rates for people whose income varies a lot from year to year, which among other things discourages independent entrepreneurs from taking wealth-creating risks.
Dave and Nicholas pick up on part of what I meant when I wrote “Now, there are reasons to say, ‘to Hell with marginal utility; a dollar is a dollar.'” Thanks, guys.
I’d add that it’s also legitimate to argue that the marginal value of a dollar doesn’t matter, that it’s all (essentially) legitimized stealing, and that stealing something is wrong no matter what value its owner places on it. I don’t find this argument very convincing and, even if you believe it, you still have to address the “no matter what value its owner places on it” aspect of the argument (i.e., marginal utility).
Bender writes:
Question then – when lowering taxes (which in my mind SHOULD be done if you are running at a surpluss or even a projected one!) – should one only lower them for the lower-middle incomes and ignore the higher tax brackets?
I’m always in favor of lower taxes when we’re running surpluses — it’s the people’s money, after all. How to structure a tax cut, however, depends on what you hope it will accomplish. I’m certainly not adverse to giving breaks to the upper tax brackets; what I am against, however, is entirely removing the notion of a progressive tax.
Sully makes another error in the same piece, when he suggests that a flat tax would end corporate lobbying, because they’d be unable to get tax breaks.
In fact, they would reallocate their lobbying funds towards getting beneficial protectionist policies enacted, towards mutating the intellectual property laws, towards getting direct or indirect subsidies, toward getting changes in regulations, etc.
It’d still be a mess, and they’d still be buying Congress.
Von, I see your point. However, I think that most of us don’t think in terms of utility of each dollar earned, rather in the effort put forth to attain it and thus value each dollar based on that. My business is sales*. So for me, each dollar I earn is based only on what I produce and the work required is the same whether it’s the first dollar I earned this year or my last. In fact, I’d say that overtime worked, or additional work put in to make one more sale makes those “last” dollars more valuable because you had to give up more, in terms of time spent on work and not on other things, to earn them.
Also, given your statement about the utility of money, why isn’t it fair to say that with the exceptions of specific basics** (food, housing, clothing, education) everything is luxury and is being purchased with dollars that are of less utility no matter how many that person has? I mean, how do you say that, if you can live on $29,050 that dollar $25,051 is really any different than dollar $70,351? Isn’t everything you spend money on after $29,050 luxury? Given the above paragraph, a flat tax starts to look pretty fair to me.
And I must say that I’d find it refreshing if a candidate or party seemed at least as serious about rooting out wasteful programs as they are about tax reform (up or down).
*You’re in law right? I assume that the hours you bill don’t seem proportionally shorter the higher on the income ladder you climb, right?
**We can argue over whether it’s fair for me to desire a higher “basics” deduction since I’m in SF than someone in rural Kansas when I’m free (or as free as anyone really is given job, family, health etc.) to move to rural Kansas whenever I like.
Can I simultaneously think Sullivan’s being an oversimplifying twit and disagree with von? Because that’s what I’d like to do, plzkthx.
There are two problems with the marginal value argument. The first is that by the same argument, the federal government derives the least value per dollar in the history of the universe, because it gets so many of them. Federal tax revenue is the largest single concentration of wealth ever. And since this is in fact the result, that argues strongly for the marginal value interpretation. The second is that agreement with the idea of marginal value (as I do) does not necessarily translate into meanginful tax policy. So people can ‘afford’ to give up more money if they have more, because their marginal dollars are less valuable. Fine, but we don’t determine tax policy by how much people can afford.
This:
Citizen: How much do you need?
Governmen: Well. . how much can you afford?
is not a reasonable state of affairs. The only reason that mythical dialogue exists is because the Federal Government has staggered so beyond its mandate and divorced expenditures from revenue so completely that there’s no sense that people are paying for things. They’re just shoveling money in with no assurance that it’s being spent well.
