Saturday, April 19, 2008

Progressive Taxation

Here at the Third Way Center we are committed to controlling government spending, and protecting individual liberties against the State.  But we feel very strongly that our current tax system is retrograde and unfair.

The wealthiest one percent in this country owns over one-third of the countries wealth [ ], yet paid less than a quarter of Federal taxes [].  If we add in data from even-more regressive State taxes, the situation becomes even bleaker.

Looking to the top 10%, we find that it owns about half the country's wealth [ ], yet paid only 52.2 percent of federal taxes.  Again, this leaving out State taxes, which would drop the percentage paid down to around 40% or less.

If we think about these numbers in real terms, it becomes clear that those who own the majority of land and buildings in this country are not paying their share from the defense of this property.  To take an imaginative scenario:  the costs of a war which destroyed all personal property would be catastrophic from the rich; but assuming there was some new country where Americans could immigrate and ply their trade (and stipulating that the global economy would remain un-affected), such a war would have a rather negligible effect on the wealth of most everyone else.  The rich benefit much more from U.S. spending for protection of property rights than the rest of us.

One may counter that this point is moot since most U.S. spending is not on the military.  However, one must first of all note that much of the spending is there to maintain the economy which supports the military, and to maintain domestic peace that allows for protection of property rights (e.g., welfare spending to pacify the "lumpen proletariat").  Moreover, the poor are often hurt by excess non-military spending just as much as the rich.  As such, it is instructive to think of all U.S. spending as being direct or indirect supports for protection of property rights, plus an unavoidable surplus that is just like an extra inefficiency.  Yes, it would be great to have more efficiency in certain areas, but since we don't have this, we need to think about who is really benefiting the most from Federal spending as compared to how much they pay-in.  (And here one must consider points such as the following:  the middle class may receive more in the way of Social Security payments, but it is also more badly hurt by the damaged business climate that comes from Social Security taxes.  Etc.) 

Since the situation is muddled, we must look to the interests of the less well-off.  So long as we do not have a strict libertarian governmental situation, one cannot readily say that the rich are being "soaked" unfairly.  Rather, it is a simple question of how to extract a maximum of wealth from them over the long-term without having countering negative economic effects that offset the value of the increased tax revenues.

Yes, lowering taxes on the rich in the 1980's in the U.S. has led to them paying a higher percentage of taxes now.  However, the upper-bracket was 70% before Reagan.  That's a little excessive.  That sort of rate is certainly going to have too many negative effects on wealth accumulation and entrepreneurship.  Moreover, the simple fact is that lower-taxes for about 30 years plus massive borrowing plus any number of government schemes which hurt the poor and help the powerful and well-connected have let the very wealth earn more compared to the rest of us.  That's not exactly progress.

We need to bump the highest tax-bracket up to 50%.  Indeed, everyone earning over $100,000 a year ought to be in that bracket, as combined with an increased standard deduction for everyone.  This would garner over $200 billion annually, and probably quite a lot more than $200 billion.

Moreover, a tax on personal wealth for the top 1% is needed.  Perhaps a 2-3% tax on real estate, financial instruments, and cash on hand, with an exemption for the first million dollars of property and for all debt-financed property.  There's nothing unfair about this, and there is something quite fair about lowering taxes and other government interference for the bottom 99% by raising the standard deduction and balancing the budget.  Such a tax would garner over $300 billion per a year (although it is very difficult to estimate the precise number).

There is no reason that the bottom 50% of earners ought to pay Federal taxes in our current condition of wealth disparity.  The bottom 80% already pays only 20% of Federal taxes [].  One might imagine that this number suggests that the situation is not as retrograde as one might think.  But another thing that is suggested is that the costs of lowering this number are not so great.  And once we consider that wealth disparity in the U.S.  is ultimately about personal wealth rather than personal income, we can see that lower this 20% figure would be the fair thing to do.

Moreover, looking beyond particular justice to general justice, we see that it is still the proper course of action.  More wealth left in the hands of the bottom 80% of earners would do wonders for improving our culture and for allowing broad-based wealth accumulation.  This will allow for a situation in which less government intervention is required in areas such as housing, health, and education, and ultimately lead to smaller government and lower taxes for all.


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