Thursday, October 13, 2011

The Case for Taxing the Rich

Today, I am going to answer a question from the studio audience:

It's a fact to say that the rich currently do pay a larger proportion of the income tax bill. So how much more do you want? Where would you cap it?

In one sense, the question is a red herring. In terms of the current political debate, I am not demanding that the government conform to my own ideas on how much to tax. Instead, I have been arguing for compromise. I might come up with a value of X%. However, some other intelligent and concerned person may come up with Y%. In this case, even though I disagree with them, I am not going to have the arrogance we see in a substantial number of Republicans these days and say "X% or nothing". I would say, "Let's assume that I am not an infallible super genius and you might be right and meet somewhere in the middle."

My utter contempt for so many Republicans does not rest on thinking that they are wrong - they may well be right. It rests in the absolute arrogance they display in refusing to go even 10% of the way towards compromise.

But, let us look at the issue of how much to tax the rich.

I want to begin by taking a quick look at the question, "Tax them for what?"

I don't have space to go into a discussion of each type of government expenditure. I will look at one, and in doing so present the types of arguments relevant in determining when such an expense is justified.

Recall, desires are the only reasons for action that exist - the only reasons for or against adopting or rejecting a particular policy.

There are some goods and services that fulfill many and strong desires - but do so regardless of whether the beneficiary pays for those goods or services. These are called "public goods".

The paradigm example of a public good is national defense. It is not possible for the military to be selective in which property it defends. It can't say, "Apartment 529 paid is current on its defense payments, but Apartment 530 has not, so we will defend the first apartment but not the second." There is no way to defend Apartment 529 that will not benefit the owner of Apartment 530, even though the owner of 530 never paid a dime for defense.

A system of police and courts also provides for the common good - produces extensive positive externalities. The rapist captured and imprisoned is a benefit to everybody.

Quality education is a public good. You and I obtain a great many benefits merely from the fact that we are surrounded by well-educated people, even if we contribute nothing for that education.

The problem with public goods is that, since people can obtain the benefits without paying, they tend to get underfunded. Too many people wait for other people to cover the costs.

The solution, in the case of public goods, is to have the government pay for the public good (military, police and courts, education) and make sure that people pay the cost through taxation.

So, here we have determined a government expense based solely by an examination of reasons for action that exist - where desires are the only reasons for action that exist.

How much should we spend?

Here, we apply the law of diminishing returns. With the first million dollars, we do the things that provide the greatest social benefit. That is, they fulfill the most and strongest desires. With the next million, pay for items that fulfill fewer and weaker desires - not quite as many or as strong to fit in the category of the first million. Each million will produce diminishing returns. We keep adding millions until we reach the point at which, for the next million, we have some alternative that fulfills more and stronger desires than we would get by another increment in the public good.

And now the big question: who should pay for it?

Remember, we are looking only at reasons for action that exist, and desires are the only reason for action that exist.

This suggests that the first dollars to be spent on a public good should be those private dollars that fulfill the fewest and weakest desires.

Dollars are subject to the same law of diminishing returns that I mentioned above. The first dollars a person has go to fulfilling the most and strongest of his desires. The next set of dollars go to fulfilling fewer and weaker desires. Dollars continue to go to fulfilling fewer and weaker desires until, for a person with hundreds of millions of dollars, the next set of dollars fulfill very few and weak desires. So, the dollars that fulfill the fewest and weakest desires are those last few dollars of the very rich.

We also need to add a qualifier that applies to everything said about desires in this article, but is best mentioned here.

Some desires are better than others.

That is to say, there are desires that people generally have many and strong reasons to promote, and desires that people generally have many and strong reasons to inhibit.

We may imagine a hoarder who has a very strong desire to accumulate as much money as possible. For this person, their three billionth dollar may fulfill a particularly strong desire. However, this is not a desire that people generally have many and strong reasons to promote. As such, it would not have nearly the weight as a desire to provide money for malaria prevention, for example. That desire is a desire that tends to fulfill other desires. Therefore, it is a desire that others have reason to promote.