However, I think that most of us don’t think in terms of utility of each dollar earned, rather in the effort put forth to attain it and thus value each dollar based on that. My business is sales*. So for me, each dollar I earn is based only on what I produce and the work required is the same whether it’s the first dollar I earned this year or my last.
This is an interesting point and perhaps it is a question over perceived versus actual value. I’m not a business owner, so the arguments about marginal utility ring true for me. But Cri, what do you think about economies of scale? If you were able to have more stores so that you were doing less work, would you still think that each dollar would require equivalent effort? Extending that, if your ability to make money depended on an infrastructure maintained by the state, wouldn’t it make sense that you contribute more because it is that infrastructure that is allowing you to make more while working less?
I would note that though it may be the sentimental power, but a lot of stores have the first dollar they made in a frame behind their cash register.
Sidereal: the government, not being a person, has no utility, marginal or otherwise. People can derive utility from its expenditures, and lose utility from its tax collection, but it itself has none.
NW: I’m not sure I see why the impossibility of interpersonal comparisons of utility cuts one way or the other in this discussion.
And to everyone who says we should have tax cuts if there’s a surplus: this is true only if (a) the nation is not in debt; (b) you have reason to believe either that the surplus will last indefinitely or that it will be as easy to put the taxes back in place if the government goes back into deficit as it was to cut them. Since (a) is false now and for the foreseeable future, the surplus is not our money; it’s our creditors’.
Step one: hold nose
There’s probably no stopping the flat tax. Bush has the political capital and he’s going to use it protecting a different sort of capital. The best that can be done, I think, is to make the flat tax less bad than it might otherwise be.
Over at
It strikes me as fallacious to say that, since we cannot make interpersonal utility comparisons in a rigorous way, we should pretend that they are meaningless.
It s certainly useful to be able to develop economic ideas without having to rely on these comparisons, but that does not suggest to me that it is illegitimate to think about them in other contexts.
I just have to chime in here. If I’m not mistaken we also have marginal rates. In that sense it really is fair, I argue. A marginal rate means that the first $20k is taxed at 12% (guessing) then $20,001-$40,000 that $20k is taxed at 15%.
This is fair because Paris Hilton pays the same tax on her first $20k as your average barista. It’s just Paris earns is a day or two. (Of course all of Paris’s earning are probably capital gains which get much more favorible treatment than wage income – this example is for illustrive purposes only)
Posthumous arguments.
“Here’s my strategy on the Cold War: We win, they lose.” – Ronald Reagan
“The most terrifying words in the English language are: I’m from the government and I’m here to help.” – Ronald Reagan
“I have wondered at times about what the Ten Commandment’s would have looked like if Moses had run them through the U.S. Congress.” – Ronald Reagan
“The taxpayer: That’s someone who works for the federal government but doesn’t have to take the civil service examination.” – Ronald Reagan
“Government is like a baby: An alimentary canal with a big appetite at one end and no sense of responsibility at the other.” – Ronald Reagan
“The nearest thing to eternal life we will ever see on this earth is a government program.” – Ronald Reagan
“It has been said that politics is the second oldest profession. I have learned that it bears a striking resemblance to the first.” Ronald Reagan
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” – Ronald Reagan
“Politics is not a bad profession. If you succeed there are many rewards, if you disgrace yourself you can always write a book.” – Ronald Reagan
Fledermaus, that’s not how it works. Once you pass a rate milestone everything you have earned is taxed at the higher rate.
LJ, I’m one of those weirdos who thinks that everyone is a business owner. First off you own the business of your job. Second, you own the business that is you. Your job is to earn enough benefits (a basket of things such as pay, health-care, paid vacation etc.) to make the business of your life profitable. This is why I’m having trouble completely getting on board with this description of the value of first and last dollars. Because your last dollar, assuming the last dollar is perhaps a bonus paid for excellent work or overtime paid for working more may indeed come at greater personal cost to you than your first, and by being used for something worth that extra cost may be even more highly valued.
