I’ve been doing a lot of reading lately, mostly online. Here’s the latest bit I’ve found…
http://www.taxwisdom.org/
It’s a website that supports the idea of a progressive income tax. OK… you economists out there, can you take a gander at this and give me the pros and cons and easily digestible language?
Thanks,
–sam
I’m no economist, and I’m still trying to digest this thing—it seems to contradict its premises on a few key points, and I’m not sure if those are real problems or just misunderstandings on my part.
A couple points, though:
Now, note that the math above ignores the effects of marginal tax brackets, since I’m writing this too fast to try to figure out that math. But I suspect that even with marginal rates, the proportions will still get screwed up, and the “double taxing” of wage earners will still lead to a loss in their purchasing power.
Well… overall… it’s true that taxes will reduce purchasing power for everyone. That’s just a simple fact. The reality is that we can pull numbers out of our asses to make an argument for or against this type of taxing system. Pulling numbers in the extremes doesn’t say much of anything about whether this system has merit or not.
What about comparing these numbers. Bill makes $20K per year. His boss at the factory, Bob, makes $100K per year. Using your simplified formula… Bill is taxed at 15%. Bob is taxed at 30%. That means Bill has $17K left over. Bob has $70K left over. This leaves them at relatively the same place. Sure, Bob has lost a little bit of relative spending power, but not so much that his position versus Bill is compromised.
Your second point is also a bit odd considering the reality of private enterprise in this country. Are you saying that private enterprise is always more effecient than government? Are you saying that defense contracts do not employ workers so that the economy is robust? How does this not benefit private citizens? While agree that private citizens spend their money directly on things that benefit them… do you see no overall benefit to having government? If everything was in the hands of private enterprise, what laws would govern these entities? And please don’t tell me that free market forces would do rule the day. 😉
As for your third point… I don’t see it… you’re supposing something that isn’t real… and again you’re using grossly inflated numbers to make a point.
All that said… I’m not sure I’m pro on the progressive income tax. I, like you, read through it and I’m still trying to make sense out of it. I just don’t think that throwing crazy numbers into the mix illuminates anything about the idea.
Sure, Bob has lost a little bit of relative spending power, but not so much that his position versus Bill is compromised.
The same thing occurs here as did in my example. In raw income, Bob has five times Bill’s purchasing power; after taxes, he has a little more than four times Bill’s. It’s not dramatic, but it’s more than “a little bit,” and it’s enough of an effect on spending power to call his thesis into question.
You say:
Well… overall… it’s true that taxes will reduce purchasing power for everyone. That’s just a simple fact.
Yes, it is; we both know that. But that “simple fact” is exactly what this guy is denying. His whole argument rests on the premise that the rich have no reason to worry about being screwed by a progressive income tax, because such a tax will leave the actual purchasing power of everyone in the economy unaffected. But both my example and yours show that there is an effect on Bob’s purchasing power, in terms of proportions if not ranking.
Arguments can be made about whether or not the reduction in Bob’s proportional spending power is a good thing or not, but all I’m trying to point out here is that contrary to his argument, there is an effect on spending power.
As for your third point… I don’t see it… you’re supposing something that isn’t real… and again you’re using grossly inflated numbers to make a point.
What am I supposing that isn’t real? That example is based on exactly what he claims to be the effect of an income tax—wages and prices get reduced accordingly to the reduction in income. The only questionable thing I can see is that one might argue that Schmoe’s wages would be paid before any taxes are assessed on Joe, and I’m not sure what the results of that calculation might be. And he explicitly says that his idea of a progressive tax is levied on gross income anyway, which includes that spent on wages and other expenses.
Of course, here’s the big contradiction that makes his argument completely not make sense, and it has nothing to do with proportions or any other random numbers.
His argument is essentially:
The problem is, though, that the premises on which (1) and (2) are based are in direct contradiction. (1) assumes that the tax money is taken out of the economy and thus the currency is deflated. But (2) assumes that the tax money is spent by the government, thereby staying in the economy. According to (2), just as much—or more—money is being spent, so prices actually don’t have to drop as (1) claims that they will.
Now, taken individually, (1) and (2) are somewhat coherent arguments for a progressive tax. You can go with (1) and just throw out the taxed money, keeping purchasing power basically unchanged (but with changes to proportions, making things more equal). Or you can go with (2) and spend that money on Good Works™, making the rich poorer but everyone better off in general. But combining the two arguments just doesn’t make sense.
OK… now you’re getting into the meat of it. This is the part where I was a little confused by the logic also. 😉
I don’t remember seeing the wages dropping accordingly after taxes are levied… I’ll have to re-read it. I do remember the concept that prices would go down, and I agree that it doesn’t seem plausible that prices would go down if the government is also spending money.
