Tax the Rich Less (2010 Oct)

by Barry A. Liebling

The Democrats and Republicans are quarreling over what to do about the soon-to-expire federal income tax cuts of 2001 and 2003. The conflict is an excellent illustration of the clash of bad ideas against different bad ideas. Neither side has it right.

Look at the Democrats. The party line is that while it might be alright to extend the tax cuts to low earners and to members of the middle class, it would be a mistake to give the rich – those making more that $250,000 – a tax break. Democrats delight in splitting Americans into classes and then showering favors upon the classes they like (lower income and middle class) while devising punishments for the classes they despise (the rich). The official, polite reason for not giving the rich a tax break is that the federal government needs the extra revenues from the highest earners to pay for the perpetually expanding welfare state.

But even if the money were not needed for social programs there is too much inequality in America, and therefore every dollar taken from “the rich” is a good thing in itself. Note that “too much inequality” means that the natural distribution of wealth is different from what a Democratic planner would impose. It is better for the government to confiscate the “surplus profits” of the rich and spend it on truly worthy projects. To Democrats, the unpalatable alternative would be to allow high earners to decide for themselves what they will do with their own money.

Consider the Republicans. They disagree with the Democrats and insist that the temporary federal income tax cuts be extended for all Americans. So far so good. But why? Do you suppose that Republicans are sympathetic to the principles of individual rights and of treating all citizens the same without favoring or penalizing any particular group or class? Think again.

The most popular Republican argument for extending the tax cuts to the rich is that increased taxes will have a negative effect on the already-fragile economy. Republican pundits say that high income people invest their money in companies which results in more jobs. If the well-to-do refrain from investing, they spend their money on goods and services which fuels job growth. Republicans warn that raising the tax rates on wealthy individuals will inhibit the creation of jobs.

Notice how the Republicans studiously avoid asserting that high earners deserve to keep their money because they acquired it legitimately. If we take the standard Republican rationale seriously there is no reason to extend tax cuts to high earners who do not invest enough or purchase enough. Perhaps only those high earners who can demonstrate they are improving the economy should be allowed to keep more of their money. The view that adding to job growth is the justification for a tax break implies that all the wealth in America really belongs to the government – but the government may let you keep more of what you make if you present evidence that you are contributing to the collective.

Another Republican argument for extending the tax cuts to the highest earners is that they are already paying a huge proportion of all federal taxes. According to 2007 IRS statistics the top 5% of taxpayers earned 37.7% of adjusted gross income but paid 60.6% of all federal income taxes. The top 10% earned 48% of adjusted gross income and paid 71.2% of all income taxes. Furthermore the bottom 50% of earners paid only 2.9% of the federal income tax. While the bottom 40% of earners paid on average no federal income tax at all.

So Republicans, acknowledging that the progressive income tax system severely penalizes American citizens for making more money, are asserting that the fines levied for success are steep enough. They do not sanction turning up the volume of abuse. But notice, they do not seem to object to the disproportionate burden put on high earners. They only bridle at making progressive taxation more extreme. To the conservative mind the graduated federal income tax has been around so long that it is unthinkable to question its legitimacy.

Mainstream Republicans fail to recognize that federal taxation amounts to involuntary servitude. In the long run it should be phased out. In the short and medium term it can be made more fair by getting rid of progressive taxation. If there must be income taxes, all Americans should be taxed at the same rate. This is sometimes referred to as a flat tax.

Recall that about 40% of households pay no federal income tax. Critics have pointed out that this introduces perverse incentives. Citizens who have no income tax liability can be persuaded by craven politicians to favor raising the tax rates on those who pay, especially “the rich.” At the same time these untaxed citizens will be inclined to approve new and increased entitlements. Thus, pressures for ever ballooning government spending is unrelenting. It is hard to object to lavish social spending when you know it will be paid by others – “the rich people.”

A universal flat tax would work against the existing always-spend-more trend. All programs would cost everyone something. No citizen would be in the position to vote for new benefits that would occur at no cost to himself. Those who are obsessed with doing something for the poor will see the merit of lower tax rates for everyone. This is analogous to lowering a sales tax from say 8% to 4% – all citizens get the same proportional break.

But bear in mind, this is icing on the cake. The essential justification for the flat tax is fairness. There should be no official despised groups where taking everything you can is fair game. And there should be no protected groups whose members automatically receive government benefits – the recipients of the latest redistribution scheme.

So what should be done about the expiring federal income tax cuts? Of course, the cuts should be extended to all citizens. More important, learn to appreciate the underlying value of universal individual rights and require the government to do the same.

*** See other entries at in “Monthly Columns.” ***

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