Truly, if I am a worker expecting to make X this year and I do extra work that bites into my free time in order to be able to pay for, I don’t know, better colleges for my kids lets say. Isn’t that dollar MORE highly valued than the first, based on what it took to get it and on what I expect to spend it?
In your example, while I am not a store owner, I know those who are and I can tell you that rarely does having more stores equate to less work and stress. The reverse is generally true.
Reagan had really clever speechwriters.
marginal utility and taxation
wish i’d written that. glad it at least got written, though. having grown up in a household where the disincentive argument came out about four nights a week, it’s always nice to be able to pull out concepts like marginal utility. see also: debates abo…
I support progressive taxation instead of a flat tax for several reasons–
1) A flat tax rate which is high enough to sustain the things our government is expected to do is going to cripple those at the bottom of the scale who need every penny far more desperately than those at the top. If we try and make exceptions for that, we’re defeating the entire point of a flat tax, which is to make everyone pay proportionately the same, and we force an even greater pushing up of the rate for those who can afford to pay.
2) We currently have a deficit; schemes to lower tax rates are going to have to wait until we get the debt under control.
3) Income redistribution is necessary to sustain the health of the economy, as past experience shows us that the market does not, of itself, set lower level wages at the rate necessary to sustain the higher level of economic activity needed to maintain year-round employment of the kind almost everyone has enjoyed since World War II.
hilzoy: You’re mixing up terms. Money is what has utility in this context, neither people nor governments. The argument for money’s varying utility is that the first dollars are spent on absolute needs and later dollars spent more frivolously. The argument applies equally well to any stack of money and an entity entrusted with spending it.
Truly, if I am a worker expecting to make X this year and I do extra work that bites into my free time in order to be able to pay for, I don’t know, better colleges for my kids lets say. Isn’t that dollar MORE highly valued than the first, based on what it took to get it and on what I expect to spend it?
Somebody posted an Adam Smith quote above that you might wish to read if you haven’t already.
The great assumption you’re making is the infrastructure you use to make your first, extra, and last dollar remains constant.
John B: note that most schemes for a flat tax include a very large personal exemption, often in the $25-35,000 range. So the people at the bottom would typically pay nothing. This does not, as you claim, defeat the purpose, as the purpose is not to make everyone pay the same *average* rate but to make the *marginal* rate the same on every dollar after the amount of the exemption. It’s the marginal rate that determines the incentive effects, and bad incentive effects are the principal pragmatic objection to progressive taxation.
Alternatively, you can, as Milton Friedman has proposed, combine a flat tax with a guaranteed minimum income to produce a system in which the average tax rate for low-income people is actually negative, but the marginal rate on every single dollar of earned income is the same. This could simplify a whole lot of other stuff in the bargain.
Bernard Y: for at least some of us, it’s not just that interpersonal utility comparisons are fuzzy, it’s that they are morally and philosophically illegitimate, period, because people are not equal but incomparable. Moreover, even if you believe such comparisons have some usefulness for individual, voluntary, day-to-day interaction, the inherent difficulties with them are still great enough to rule out their use in the coercive apparatus of government.
So (to respond also to hilzoy) redistribution is illegitimate because the government may not rightly weigh the “need” of A against that of B, decide that B is needier, and take from A to give to B on the basis of that judgment.
The great assumption you’re making is the infrastructure you use to make your first, extra, and last dollar remains constant.
And you assume that it does not. ;P OK, I guess I see your point if I’m a trucker and drive more miles on a road or add more pollution to the sky or even if I’m a knowledge worker who uses the Internet just that little bit more. If that’s the case then perhaps we should be taxing based on consumption of the common infrastructure. So, if I knit a sweater to make an extra buck, shouldn’t that be taxed at a lesser rate in order to drive folks to do that which uses the least public infrastructure possible?
“The subjects of every state ought to contribute toward the support of the government in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
I like the way he puts it at the end. Otherwise, one might say he was demanding that those with the abilities to earn revenue be taxed whether they do or not. Now that would be fair.
By God, I think Nick Weininger is on to something with that negative tax for the poor thing! We could call it … the Earned Income Tax Credit!