I think, however, that the prices referred to are for consumer goods. So the premise is that the prices of consumer goods would go down… while the government spends money on “Good Works” that enrich the entire society (while leaving the rich a little less richer).
Hmmmm… that’s interesting, but I’m not sure it explains away the contradiction you bring up.
Gotta get back to work… 🙁
–sam
I don’t remember seeing the wages dropping accordingly after taxes are levied… I’ll have to re-read it. I do remember the concept that prices would go down, and I agree that it doesn’t seem plausible that prices would go down if the government is also spending money.
Thinking back, he may not have said that explicitly, and only said that prices would drop. But really, wages are just a kind of price. 😛 But they do have to, if purchasing power is going to be unaffected. If wages don’t drop—if Bob’s income goes from $100K to $70K, but he keeps paying Bill $20K, then Bill’s wages become a greater percentage of his income, and keeping Bill hired becomes more expensive. (So, of course, he has to lay off Bill or some other hapless worker to stay in business, and the quality of his business decreases due to the lack of workers, and so on. :-P)
Now you’re just being silly. It is more likely that Bob would force Bill to be a bit more productive so that he gets more out of his $20K than he currently does. ;p
Then again… Bob might just replace Bill with a robot and be done with it entirely. 😉
–sam
Sometimes, you just can’t get people to be more productive. And if you try too hard, they’ll file a class action suit on your ass. 😛
progressive income tax
At a quick glance I’d say it is pretty crackpot. Here is a tax reform proposal I can really get behind:
http://www.fairtax.org/
Jay
Re: progressive income tax
While the idea of a single sales tax on consumption sounds appealing at a distance… I’m not buying some of the assumptions behind it. I read through the FAQ and some of the ideas don’t wash for me. I think this type of tax puts a heavy burden on low and middle income families without giving much relief. It also overstates the purchasing habits of the wealthy.
These type of “fair” tax schemes are fair in name only… unless, of course, you’re rich. In which case it amounts to a huge tax cut. Basically, the more money you make, the fewer taxes you pay. I suppose that holds some appeal to those that fancy themselves as “moving on up”, but all it will serve to do is make the rich, richer… and the poor, poorer.
I think we’re all searching for the holy grail of a simple tax system, but I remain unconvinced that a flat sales tax is the answer.
Re: progressive income tax
Perhaps. But a “progressive” system that punishes the hardest working biggest producing individuals does not make sense to me. The goal of a tax system should not be to redistribute wealth. With one’s views you must choose if you would rather help the poor or eat the rich because in our country “the rich get richer and the poor get poorer” is a deadly false meme. As the rich get richer here, the poor do as well. The poor in America live better than the poor in America lived in previous generations, and live better than most people in the rest of the world now. There is always going to be a bottom 15%. I believe we should make sure people’s needs are provided for, and let motivation and charity provide the rest. And this is coming from a guy who is not anywhere close to a rich high income upper tax bracket and who grew up poor.
Re: progressive income tax
Oh… I agree that the world isn’t just about the “rich get richer, while the poor get poorer”. I’m just saying that a taxation scheme that relies more on those that spend will inherently hurt the poor and middle class more than it hurts the rich. In such a scenario, the rich benefit from the taxation scheme in a way that the poor and middle class never can.
I’m not advocating that their be redistribution of wealth here. I’m not asking for the government to take from the rich and give to the poor. Hell no… I am absolutely not a fan of wholesale welfare systems. That said, there is a role for government to play in providing benefit to all citizens. Where we differ is likely in how large a role government should play. 😉
–sam
Re: progressive income tax
I do not know if I can buy into it will “inherently hurt the poor and middle class” so much as it will not benefit them as much. But I do not think such a system would hinder their growth potential or keep them at a subsistance level… I guess it depends on what is perceived as inherent hurt.
The progressive system seems to be about redistribution of wealth generally. Perhaps I do not get it, but that is how it looks to me.
Anyway, here is an article i found interesting. It has a great way of viewing america’s capitalism, and its growth. It is very bird’s eye, non-technical, and positivist… and it changed the way I think about our economic system:
http://www.ejectejecteject.com/archives/000056.html
Oh yeah, it is wordy and you could skip down to the middle of the page and get the gist from this point:
“The first of these three pillars has several names: private property, the free market, enlightened self-interest…but the first essential element of the American Trinity, and the hardest to come to grips with, is Capitalism.”
