Wednesday, October 26, 2011

Progressive Taxes are Unfair

Listening to the various discussions on the flat taxes and the national sales taxes I keep hearing how flat taxes are unfair to lower wage earners because they "impact" lower wage earners more. I used to get that... but now I'm not so sure. Here's how I see it...

Work is work. Say I'm working hard for an hour, doing the best I can with the tools at my disposal to complete the task at hand. That task may be digging a ditch, waiting tables, fixing a pipe, or analyzing some numbers. Someone places a dollar value on an hour of work, and if I agree, I'll give them the outputs of my labor for that dollar value. Some work I'll get $10 an hour for, other work I'll get $50 an hour for. Most of us strive to enhance and apply our talents and tools to do something that will make us $50 an hour. This will allow us to better provide for our families. We don't all have the tools and talent to get there, but it's a goal.

I also agree to let the government take part of that money I just worked for.

Let's say we have a 10% flat tax.
If I earn $10 an hour, they take $1, or 6 minutes of my labor.
If I earn $20 an hour, they take $2, or 6 minutes of my labor.
If I earn $50 an hour, they take $5, or 6 minutes of my labor.

That's fine. I earn more, so I can pay more in dollars, but it still "costs" me the same amount of effort to generate those dollars. Assuming I am creating value equal to those dollars, that is adding to the economic output of the nation. The more I earn per hour, the more I earn keep. It's linear. Sounds fair to me.

But a "progressive" tax is different. Say we have tax rates of 10%, 20% and 30%.
If I earn $10 an hour, they take $1, or 6 minutes of my labor.
If I earn $20 an hour, they take $4, or 12 minutes of my labor.
If I earn $50 an hour, they take $15, or 18 minutes of my labor.

This progressive tax rate is acceptable to some. I think it is based on the premise of what I have left over after the government taxes me. "Hey, if you earn $50 an hour, at a %10 tax rate, you still have $45. That's too much. We think you should be good with having $35."

This line of thinking devalues my work. It means that the government must make a value judgement about my labor. It removes the incentive of striving to produce more value and to make more for myself. It takes away the fruits of my work in the name of fairness. But it is not fair.



Anonymous Anonymous said...

The counter argument in support of progressive taxation comes from Adam Smith, the founding writer behind market economics. Smith's First Maxim of Taxation:
"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. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation."
Smith writes this on the sources of public revenue:
"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

Aug 30, 2012, 9:30:00 PM  

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