Meghan McArdle raises an interesting point about the limits of taxation:
[I]sn’t there some upper limit on tax brackets for the wealthy? When the Bush tax cuts expire, that top rate will go to 39.5%. Then there’s the 2.9% Medicare tax, and the 0.9% Medicare surtax we just enacted. There are, for those living in places like New York, New Jersey, California, or DC, state and local income taxes that can add an extra 5-10% onto the tax bills. We’re now well over 50% marginal rates before we’ve even considered things like property and sales taxes.
When more of your extra dollars are going to the government than yourself, I think it’s a problem, even if you’re very rich. I think that has to be factored into any argument about the “fairness” of the tax system.
I think McArdle has hit upon a defensible principle in the morality of taxation. How can it be fair for the government to take more than half a person’s income? An abandoned spouse is unlikely to get more than half in a divorce settlement. Why then should the government be able to take that amount each and every year of a person’s life? Even Rawlsian liberals, who advocate fairness as justice, should be opposed to cumulative levels of taxation that exceed 50 percent.
Rather than talking about marginal tax rates—which few people fully understand—savvy politicians should support a law that would state that no citizen can be compelled to give more than half of his annual income to any government entity. Who wouldn’t support such a law? It be an almost unbeatable campaign issue.
Assuming, as I do, that this is a moral issue, what would be the counter-principle that would justify taking more than 50 percent of income? And if the allowable percentage should be higher, what should the upper boundary be?
August 11th, 2010 | 9:53 am
Joe, you ask “How can it be fair for the government to take more than half of a person’s income?”
Perhaps it would be better to use the term “just.” As in “with liberty and justice for all.”
August 11th, 2010 | 11:31 am
I can recall a time in the United Kingdom, when the top rate of tax was 19/6d (97.5%) on the top slice of some unearned (i.e. investment) income.
The object was to impose a ceiling on incomes.
Similar top rates applied to death duties and the logic was the same.
August 11th, 2010 | 11:54 am
A large and increasing percentage of government spending goes to simply meet existing obligations: SS, Medicare and interest on debt. Presumably, it would be a moral issue to walk away from those obligations, wouldn’t it?
As Milton Friedman once said, to spend is to tax. The current answer for what the tax rate should be is “whatever balances the budget in the medium run.” If taxes are “too high,” the remedy is not an unenforceable cap on tax rates but rather an honest and feasible program of spending cuts.
August 11th, 2010 | 12:13 pm
How can it be fair for the government to take half of one’s income? Simple. The same way its fair to take any of one’s income. Taking an arbitrary point and saying above this it’s immoral and below this it’s moral is silly.
Beyond that, all of these arguments about making people pay their ‘fair share’ are pointless, since there can be no reasonable definition of ‘fair share’
The goal of a tax policy should be to raise enough money to cover the bills in a way which minimizes distortions in the overall economy and minimizes disincentives to productive economic activity.
August 11th, 2010 | 12:49 pm
In our public culture, morality doesn’t apply in anything done to the rich, because the rich can not garner sympathy. We could pull out the fingernails of the rich, and objections would fall on deaf ears. “How can I feel bad for someone who has a million dollars?”
August 11th, 2010 | 12:56 pm
The US once had a top marginal tax rate of about 91% in the 1950s and early 1960s. After the Kennedy tax cuts it was brought down to 70% or so, and during the 1980s it fell to roughly contemporary levels.
Mark is on to something, however: if taxes are too high the only honest thing to do is re-evaluate the spending commitments of the State.
August 11th, 2010 | 1:04 pm
Well, we certainly would have lost the Second World War if we couldn’t have taxed the wealthy at extortionary rates. And the infrastructure boom of the 1950s (Eisenhower’s highways) would never have appeared without very high tax rates. It’s worth noting that we spend most of our time driving on roads and bridges that were all built with money collected in a time when many taxpayers paid over half their income. Those bridges and roads are collapsing all around us now. And until we start taking in much more revenue in taxation, our chances for rebuilding our crumbling infrastructure are bleak.
August 11th, 2010 | 2:36 pm
The amount of legitimate taxation is intimately related to the purpose of Government. That amount of taxation is just which is necessary for the fulfillment of its purpose: national defense, police, courts, etc. This is perhaps a difficult line to draw, but our present welfare state is clearly on the wrong side. Charity is an individual moral obligation, not a societal one, there being nothing charitable about giving away other people’s money. The legitimate functions of Government would probably take up no more than 10% of GDP.
August 11th, 2010 | 4:08 pm
Loopholes were notoriously rife, so very few indeed paid it.
August 11th, 2010 | 4:55 pm
The tax rate is not unjust, it is the tax system that is unjust. A progressive income tax is by its very definition unjust. if taxes were a fixed percentage and we decided to tax ourselves 50% I would have no problem. The problem is that the 50% of people who pay NO taxes have equal representation as those of us who do pay taxes. When they vote for higher taxes, it doesn’t effect them. That’s the problem.
August 11th, 2010 | 7:37 pm
Jeff’s got it right. The swing towards increased public spending has accelerated to the point where the public actually notices and reacts. If those in favor of increased public roles in social functions/services had simply continued to nudge the country further to the left, they may have succeded. They may yet succeed, but the acceleration of spending, which required inefficiently and ineffectively picking winners and losers has created an environment where the mainstream has begun to question the legitimate role of government, and the starting point is national defense, transportation infrastructure, etc. and not the litany of things upon which the adminstration has spent untold billions.