Consequently, the person contributing money to malaria prevention may get a tax break that the person wanting to hoard as much cash as possible would not get. We may raise the percentage collected in taxes a bit to collect enough from the hoarders to cover the losses from the tax breaks given to those contributing to malaria prevention.

Ultimately, this is a case for covering government expenses out if the pockets of this who have the most money. The dollars that are fulfilling the fewest and weakest desires should be the first to go to public goods and, I would argue, essential welfare goods, that fulfill the most and strongest desires.

There are other proposals out there, but the most common alternatives are founded on myth. They postulate reasons for action that do not exist, most of which have the effect of putting the few, weak, and low-value desires of some above the more, stronger, and better desires of others. As imaginary entities, they have no relevance in a discussion of real world policies. They provide no real world reason to reject the form of taxation defended above.


Eric Noren said...

I have to generally agree with the entire post. I think it's when you express political opinions that you go astray. You've also presented the right questions.
1) What role do we want the government to fulfill and, consequently, which desires are better than others?

2) How much do we want to spend?

3) Who should pay?

Each question presents opportunity for left and right to disagree.

But perhaps my question was unclear. The point I wanted to get to is the point at which it is immoral (or in your terms, unethical) to tax someone? If we can agree that the rich currently pay a larger portion of income taxes, yet many on the left want to increase that share, I ask "by how much?"

I understand your point of not picking a number because there will be some variance. But perhaps you could indicate a number that is unethically too high. For example, most people would say a top tax bracket of 100% is too high because everyone is entitled to the fruits of their labor. While I have met people who would support 100% at the top, they're not normal.

So is 90% too high? Or 75%? Or 50%? Is there a proportion of income that you, Mr Fyfe, would agree is too high for even the rich to pay? That was the gist of my question.

Kristopher said...

that sounds good as long as you have a caveat in place to protect ambition. (which you do in previous posts)
desire utility can be maximized with some redistribution of wealth, but growing the pie, as you said before, would also tend to promote the utility of desires. (growing the pie also is a public good. something we all benefit from but we benefit more if we don't contribute when others do.)

just thought I would point this out before someone accused him of socialism by assuming (errouniously) that an argument for some redistribution of wealth is an argument for total redistribution of wealth.

keep in mind this post does not say that there should be more or less redistribution than there is now, only that the percentage is a non-zero and that the percentage should grow as income grows by some amount.

i hope to prove now that not only is it non 0% but it is greater than 33%

brackets of this nature started in 1912 ranging from 2 to 7% consisting of 7 brackets

the wealthy were taxed at 94% during WW2 with the poor being taxed at 38% (more than the wealthy are being taxed now) ambition was not destroyed... they stayed about that high until 64'

in the 60's they got rid of the top two tax brackets and folded them into the next lowest treating everyone above 250k a year roughly the same instead of having seperate brackets for 500k and millionaires. (never have we had a seperate bracket for billionaires)

it had been steadily dropping for everyone until the 80's when it started primarily only dropping for the wealthy with taxes on the poor staying relatively stable.(around 87' the tax on the rich was almost cut in half while the tax on the poor went up)(with the poor at 15% and the wealthy at 28%) (this seems to be where our economy began to become unstable)

taxing the income of the rich in the past did not destroy the economy or the country or make us socialists and government income tax rates have not been spiraling out of control for the past 50 years they have been decreasing steadily. but in the 80's they stopped decreasing for everyone and started only decreasing for the rich. the surplus we had in the 90's came after incremental tax increases on the rich. to 36%

the bush tax cuts affect only the super poor, the uppermiddle class, and the rich with no cuts for the lower middle class or "the folks" as they are called.

it would seem that we have lowered the taxes on the rich to below the economical sweet spot and we have let them become out of balance with the taxes on the poor and middle class...