Almost any time when governments have financial problems, many people think the obvious answer is to “tax the rich.” They believe that if government would just get those nasty rich people to pay “their fair share,” there would be plenty of money to let governments continue their spendthrift ways. It’s not true and it wouldn’t be fair to try.
I’ve been thinking about this because of a recent episode of public radio’s “This American Life” called “What Kind of Country.” (Hit the link to listen. It’s worth hearing, even though they’re coming from a position with some very mistaken assumptions, in my view.) The episode is about the continuing debate between people who want lower taxes and smaller government and people who want higher taxes and bigger government. It tries to take a look at why both sides of the mainstream want what they want.
A recurring theme in such debates is the issue of whether higher taxes is the way out of government budget woes. Some people say they would be happy to pay higher taxes in exchange for better police protection or better services of whatever kind they happen to want. But there are two issues with that. First, those people are typically happy to say they would favor higher taxes because the taxes would fall most heavily on people other than themselves. (Those with lower incomes almost always think taxes should be higher on high-income people, for instance.) Second, people who know that a tax would hit them say that they don’t trust government to get it right. Even if they’re willing to pay more, they don’t trust the people in power to spend the money wisely.
But let’s ignore those little issues and just look at the math. Let’s say the federal government levied a tax of 100 percent on everything that everyone earned more than a million dollars. So if someone earned $10 million, the government would get about 35 percent of the first million, but all of the remaining $9 million. That means a person earning $10 million would give the government approximately $9.35 million. Isn’t that the dream of the “soak the rich” folks? Even if the feds did that, it would only raise about $616 billion — which is about enough to cover only one third of this year’s deficit. In other words, the debt would continue to skyrocket.
What’s worse is that if you knew government was going to take away everything you earned above a certain amount, why would you bother earning more than that? The incentive to work hard and become wealthy would fall, and fewer people would earn high incomes. That disincentive effect used to hit people in the past, when the top rates were in the 70s or so. The less you get to keep of each dollar you earn, the lower your incentive to work and take risks to earn more dollars.
And now let’s touch on the issue of why we discuss taxes in terms of percentages. Have you ever thought of that? Why do we discuss the cost of government in percentages — when we discuss the cost of everything else in dollars and cents?
Let’s say you went to buy a 2012 Honda Accord and the salesperson asked you your income. You tell him it doesn’t matter, because you’re paying cash. (Let’s ignore any financing, just to keep it simple.) But the salesperson says the price is different depending on your income — your ability to pay. If you have a high income, that car might cost you $90,000. But if you have a very low income, the price might be $2,500. And if your income is low enough, it doesn’t cost you a thing. The car is free.
If you’re a low-income person, you think this pricing scheme is a brilliant idea. All you want is your car — for little or nothing. But if you earn a lot of money, you would ask, “Why do I have to pay more — for the same product — than other people do? Why am I being penalized for being successful?” And the salesperson would say, “Oh, but it’s only fair to have people pay according to their ability to pay.” And you would rightfully say, “Why should I have to subsidize others who are getting the same thing I’m getting?” And you’d be right.
If anything else in our society were priced that way, we would rebel. We wouldn’t agree to that for cars or phones or loaves of bread — yet that is exactly the system by which we pay for the services we purchase from governments.
Government’s alleged reason for being is to provide services to us. We’re supposed to be paying for what we get through our taxes. But the system that calls for different people to pay differing amounts depending on their ability to pay — for the same government services — sounds a lot like the philosophy of a gentleman named Karl Marx, who penned these words: “From each according to his ability, to each according to his need.”
Whatever governance is in existence should serve purely to sell services to people who live in the territory where it “serves.” If there’s a defense provided, it benefits everyone the same. If there are “public roads,” they benefit everyone the same. If the services are for everyone, then everyone should share equally in the cost. If services don’t benefit all, the costs should be paid by those who benefit, not everybody.
The kind of taxation where everyone pays the same thing for the same services is considered bad today. It’s called “regressive taxation,” and somber people talk about percentages of income and how tax burdens hit “those least able to pay for them.” The “progressive taxation” that they favor — that almost everyone favors today — is just a fancy way to hide what’s really going on: “We’ll force productive people to subsidize everyone else.”
A system where the majority try to live at the expense of the minority not only can’t work, but it’s immoral. Even if you believe in some minimal state, understand that the progressive tax system is already at least halfway to socialism. It’s what the progressive left demanded for ages. It was adopted and it didn’t work. It’s never going to work. And it’s never going to be moral.