An Argument For A Progressive Income Tax

An Argument for a Progressive Income Tax

By Peter Van Schaik

If you want to initiate a heated debate anywhere in the United States, all you have to do is mention income taxes. Everyone has an opinion ranging from one extreme to another: the Communist wants to tax the wealthy and middle class until they are as poor as everyone else; the Socialist is willing to settle for a reasonable progressive tax; the Capitalist says no, we need a flat tax; and the Libertarian says you’re all wrong, if we eliminate all inefficient government programs, we won’t need any income tax. In spite of this diversity in opinion, nearly everyone thinks the tax code is far too complex and must be simplified no matter the cost. Regardless of political ideology, finding someone who is truly satisfied with our current income tax laws is extremely rare. However, a realistic look at the facts indicates we do need some type of tax system to fund necessary government services and a progressive income tax is the fairest and least complex method to raise the required funds. The first important question is whether or not we need an income tax. Hard core capitalists and libertarians would have us believe that the private sector can provide all the services we need, with the exceptions of national defense and protection of our constitutional rights, “better and cheaper” than our government. (Libertarian 1,2) They would have us believe that government services, programs, and regulating agencies are unnecessary and even harmful to our economy. This belief simply denies our history and fails to recognize why our federal government instituted the social programs and regulations in the first place. As ineffective and counterproductive as our government may be at times, a brief study of history proves the ramifications of unrestrained business are even worse. One need not travel far back into our history to realize that our quality of life, from working conditions to pollution, was hardly utopian when there were fewer government regulations and social programs. The federal government didn’t pass child labor laws, pollution regulations, minimum wage laws, and workplace safety regulations just to hamper business. Barber Conable, who served for many years as a Republican leader on the House Ways and Means Committee, said, “ As a former Congressman, I can tell you that people are always writing to their legislators to say there ought to be another law to do this or that. They are always suggesting new ways in which government should be useful.” (Conable 94) In other words, these laws and regulations were enacted because of perceived failures and deficiencies in the private sector. These laws were passed because constituents felt there were problems that needed to be corrected and private enterprise wasn’t about to correct the problems because it wouldn’t be in their best interest to initiate actions which would increase their costs without also increasing their revenue. We wouldn’t necessarily save money if we eliminated many of our government programs, we would just change who received our money or, in some cases, we would increase our risks. Eliminate the Food and Drug Administration and you better study hard in biology and chemistry because it is going to be up to you to determine if that steak is safe to eat and what adverse side effects that new drug may inflict upon your body. Of course, if you are wealthy you can always send your

steak and pills to a private lab to be tested but it’s going to cost you because they want to produce an attractive bottom line. And if you can’t afford a lab test? Oh well, just take your chances. Want to drive from Dayton to California? Better take along a huge stack of change because those toll roads are going to take some money out of your pocket for each and every mile you drive; the same tolls will be charged whether you are rich or poor. Although our public schools may not be the best, they still provide a basic education to even the poorest of children who have the desire to learn and improve their position in life. Eliminate our public schools and you can rest assured that many of the poor will be denied an education simply because they cannot afford the private school. Our federal government provides necessary services, programs, and infrastructure for the benefit of all regardless of one’s ability to pay. The private sector wouldn’t: they would only be provided to those with the ability to pay the price and the price will always include a profit. The libertarians would have us believe that eliminating most of our government agencies and programs would give individuals more control over their lives. But the libertarian argument that government services should be provided by private business is really not an argument about someone having control versus no one having control over our lives. It is really just an argument about who is in control. We can have control by elected officials who must face periodic elections or we can have huge international corporations, who need to answer to no one but the wealthiest of stockholders, in control. Either way, some entity will be in control and running aspects of our lives, directly or indirectly. Without government regulations, the large multinational corporations would control much of our lives and most of us would find the situation worse than the current level of governmental control. Business entities would control the length of the work week and the size of our paychecks without any restraint on how low the pay could be or how long we would have to toil in order to earn the measly compensation. Without unemployment insurance, laid off workers would be forced to take a job, any job, in order to survive. Competition for jobs, if government employment was eliminated, would ensure a decrease in wages due to increased competition. It’s a fallacy that the jobs would merely move from the public sector to the private sector. Many services that our government now provides wouldn’t be provided by business in a totally unregulated free-market economy. Some services would simply be unprofitable and others, like welfare for the needy, would be impossible to duplicate in the private sector with the same reliability as the public sector. After all, if private charities had really been successful in feeding the hungry and housing the homeless, there never would have been constituents demanding their government take action to protect the most basic human rights of the those doing without life’s basic necessities. The expenditures of the Federal government have always had a major impact on our economy. Our government has been in debt continuously since 1791. (Historical 1117, 1118) Attempts at paying off the debt, that is, running budget surpluses, has preceded six major periods of economic depression this nation has witnessed. The United States suffered depressions and financial panics in 1820, 1837, 1857, 1869, and 1893. (Davis) After World War I our federal debt stood at $25,484,506,000. By 1930 a decade of balanced budgets had allowed the debt to drop to $16,185,310,000 (Historical 1117) and we were entering what became known as the Great Depression where the Gross National Product fell from $103.1 billion in 1929 to $55.6 billion in 1933. (Historical 224) During and after the Great Depression, the federal government took more control over our economy out of necessity. Elected officials, for the benefit of the citizens, wanted to put an end to the periods of depression that were considered normal in the unrestrained capitalist market. For over 60 years, they have been successful. The recessions since World War II have been mild compared to the economic downturns of the 19th and early