Nicholas:
It might be that the government rightly weighs other factors when compromising your absolute principles. B may, in fact, need. If B doesn’t get, some B’s croak, but other Bs get by but suffer and get ticked off, incentivized to do so by ummitigated suffering. A few As might join them in agreeing that the government should be the vehicle for redistribution. Then government has a problem. It must now collect money from the As who hold your principle sancrosanct to protect itself against the angry Bs and a few As, who threaten the survival of said government.
Then the Bs and the few misguided As morph into a third, virulent category of Cs. Then the government will use its coercive apparatus in ways it hadn’t planned on, and who wants to live like that?
Not that any of this should happen, but it has before.
Now, I’m going down to the end of the street to dig up the stop sign because money was coerced from me to redistribute to the sensitivities of others who just won’t stay out of my way when I’m pulling into the intersection.
I have absolute principles, too. 😉 But I see your point.
Blog(bud)sman:
I suspect we’re about to find out what the Ten Commandments look like when they are run through the Congress. I see they already broken the 11th Commandment by “speaking ill” of Spector. And maybe the taxpayer should take the Civil Service exam so they feel more qualified when their tax dollars pay for murder at Abu Ghraib. And I suspect that much of the water in Reagan’s beloved state of California that refreshed his horses and perhaps some of the original research on the medicines he took to relieve some of his final suffering, not to mention the pension redistributed from me to him to buy those medicines (I gladly give it) were terrifying to him as they emerged from the nasty end of the baby. The same end the victory in the Cold War emerged from.
But he was pithy.
sidereal: as I understand it, ‘utility’ in economics is satisfaction or welfare. (See, ehere.g., von’s argument (if I’m not missing something) is that each additional dollar a person gets gives that person less utility: the satisfaction you get from not starving to death, for instance, being greater than the satisfaction you get from whatever you buy with your millionth dollar.
It’s people who get less and less utility with each additional dollar. If, for instance, “you” are not a person but a construction company, there’s no reason whatsoever to think that you would get less of what you need (e.g., fewer bricks, workers, or bags of concrete) with your millionth dollar than with your first.
Crionna,
If your store benefits from easier access from customers or easier access to goods, that’s infrastructure. If your store benefits from more customers coming into your area because policing and fire prevention are appropriate, that’s infrastructure. If you hire some decent workers who have a good basic education so you don’t have to spend your time teaching them how to calcuate the tax, that’s infrastructure. If you want to have your contracts enforced, so that when you pay your rent or deposit a check or accept a credit card, you aren’t left holding the bag, that is infrastructure. If you don’t have to worry about mass food poisonings at the food court across the way depressing your walk thru traffic, that’s infrastructure. If you want people to travel to your fair city and possibly buy something at your store, that is infrastructure. If you want to advertise on the airwaves, that is infrastructure. Claiming it is just truckers or net surfers who benefit from infrastructure is just bizarre.
Eek! what happened to my link? That was supposed to read: see, e.g., here. (Econ dictionary, entry for ‘utility’.)
Fledermaus, that’s not how it works. Once you pass a rate milestone everything you have earned is taxed at the higher rate.
That’s too bad – it seems like a good and fair idea to me – that way we can have the benefits of a progressive tax (yes, I think it is necessary) and a flat tax (in that every pays the same amount of tax on the first $20k and so on and so on). I can’t see how anyone could argue that they were getting the short end of the stick.
Really, why hasn’t this been done.
Yes, pithy is…, well, pithy. We’ll accept just about anything if you can tie a good chuckle to it. It o-puns the door to civility. And civil is what most humans want to think of themselves as being. Thank goodness many recognize civil lies. And many will agree just to relate to those less egregious. That’s when trust is betrayed. I trust the Republicans won’t make a spector of themselves. And tax dollars pay for a lot of unintended torturous situations, some less photogenic. And babies have no nasty end. Al Quaqua happens.
And babies have no nasty end.