Re: progressive income tax
Thanks for the link… I don’t have any problem whatsoever with Capitalism. That’s not the issue. The issue here is a fair taxing scheme that allows people at the bottom to “create wealth.”
Keep in mind that redistribution of wealth can only happen if government takes assets from the rich and gives those assets directly to the poor. I don’t think either the fair tax or progressive tax schemes are trying to do that. Certainly, the progressive tax scheme places a higher burden on the wealthy, but at no point is it giving it back directly to the poor.
That said, I’m not advocating it… I’m just trying to understand it. I find that I understand things better if I debate it with others. There are things about the premise on which the progressive tax is predicated that I’m finding difficult to swallow… same with the “fair” tax. 🙂
–sam
Re: progressive income tax
I’m just saying that a taxation scheme that relies more on those that spend will inherently hurt the poor and middle class more than it hurts the rich.
er…be very careful here. I tax on income is not the same thing as a tax on spending, ergo a tax on the income on those who spend doesn’t entirely follow. Think about it like this, when you recieve income, you would either spend or save. You are taxing income prior to spending or saving. When you are spending and taxed on that spending, then you are taxing at the advanced part of the process.
It’s fairly common to observe that an actual tax on spending is far far more regressive than progressive, and if i had to be honest, a progressive income tax actually goes some way to addressing the inequality problem.
another thing about income taxation, is that without officially saying so, it can be reversed and negative taxation incurred (eg benefits) for those who fall below a threshold, whereas spending taxation isn’t always rebated and it certainly isn’t due to income if it is.
Very often, spending is on imports, and in that case, the rich are usually (if they aren’t saving) spending on imports which is basically giving to the rich of another country who then may give it to the poor of their own country (probably not)
sorry Sam, I’ll get my hat
Sameen
Re: progressive income tax
Oh… I wasn’t trying to say that you fancied yourself as “moving on up”… I was just making a general statement. 🙂
–sam
Re: progressive income tax
oh no problem, i did not take it that way. I hope one day to feel i am moving on up… I would love to be in a position to one day provide for a family to live comfortably, and have plenty left over to donate or even create my own charity… that would be great…
progressive income tax
At a quick glance I’d say it is pretty crackpot. Here is a tax reform proposal I can really get behind:
http://www.fairtax.org/
It seems to me to be a great way to protect the poor while not hobbling the economy, depoliticizing taxes (wouldn’t that alone be great!), reward saving, and the biggest earners would be the biggest contributors (and in a way they would not complain about), cuts out a gargantuan governmental expense (IRS) and a huge class of middlemen.
Jay
ask Sameen..he knows these things :)and he’s delighted with the idea of sharing it with others 🙂
Will do… 🙂
–sam
in general a progressive income tax is one where those who are on higher incomes will pay more tax than those who are on lower incomes.
The objective (eg pre-tax and post-tax) is redistribution towards the poorer which may or may not be a good thing depending on who you are.
this is without looking at the website.
did you work it out?
Sameen
Sort of… I don’t necessarily buy all of the arguments presented for a progressive income tax. That said, I don’t think that’s a fault of the concept of progressive income taxes, but of the author of the piece.
Unlike other people, I don’t have a problem with government providing services and benefits to the citizenry. I think there is a vital role for government to help the disadvantaged, to protect the country, to foster educational opportunites, to protect consumers and businesses alike in the marketplace. In order to do all of these things (and more), taxes are necessary.
Even though I don’t personally agree with the idea of a flat sales tax… one of its appeals is that it is very simple. People latch onto that simplicity and see it as something that is not so bad afterall. In my opinion, all that a high flat sales tax will accomplish is a reduction in overall purchasing by the population. The proponents of this system gloss over that little tidbit. Not only might such a scheme reduce the amount of taxes collected, thus limiting government (which is what the proponents of this scheme are really after), but it may also be ruinous for the economy.
Conversely, one of the problems with our current tax scheme (which is a progressive income tax) is the sheer complexity of it. There are several loopholes and exemptions. One of the reasons for the complexity of the system is due to the very nature of a progressive tax. It taxes people of different incomes at different rates. In order to “fix” the inherent unfairness of this the system tries to correct it with exemptions and loopholes.
I’m still not sure whether a progressive income tax is better than a standardized income tax. What I do know is that taxes are necessary, and I don’t consider them evil. To me a perfect tax scheme would be one that is both simple and fair. I think that in America that probably means some form of income tax that exempts those with the least resources from paying. Whether or not those with the most resources pay a higher percentage than those in the middle is thankfully up to someone else to decide.
I’m far from an economist so please pardon what to you must seem like ignorant ramblings. 😉
–sam