20th centuries: a direct result of increased government intervention in our economy. If we can establish that the federal government has economic and social responsibilities to the citizens, we can agree we need some method of financing the required government services and programs. Most of us agree that we do need an income tax, but disagree on how the tax should be structured. Many capitalists prefer the flat tax, one tax rate for all regardless of income. According to capitalist theory, this would allow the wealthy to keep more of their money so they can invest it and finance further economic growth. The increased economic growth provides new jobs and additional income which can be taxed, leading, ultimately, to more taxes taken in by the government at the lower rate: good old supply side economics coming to the rescue. Make the rich richer and the wealth will trickle down and we all benefit. This sounds good in theory, but the realities of the investment world don’t always work in the intended manner. If the wealthy take their savings from lower taxes and buy an existing factory or business, they create no new jobs. They just own and control more of our nation’s financial assets than they already do. If they take their increased capital and buy existing houses for rentals, no new jobs are created; no new wealth is brought into the economy. But the increased competition for houses can drive up the price of homes, forcing lower income families out of the housing market and into the rentals owned by the already wealthy. They can stick their extra money from lower taxes into gold and, once again, the economy doesn’t benefit: the price of gold simply rises. Additional money in the pockets of the wealthy can lead to economic growth and additional jobs, but there is no economic law that says it has to or that it always will. Supply side economics didn’t work during Reagan’s administration and it’s not likely to work now. Libertarians and capitalists are fond of quoting John Locke as evidence governments shouldn’t intervene in the lives of the individual through income taxes. Locke wrote, “...every Man has a Property in his own Person. This no Body has any Right to but himself. The Labour of his Body, and the Work of his Hands, we may say, are properly his.” (Locke 287,288) But government taxes aren’t the only means of confiscating what is properly ours. Business owners, in the name of profit, also take a piece of our labor. Any economist will tell you there are two kinds of profit: normal profit and economic profit. Normal profit is the return received from the labor and goods, including capital, that a business owner puts into and provides for his business. The owner earns the normal profit. The economic profit is the gross receipts less all costs, including normal profit, that a business incurs. All economic profit is earned from someone’s labor. Of course, some of the economic profit can result from the owner’s labor, but, in reality, most of the economic profit comes from the labor of the employees, especially in the modern corporation where the owners are usually not employees of the firm. When a business shows an economic profit, it is confiscating part of what Locke said properly belonged to the one who produced the good or performed the service. The higher your income and the larger your net worth, the less likely you are to have earned your wealth from the sweat of your brow and by only your own labor: enormous net worth is most likely earned through confiscating a piece of the labor of many others through economic profit. A progressive income tax simply returns some of that unearned wealth back to its rightful owners through government benefits and services. Those who think that our tax system is too complicated frequently want a flat tax in order to simplify the system. But the number of tax brackets is not what complicates our income tax. The IRS can construct tax tables to accommodate