I guess that your definition of baby rules out solid food…
Naw, I just love life, no matter how it smells. (Actually barf challenges me a bit)
“And babies have no nasty end”
Oh, President Reagan meant BABIES. I thought he meant “babies”.
But I agree. My BABY and my baby have wonderful means and ends.
There is something about baby vomitus, though. 😉
LJ,
Bizarre, just because I chose to discuss three very dissimilar single operator businesses, in an answer to someone else? I chose a single operator in that response because that’s what I am. I was discussing the tax affect and infrastructure usage on working some overtime to earn extra bucks for some important reason and why those bucks might be highly valued despite the fact that they don’t keep you from starving.
In my answer to you I told you I wasn’t a store owner. You asked specifically If you were able to have more stores so that you were doing less work…. I disputed that you would do less work.
I know that there are a multitude of services used by a chain of stores and its plainly obvious that Wal*Mart, for example, does use more services and should be taxed for them. But hey, feel free to jump on me to make a point about something I haven’t disputed anytime you feel the need to vent.
“Fledermaus, that’s not how it works. Once you pass a rate milestone everything you have earned is taxed at the higher rate.”
Could someone clarify this for me please? Does the US income tax system really impsose a uniform tax percentage on one’s entire income?
It boggles my imagination to think that if you earn e.g. $100,000 then you pay 20% tax or $20,000.00. But if you earn $100,001 then you pay 25% or $25,000.25. The distortionary effect at the magic milstone point would be huge.
Yukoner:
It is more complicated than your impression, which I find to be common. The complication makes it easy to attack and mislead.
The 25% marginal tax rate is only applied to the last dollar over $100,000, to use your example. So, again using your example, an income of $100,001 would not generate $25,000.25 of tax, but instead $20,000.25.
But in the real world, subject to the actual marginal rates and adding in all of those horrific exemptions and deductions, a person in the 15% marginal tax bracket would pay, maybe, 11.8% in Federal income tax on their entire income. Folks with lots of kids and bigger mortgages and who max out their 401ks and regular IRAs would pay even less.
Someone please correct me if I’m wrong here.
But, I run into lots of people who simply don’t believe me. They will insist they are paying 28% rates on all their income in the 28% bracket. They might concede it just “seems” like it, and maybe it’s slightly less. But that’s no good either. They don’t want to pay anything.
So, so much for facts and conversation.
Yukoner, Crionna, John,
Fledermaus is correct. Look at your tax instructions. Being in the 28% bracket does not mean you pay 28% on all your income. It means you pay 28% on the amount above some number. On amounts below that you pay less. A single filer will pay 10% of the first $7000 earned, 15% od the next $21,000, and so on.
See http://www.irs.gov/formspubs/article/0,,id=109877,00.html
Bernard’s right. The so-called tax rate reductions were reductions on marginal tax rates.
But then there are deductions, which affect the gross income for which you figure your tax (Adjusted Gross Income). If it were the other way, you’d wind up effectively making a lot less money at $1 over the upper bracket line than the guy who’s $1 under the line. It is true, however, that every dollar over the top bracket limit is taxed at that rate. It’s just that every dollar under that limit is taxed at a lower rate.
And then there are tax credits. Don’t even get me started.
Thank you for the info Bernard and sorry for my error Fled.
John, Bernard, Slartibartfast, Crionna,
Thanks for the clarifications, it just didn’t seem to make sense.
Crionna,
Apologies if I was too aggressive. While you were responding to someone else, you had also responded to me previously. Also, I’m thinking (though I can’t remember for certain) that the use of ‘bizarre’ prompted by your self-descriptor of ‘weirdo’ in your response to me. Nothing personal intended, just a riff that crashed.
A couple of general points on taxes (which have already been made in various forms in the thread):
1. The “it is my money and the government has no right to it” crowd are only partly right. Only that part of my income that I would have earned whether the government exists or not is purely “mine.” (And that part is pretty damm small if you really think about it).