Mark makes a point we also must consider. The moral obligation we have to honor commitments made may require higher taxation than we would like. However, while that obligation needs to be met for today’s seniors, there is nothing immoral about renegotiating elements of the social compact with other demographic cohorts. If we “changed the deal” for those in their 40′s in one manner, and for those in their 30′s in another, still another for those in their 20′s to something sustainable, we could honor our elders, and get about the serious work of getting to work. GDP would take off. Markets would fly. The dollar would rise. Tax receipts would increase. For disclosure’s sake, I’m in my 40′s and I’d rather have ZERO social security but 20 years of a flying economy in which to produce value and yes, wealth than have today’s system be there for me.
We may be getting near that point.
August 11th, 2010 | 8:25 pm
As I see it, the legal extortion of public money (“taxation”) is morally defensible because it is necessary for the public good. It ceases to be defensible when its level is higher than the public good requires.
This is an argument about the absolute level of taxation in an economy. Mr Carter, however, is discussing the moral limits on an individual’s income tax in a system where the burden is not evenly spread. I have no idea where the moral upper limit is, assuming that one accepts the principal that progressive taxation is in any sense just. Certainly, high marginal tax rates encourage tax avoidance or even tax evasion, and could therefore be cause for scandal. It is also important to recognise that there are many interacting taxes, as Mr Carter points out. I also understand that our American friends once fought a war over the principal of no taxation without representation. I wonder if the opposite holds: no representation without taxation? I am not in any way suggesting that the poor should not vote, but it is certainly true that being a tax payer gives on e a certain stake in the government: if I’ve paid no tax, then I don’t care about government spending decisions, unless they impact me directly. If I do pay tax, then I do care if money is wasted on vanity projects, pork barrelling, paying off unions / business interests or whatever.
(This is one aspect of the “oil curse”: governments which do not need to tax the population because of some other income stream can afford to despise the population, dispensing enough largesse to keep it quiet. The problem of too much money, however, is not a common one in the West at the moment.)
My view, then, is that tax should be as low as is prudent, and as broad as is possible. My preference is for a focus on consumption tax, as it is hard to evade and extremely broad based, followed by a flat tax. Of course, I understand that there will be winners and losers, and that welfare policy may need to be adjusted to protect the poorest from a disproportionate effect when a change is introduced – but that would be only a transitional arrangement.
Now, I wait to be flayed!
August 11th, 2010 | 11:35 pm
Of course, that should be
… the legal extortion of private money…
August 11th, 2010 | 11:55 pm
Bernard,
I largely agree with you, but I would add one caveat.
I think if there is to be any welfare, it ought to be at the local level, perhaps township or county, and kept to the bare essentials. Anything more extravagant induces, or rather inspires, indolence.
Federal bureaucrats that have no relation to those they claim to be helping are more likely to be indifferent, and thus ineffective, than an equivalent person who lives among, or at least near, the people he is helping.
August 12th, 2010 | 10:08 am
Regarding “an honest and feasible program of spending cuts,” we know this is impossible in the present climate. If the US wanted to return to an isolationist, agrarian, by-one’s-own-bootstrap kind of society.
Oil companies want unlimited access to hydrocarbon deposits. That costs money in terms of military build-up.
Nations don’t seem to have credit limits like I do. But if they did, they’d be getting to the point where they would have to assess actual income and expenses, just like any of the rest of us.
Corporations seem to get off way lucky in the new world order. They lobby for wars and other expenditures. They have no serious risk involved in doing tricky financial things that would get me laughed at by my bank or thrown in jail. And they get handouts so they can thrash local businesses in the so-called free market.
I’m all for a fair and just tax system. But it has to be connected to an equitable economic system, not this Republican brand of sovietism.
August 12th, 2010 | 4:24 pm
In theory, I love Mark Greif’s proposal for capping income at $100,000, which he argues would end the insanity that happens in our system in the pursuit of inhuman amounts of money:
http://nplusonemag.com/gut-level-legislation-or-redistribution
“If there is anyone working a job who would stop doing that job should his income—and all his richest compatriots’ incomes—drop to $100,000 a year, he should not be doing that job. He should never have been doing that job—for his own life’s sake. … If no one would choose to do this job for a mere $100,000 a year, if all would pursue something else more humanly valuable; if, say, there would no longer be anyone willing to be a trader, a captain of industry, an actor, or an athlete for that kind of money—then the job should not exist.”
This is utopian and I don’t take it completely seriously. But the moral thrust of it is relevant to this conversation: extreme wealth is worse for the soul (and arguably for society) than poverty. (See Matt. 19:24). We try our best to keep people out of poverty, so why shouldn’t we try to keep them out of extreme wealth? Who cares if it’s “fair?” We’ll talk about “fair” when we have examined, as Todd recommends above, a system that by its very nature balloons the wealth of the wealthiest and leaves the poor to fend for themselves. It seems a little odd that religious people would be worrying about what’s “fair” to the rich when, regardless of the fact that they might be paying a 55% tax rate, they are still insulated from human reality in ways that no one else will ever be.
August 12th, 2010 | 8:37 pm
We have a spiritually rich culture just off Australia’s northern coast: it’s called Timor Leste, and most everyone is a peasant. It is also very devout, the people wear interesting costumes and the women die in childbirth.
I am not denying that there are temptations that go along with great wealth (pride, avarice, sensuality), but the answer is not to create poverty (David would agree) which has other temptations (theft, prostitution, despair). Better to live one’s life as well as one can, and work for governmental policies that allow people to pursue their own lives in a productive and dignified manner. With humans being humans, some will misuse their freedom, but our response must not be to take their freedom off them. That road leads to ruin, physical and spiritual.
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