any number of tax rates. Figure your income, look up your income on the tax tables and there’s the tax you owe. What complicates our taxes are the many preferences, commonly called loopholes by those who don’t qualify for the preferences, which have gradually been instilled into our tax code. Conable states, “Congress wasn’t trying to complicate the process. It was simply trying to be responsive to a tremendous diversity in sources of income and different circumstances of taxpayers.” (Conable 41) He believes, “Preferences are... a form of problem solving. They are a way to encourage, through incentives, some investment by the private sector in areas for which Congress is unwilling to appropriate money.” (Conable 101) Individually, the preferences were all legitimate attempts at creating a more equitable system of taxation intended to achieve goals that would benefit society, but collectively they have created a monster of enormous complexity. The tax code is a fantastic tool for social engineering, but the price is a complex system of tax laws. We can simplify the system by eliminating the loopholes, but a flat tax in itself will not simplify the system. Not everyone thinks the tax code should be used to achieve desired social aims through tax preferences. Stanley Surrey was a Harvard Law School professor who believed “... our income tax system should be used only to raise revenues and that the rate of taxation should be highly progressive.” Surrey felt that tax preferences “...eroded revenues otherwise available to the government.” He wanted to simplify the tax system and he thought the wealthier taxpayers should shoulder a proportionally higher cost of government operations. (Witte 8) Surrey was not alone in his call for progressive tax rates. Henry Simons was a professor of economics at the University of Chicago who believed that “...the prevailing inequality of income and wealth was unjustified in terms of merit and thus inappropriate, and that the tax system was the most convenient vehicle for altering the situation.” (Witte 49, 51) Simons said, “The case for drastic progression in taxation must be rested on the case against inequality- on the ethical or aesthetic judgment that the prevailing distribution of wealth and income reveals a degree... of inequality which is distinctly unlovely.” (Witte 51) While capitalists and libertarians are fond of citing Adam Smith’s single reference to “the invisible hand” in The Wealth of Nations, they fail to mention that, in the same book, Smith also said, “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” (Book 5, Chap.2, Pt. 2) Were Surrey, Simons and Smith radical socialists demanding equality for all? No, they were simply concerned with a degree of morality and fairness. They realized societies and economies function better when there is a degree of balance in the income and wealth among the citizens. In the case of Smith, a classical capitalist of tremendous influence, some balance in income and wealth was believed to be essential to capitalism itself. Capitalism works best when there are many firms producing a particular product or service. Ideally, there should be so many producers that no single producer can control enough of the total output to have any effect, regardless of its actions, on the price or availability of the product or service. Due to the success of some firms and the accumulation of wealth, we no longer have competitive capitalism in most industries of the United States. Instead, we have what economists call oligopolies where few firms control a market. The Fortune 500 consists mostly of oligopolies. (Gottheil 208) We live in a world where more and more of the production and wealth are controlled by fewer and fewer firms and individuals. A progressive income tax simply brings the playing field a little closer to level.

An economic goal, “widely accepted in the United States” is the principle of “equitable distribution of income.” (McConnell 9) In 1967 the top 20% of households earned 43.8% of our nation’s total household income. By 1998, that figure grew to 49.2%. In contrast, the bottom 20% of households earned 4% of the total income in 1967 and only 3.6% by 1998. It is no illusion: the rich are getting richer and the poor are growing poorer. (Jones 4) The situation is even worse if you consider the distribution of financial assets. In 1998 the wealthiest 5% of households held 57.2% of the total wealth held by all households; the poorest 25% held -0.2%. The richest 5% owned 81.6% of all stocks owned by households; the poorest 25% owned 0.0%. (Bertaut 30) A progressive income tax, and taxing all sources of income at the same rates, is the most logical and convenient method to keep a reasonable gap between the rich and poor and keep the spirit of competitive capitalism alive and functioning in the manner intended by the classical economists. In The Theory of Moral Sentiments, Adam Smith said The wise and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest of his own particular order or society. He is at all times willing, too, that the interest of this order or society should be sacrificed to the greater interest of the state... of which he is only a subordinate part. (346) While absolute economic equality among all is neither a logical nor desirable goal, it is in the public interest to aim for reasonable levels of economic inequality. It is in the public interest to ensure that all humans have access to the basic necessities of life. It is in the public interest to ensure that all citizens have access to education and health care. Socialist policies that are intended to achieve these goals are in our public interest, from both a moral as well as practical point of view. Healthy, well fed, and well educated citizens lead more productive lives and that bestows benefits on the entire society. Freedom for the largest majority in any society requires that financial power be relatively equal. That is a proper goal for not only the socialists but the capitalists and libertarians as well. A progressive income tax is the simplest and fairest method to achieve that goal.

Copyright 2001 – Peter Van Schaik

Works Cited Libertarian Party Brochure.

www.lp.org/issues/cut-taxes.html

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