2. I recently saw reference to a comment made by the late Pierre Trudeau when he was prime minister of Canada. To paraphrase, “I’m happy to provide any and all programs to Canadians that Canadians are happy to pay for.” Okay, he didn’t really follow through very well and ran up some big debt, but it reminded me again how irritating people are who insist on tax cuts without insisting as strongly on cutting the programs from which they benefit (and vice versa).
LJ, No problemo, knee’s just killing me today.
Bernard:
We agree on the tax thing. Thanks.
Yukoner:
Could you unpack your first point a little bit on “your income” whether the government existed or not. Sounds interesting.
Thank you for the info Bernard and sorry for my error Fled.
No problem 🙂 – we all make mistakes (I wasn’t even that sure of my understanding, either). Thanks for clearing things up, Bernard.
Slart:
Thanks. I did, Krugman didn’t – essay’s on income, not wealth, quite good. I recommend it.
John T: I’m not Yukoner, obviously, but I’ll give a related point a shot. Consider the difference between our current situation and a world without governments (the “state of nature”): in the state of nature, I would have stuff, in the sense of physically controlling it, being able to ward you off if you tried to take it and I were bigger than you, etc. But I would not actually own anything, since ownership is something that can only exist given certain rules (explicit or implicit) that govern it. E.g., when I own something, I can sell it to you, and then you own it; if you steal it, then you may control it but you do not own it and cannot transfer title to it; the owner and no one else can rent it out; etc.
Personally, I prefer ownership to mere physical control: I like actually owning my car, and feeling fairly secure in the knowledge that I, backed by the law, can keep it until I decide to sell is, without having to guard it all the time. But regardless of my feelings, I only own things as a member of a society which has created ‘ownership’. And ownership and related things like the transfer of property work according to the rules set up by society: I can sell my car but not my kidneys, for instance.
This means (for starters) that in the absence of society I would not own anything, including money. (Leave aside for now the further point that without society there wouldn’t be money either.) In some societies the rules governing the institution of property are not formalized; in ours, however, they are codified in laws. And among these rules are our tax laws, according to which when I earn a given amount of money, a percentage of it goes to the government; when I buy something, likewise; and so forth.
This in turn means that it is not true that the money the government takes in taxes is “my money”. It is not; and that’s why the IRS is not literally a bunch of thieves. Nor do I deserve to keep the money the government takes in taxes, in the sense of being entitled to it under the rules: I am not. Nor, finally, is it true that if it weren’t for the government I’d get to keep it all: if it weren’t for the government, I would not own anything, including money.
What may be true is that there is a better system of rules than the one we now have, and that if that system were in place, I would keep more of the money I earn. (It’s also possible that the best system would end up taking more.) But this does not mean that I am entitled to keep it all (or: all the money I would keep under the best system), since that system is not currently in place. (Compare: it might be true that baseball would be a better game if each team were allowed four outs, but that, if true, wouldn’t imply that any team should have gotten any extra outs in a game played last year under the existing rules.)
The upshot of all of this, according to me, is: (a) I deserve my after-tax income, in the sense of being entitled to it under the existing rules. I am not entitled to the money I pay in taxes in this sense, and it’s therefore wrong to say that ‘it’s my money’. (b) I would own nothing in the state of nature, so if I ask what part of my money I would own were I in that state, the answer is ‘none of it.’ (c) It may be true that there is some better system of taxation according to which I would keep more (or less) of the money I earn than I now do. But if so, that doesn’t mean I am entitled to that money now; it means that I should work to get that system enacted. And finally: whatever “better” means here, there may be a presumption in favor of my keeping more money on such grounds as its being good to have incentives for work, etc., but there is no presumption based on the idea that I deserve to keep all my money, since (see above) there is no sense in which that is true.
Needless to say, this is not meant to be the first move in an argument for raising taxes through the roof; it’s just me trying to get clear on the kinds of arguments one would have to make in order to justify a scheme of taxation.
