Our “modern,” “progressive” tax code reflects not science or progress but a pre-scientific (zero sum) view of the origins (and inequality) of income and wealth.
The rich in America don’t pay their “fair share” of taxes, according to critics of capitalism and of inequality who propose a near doubling (to 70 percent) of the current top federal tax rate on personal income. Many such critics also demand a new wealth tax on previously earned income that’s been saved and invested. But what’s a “fair share?” Why is 70 percent the right and proper tax take? Why not 50 percent? Is today’s top rate of 35 percent inherently fair? Why not 10 percent?
Ask anyone who’s willing to define or defend “fair share” in this context — whether a tax expert, an editorialist, or a neighbor — and you’ll likely hear not hard facts and solid logic but a host of banal attitudes and platitudes. “Inequality is unjust!” Why? “Because it’s unfair!” Why? “Because so many people are in need today — and most people agree with me.” But why assume the status of needy or less rich people is caused by the rich? It just doesn’t follow. If the rich aren’t blameworthy for the poor lot of others, as a criminal would be for robbing and impoverishing a victim, what, in plain justice, could justify punitive taxation of the rich?
Part of the problem (and the emotionalism) is that many people today — especially the highly schooled (and highly paid) elites — doubt or deny the principle of desert. They believe no one is truly or fully responsible or deserving of their socioeconomic position or trajectory in life. “They didn’t earn it,” we hear, because so many others — whether parents, teachers, peers, or preachers — played a role. Well, if others played a role, are they deserving? If so, is desert in fact a valid principle? If so, why bother equating unequal possessions with ill-gotten gains? Those who most deny desert deny it most vehemently in the rich; in failing to see how anyone succeeds “on their own,” they fail the more so in seeing how truly great producers succeed.
Randomness and “luck” also are posited as causal in one’s socioeconomic status; but it’s a contradictory claim, since randomness, by definition, is the causeless (or unidentified). The causeless can’t be causal. Even when self-responsibility is conceded as a factor in people’s socioeconomic status, it’s usually assigned an insignificant role. Yet if no one truly “deserves” their status in life, or their possessions, logical consistency requires that the principle apply alike to the rich, poor, and middle. But it’s not applied that way these days; “social justice” now entails not desert but a denial of desert and the contradictory claim that while no one deserves anything, some people nevertheless “deserve” redistributed income and wealth.
In truth, in a free society with equal treatment before the law, different human endowments, talents, and productive capacities necessarily yield different socioeconomic outcomes. Since no human is omniscient or omnipotent, it isn’t necessary to assume that everything humans possess has been attained by perfect prescience, a perfect plan, perfect execution, or superhuman powers.
In the economic realm, if unequal people are left free to invent, create, produce, exchange, and consume wealth in mutual, voluntary exchange, to mutual advantage, what they come to possess is, thereby, presumptively just — legitimately earned — however unequal or dissimilar may be their possessions relative to the possessions of others. If society lacks freedom and wealth is seized, one should fight for more freedom, not punitive taxation.
Legitimately obtained possessions shouldn’t be condemned or seized by third-party passers-by who lack standing in trade. If it can be demonstrated — not merely assumed, according to the premise of a “zero-sum society” — that someone’s status or possessions have been attained by force, fraud, or political favoritism-cronyism, the proper remedy is to preclude and punish such wrongs, not to preclude or punish unequal possession or socioeconomic status per se. That requires a constitutionally limited government devoted to protecting individual rights, including property rights, not the opposite, more common type observed today, which variously violates rights, extends special favors, and applies the law (or taxes) unequally.
Guided by the principle of justice as desert, “fair share” in taxation requires that no person, group, or firm be singled out for punishment or favors, for higher tax rates or subsidies, based on differential economic prowess, earnings, or possessions. Whether what’s taxed is income, sales, or wealth, the fairness test is satisfied when a single, uniform tax rate is applied equally to all; in contrast, a graduated tax code that imposes ever-higher rates the more one makes, spends, or owns — penalizing the richer because they are richer — fails the fairness test; it is punitive (unjust) taxation; it presumes guilt, not innocence; it assumes that great wealth is stolen, not produced. In fact, vast concentrations of wealth usually reflect vast and sustained success — necessarily by “big business” — in supplying and satisfying millions of customers.
