Monday, April 11, 2011

The morality of taxation

With a looming deadline for raising the country's national debt limit, Rep. Paul Ryan's new plan for eliminating the deficit and a competing plan set to be released by President Obama, the battle over the country's fiscal future now appears to be fully joined. The debate is sure to produce lots of talk about the need for shared sacrifice -- particularly from "the rich," who will surely face renewed demands by the left to pay higher tax rates. Beyond practical considerations, however, there is a strong moral and philosophical component for resisting such increases.

The justification for raising taxes on the rich, if unaccompanied by similar increases on the poor and middle class, is essentially nothing more sophisticated than "they've got it and we want it." Call it class warfare or the law of the jungle -- either description is apt. It is the extraction of resources from a small minority of the population to please the majority.

Few will ever admit this of course, with tax increases usually presented as a simple matter of fairness. How this is fair, however, is not at all obvious. Fairness, loosely defined as equitable treatment of taxpayers, would seem to involve taxing all individuals at a uniform rate. This is clearly not the case in the current system, where citizens are taxed at six different rates which range from 10-35 percent of marginal income. What sense of fairness holds that someone already handing over more than one-third of their marginal income in tax is insufficiently contributing to the country's needs?

Calls for the Bush tax cuts to expire and the top marginal rate to return to their previous level of 39.6 percent are a clear illustration of the fiction that the taxation debate has anything to do with fairness. Can anyone make a coherent argument for why a tax rate of 39.6 percent represents an equitable burden? Why not 40 percent? Why not 38 percent? It's all completely arbitrary and subject to the whims of politicians.

Some may respond that the rich must pay more as they are simply lucky, the beneficiaries of some cosmic accident that worked in their favor. While it is true that luck often plays a role in success, and fortune and misfortune are not evenly distributed, it's a mistake to overemphasize this factor. Success in life is far more determined by individual behavior than mere serendipity -- show me a successful person and I'll almost invariably show you someone who has put in some hard work. It's worth noting that the vast majority rich people did not inherit their fortunes, but earned them.

But let us suppose that the rich did indeed attain their station in life in large part because the fate smiled upon them, and thus owe some kind of debt to society. How should this impact the taxation debate? More specifically, why should we think this debt has not already been paid? Unless stolen or won in a lottery of some kind, wealth is attained through the provision of a valuable good or service to society. After all, people rarely pay that which holds no value.

Steve Jobs, it could be argued, is the beneficiary of good luck. He was fortunate to be adopted by good parents, gifted with considerable intelligence, meet other bright individuals such as Steve Wozniak at an early age and rise to adulthood at a time when his particular skill set was highly-valued. Had Jobs grown up in rural America during the early 1800s, it is unlikely that his experimentation with LSD, embrace of Buddhism and dabblings in calligraphy would even have been possible, much less helped form a man who has already left a remarkable legacy.

But if Jobs ever owed a debt to society, is is perfectly reasonable to think it has already been paid. The products he has helped introduce to society have served to boost productivity and enjoyment for literally millions of people. How many of us can say the same? This is not to suggest that Jobs has been engaging in charity, but let us also recognize how so many of us have benefited from his initiative and hard work. The Jobs story is not unique.

Another argument frequently invoked to justify high tax rates on the rich is that they should pay more because they disproportionately benefit from government services. In a certain sense, this is correct. Steve Jobs, with wealth and assets in the billions of dollars, benefits from law and order more than someone of more humble means with far less to lose. Apple Computer, which relies on the country's infrastructure to distribute its goods, similarly gains more from the provision of such public goods than the owner of a corner store.

The problem with this argument, however, is that most federal expenditures hold little direct benefit for the rich. Indeed, most of the budget is devoted to spending on social programs and interest on the national debt. While the US military ensures that corporations and wealthy individuals are in little danger of seeing their assets confiscated by marauding foreign armies, the Department of Defense budget exceeds what is necessary to guard the territorial integrity of the country to the tune of several hundred billion dollars.

It is similarly unclear how much of the remaining part of the budget -- non-defense discretionary spending -- benefits the rich. The Departments of Housing and Urban Development and Health and Human Services account for roughly $130 billion in spending -- what use does this serve for Bill Gates, General Electric or the Koch brothers? Indeed, when one considers the abysmal record of the welfare state and the havoc it has wreaked through welfare dependency, failed public schools and disastrous public housing schemes, one can easily conclude such social spending has been a net negative for society and the desire by the rich for social stability.

Further consider that the top 10 percent of income earners account for roughly 70 percent of federal income tax revenue, or about $629 billion based on income tax receipts of $899 billion. This alone would be enough to pay for defense spending of $400 billion with $229 billion left over to pay for essential government functions such as the State and Justice Departments.

And yet we are to believe the rich have somehow failed to pay their share?

Update: A. Barton Hinkle with related thoughts:
In this light, to speak of Ryan’s proposal as transferring wealth to the wealthy borders on the mendacious. If Fred pays $100 in taxes, and Mortimer pays nothing while collecting $25 out of Fred’s tax payment, then it is fatuous to say lowering both Fred’s tax bill and Mortimer’s benefit check by $10 is “taking money away from Mortimer and giving it to Fred.” That is not what is going on at all. The government is still doing just what it was doing before—taking money from Fred and giving it to Mortimer—only to a lesser degree.

And yet progressives insist on pretending otherwise, again and again.
I'd add that as we hear increasing nods to shared sacrifice that the burdens borne by Fred, who is being asked to pay more in tax, and Mortimer, who is asked to consume less of what Fred contributes, are not morally equivalent.

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