Nicholas,
Moreover, even if you believe such comparisons have some usefulness for individual, voluntary, day-to-day interaction, the inherent difficulties with them are still great enough to rule out their use in the coercive apparatus of government.
The problem I see is that interpersonal utility differences do exist, and taxes will inevitably affect individuals’ utility. So I don’t see the point of simply ignoring the issue, just because it’s hard and our answers are only approximate.
So (to respond also to hilzoy) redistribution is illegitimate because the government may not rightly weigh the “need” of A against that of B, decide that B is needier, and take from A to give to B on the basis of that judgment.
I think it may, if we want it to. But utility comparisons are not needed to justify the redistribution. It is perfectly legitimate for the government to define groups who are entitled to assistance, hence to redistribute money. I see no reason why social insurance is inherently illegitimate.
Great conversation, and my apologies for not answering the questions put to me. I’ve been trapped in the OC (California) for a wedding, and, between the wedding and the work that continues unabated, I’ve had no time to check ObWi ’till now. And there’s been good points made, which I wish I had time to respond to or agree with.
von
John Thullen
Could you unpack your first point a little bit on “your income” whether the government existed or not. Sounds interesting.
Well hilzoy has beaten me to it and explained the core point more clearly than I could have.
There is a strong tendency, especially in the political right, to accept and empasize one side of Adam Smith’s famous idea of the invisible hand, i.e. that if everyone strives to make more for themselves, society as a whole will benefit. This is true but if and only if (as Smith himself argued in his writings) government maintains the necessary conditions for the invisible hand to function. Part of maintaining those conditions, he argues, is the need (for both practical and moral reasons) for progressive taxation.
As hilzoy so ably points out, what the “it’s my money” crowd often seem to miss is that, purely as a practical point and leaving out any moral arguments, our ability to get and keep rests on the fact that it is not “all” our money.
I’m not as much opposed to progressive taxation as I am interested in how progressive you want to make it.
how progressive
Was the structure before Bush slashed it causing the country’s wealthier folks that much hardship? Really, weren’t they doing just fine?
I’m sure they were. Probably they’d have been fine paying 40%, too. Maybe even still fine at 45%.
Someone was trying to raise their taxes that high? Who?
“Someone was trying to raise their taxes that high? Who?”
Well, it was Slart’s suggestion, but it works for me (although I’d probably start by eliminating the special tax rates for capital gains and dividends).
I suggest you review again, and/or take Eleanor Woodhead’s sped reddin course. I was taking an oblique swipe at the notion that being “fine” at any given tax rate is a metric worth considering.
hilzoy
in the state of nature, I would have stuff, in the sense of physically controlling it, being able to ward you off if you tried to take it and I were bigger than you, etc. But I would not actually own anything, since ownership is something that can only exist given certain rules (explicit or implicit) that govern it.
I think you are using the term “state of nature” as shorthand for a complete anarchy or war of all against all. Nothing wrong with that of course but I’d like to offer a couple of thoughts on how different the issues of ownership, control and acquisition look from an entirely different setting, that of a hunter-gatherer society (a functioning state of nature as it were).
(This is a bit of a hobby-horse so forgive me if I ramble on. One thing to emphasize though, is that nomadic hunter-gathers and their societies are not something that is in the dim past of thousands of years ago, at least not here in the North. I’m only in my 40s and yet the vestiges of that way of life, and certainly the cultural imperatives that were integral to it were still very much alive during my growing up).
For Yukon First Nations, ownership was certainly a real concept and there were rules (not formal written ones of course) governing who owned what. Of course being nomadic reduced the propensity to aquire too many things anyway. Clothing was an obvious thing that individuals owned, made and owned. Ditto with basic tools and weapons, although some tools, e.g. bark baskets, were made when needed and then discarded or abandonded when not.
Where these cultures differed markedly from our own is in the basic economic activity of getting everyone fed. If I killed a moose, that moose was not mine to do with as I pleased, it belonged to the group (whether the family of a larger gathering). And I could not control the distribution for my own ends either. Everyone got fed and if some had the need, e.g. old people with few teeth, they would get the tenderest portions. So almost all of my effort as a hunter would be devoted not to my own needs and wants but to the needs of all.