The current U.S. federal income tax schedule isn’t uniform when it comes to rates. For example, the tax rate is only 12 percent for those making between $9,525 and $38,700 per year but 24 percent for those making between $82,500 and $157,500 and 37 percent for those making more than $500,000. There’s no good reason in ethics, logic, or economics why some people should pay two or three times the rate others pay; the graduated tax-rate schedule violates not only the precepts of fundamental fairness but also the equal-protection clause in the U.S. Constitution.
Of course, were all U.S. citizens in all income brackets subject to the same tax rate, the richer would still pay more in total taxes than would the less rich or poor. If the uniform rate was 20 percent, those earning $10,000 a year, $100,000 a year, and $1,000,000 a year would pay, respectively, $2,000, $20,000, and $200,000 per year. Those with 10 times the income of others would pay 10 times the total taxes, no more or less. It would be unjust to pay more or less than what’s proportionate. It’s also perfectly plausible that the richer should pay more in taxes not because of their greater “ability to pay” but because they depend more on legitimate government services (law and order, courts, military defense, private-property protection).
The unfair graduation in U.S. income tax rates isn’t mitigated in other parts of the tax code. The rich as much as the non-rich also pay sales taxes, estate taxes, property taxes, and taxes for Social Security and Medicare. Considering all federal taxes, the rich in America unfairly pay far more than their fair share, which implies that the real inequity that now requires a remedy is the fact that most non-rich Americans pay far less than their fair share of taxes.
The nearby exhibit shows that in 2015 the top 1 percent of income earners in America, representing 16 percent of total income, paid 27 percent of all federal taxes; if they had paid their “fair share,” they’d have paid only 16 percent of all taxes. They were forced to overpay by 11 percentage points. Similarly, those in the 81st to 99th percentiles of income earners, representing 37 percent of total income, paid 43 percent of all federal taxes; if they had paid their fair share, they’d have paid only 37 percent of all taxes, so they too overpaid (by 6 percentage points). Taken together, the top quintile of earners, representing 53 percent of total income, paid 70 percent of all federal taxes, or 17 percentage points above their fair share.
In contrast, the fourth quintile of earners paid only 17 percent of taxes despite earning 20 percent of all income (an underpayment of three percentage points); worse still, the lower three quintiles (representing 60 percent of all income earners) paid only 13 percent of all federal taxes in 2015, even while comprising 27 percent of all income. It’s patently unfair when more than half of income-earning Americans pay less than half of their fair share of federal taxes. Yet few elected officials care to rectify it. In unlimited democracies unconcerned with rights, a majority can easily freeload on a minority.
There’s nothing moral or “progressive” about a graduated tax schedule. It stunts economic progress by penalizing those who most contribute to it. It also defies the scientific progress made in economics in recent centuries, demonstrating that wealth is created, not stolen, and mainly by brains, not brawn. It’s no coincidence that the second plank in Marx and Engels’ Communist Manifesto (1848) demanded “a heavy progressive or graduated income tax.” The demand was understandable perhaps, to the extent it was based on the false “labor theory of value,” which presumed that only manual labor created surplus value, while skilled, mental, and managerial labor were parasitical and larcenous. The Marxian-socialist scheme of graduated taxation, although common to this day, is no less false than the income theory it rests upon.
Surely, most economists should know better by now — that skilled, mental, and managerial labor is far more productive than is manual or menial labor. Not even the income obtained by investing is “unearned,” despite unjust tax-code jargon. Creativity, capital, corporations, and concentrations of wealth are indispensable to productivity, profits, and prosperity. But is this acknowledged today? Our “modern,” “progressive” tax code reflects not science or progress but a pre-scientific (zero sum) view of the origins (and inequality) of income and wealth. Yes, the size, scope, power, and spending of government should be reduced, but economists also should identify ways to make government financing, at any level, less punitive and more just.
Made available by the American Institute for Economic Research. Visit their website at https://www.aier.org.