It is important to recognize just how different that means of organizing economic activity is from our own. The First Nation people did not organize themselves this way because they are fudamentally alturistic but because the survival of all depended on the co-operation and sharing by all.
In our current society we have managed to build social structures (including the need to pay taxes!) that allow Smith’s invisible hand to work. Indeed, individuals who strive to enrich themselves are largely admired and recognized to be contributing much to society. But strivers such as those in a First Nation society were a menace and endangered the survival of all. If their energies could not be chanelled into doing most everything for the group they would be banished. And banishment was an effecive, if slow-motion, death sentence.
As a child I remember a young First Nation man approaching my father for advice. He was ambitious and wanted to get a steady year-round job (game warden I think) that required him to obtain more education and formal qualifications. My dad encouraged him and helped him get the qualifications and eventually he was hired. He then ran smack into a painful cultural dilemma. Every two weeks his pay would arrive and with it would come many members of his extended family to share it. Of course he was the one working and wanted the material rewards but also simply could not refuse to meet the expectations of his family. By our standards the family members are reprehensible free loaders who should have gotten jobs of their own, but by their standards they were simply enjoying (and quite rightly so) the good fortune that happened to occur to one of their own. It didn’t take too long for the contradictions to become too much and the young man quit his job and went back to doing occasional paid work mixed in with subsistence activities.
But time and the dominant culture has continued their work and that dilemma is far less acute among First Nation people now. Although there is still a strong sharing ethos, there is also the adoption of the idea that the fruits of my labour are largely mine rather than belonging to the group.
Slart:
I’m interested in how progressive YOU want to make it.
You (hey, this is not you, but the royal YOU of a general point of view):
91% high marginal tax rate in 1950 — not fine. 70% in 1980 — not fine. 28% in 1985 — not fine. @35% in 1992 — not fine. @39.6% in 1993 — incredibly not fine. Whatever it is now — not fine.
So what’s fine? And is fine still progressive?
Me: 39.6%: Final offer. No more compromise. Next offer from me. 0% You know, in the context of debate.
Hilzoy and Yukoner and others, including Slart:
Very fine explanations. Clears it all up for me.
Let’s run with it. But is it to late to head off the current “mandate” assumed by the current disincentive-hell-it’s-theft crowd?
Well, that collapses it all down to a disagreement between you and Edward (Edward: upper bracket rate fine; you: upper bracket rate not fine), and I can sneak out unnoticed. Which is just the way I like it.
And John, if you’re not blogging, you might want to consider it. If for no other reason than to clean out all the junk in the attic.
Hey, there’s good stuff in that attic. But it is a little like the protagonist in a horror ghost movie who hears noises in the night but who goes up there to check it out anyway with a flashlight cause there’s a power failure, wouldn’t you know, and the audience is screaming. Maybe best not to go. Ignore the noises. It’s probably just mice.
Aw, cmon, throw out a number. Or are there questions you think should be answered before we decide the number?
This is between you and Edward now, John. Besides, I’m not going to even begin to discuss bracket rates without examining simplification of the tax code, which is going to involve (in anywhere above average of possible worlds) closing of miscellaneous loopholes, shelters, etc. effected by friends of those in the upper bracket to reduce the tax they pay. Because really, did anyone actually pay the 91% upper bracket rate?
And that’s a real bucket of worms. You want to start?
Slart:
It’s late but check back, say Sunday, and I’ll dump some of the worms out on the floor and watch them wriggle.
But as a preview to my ramblings next time, and as answer to your question about compliance under the 91% bracket, let me say that once you and I close the loopholes, my compatriots Barbara Steisand, Whoopii Goldberg, and Michael Moore will vote Republican next time around.
See ya.
So, is it all of you in the upper-bracket rate, or just your compatriots?