An economic argument for the fairness of a progressive tax system

[CTLawGuy]

Conservatives might say it is unfair to tax the rich at a greater percentage than a poor person, that it is only a means to "punish" a person for being "successful".

However, if you think about this, a progressive tax system is perfectly fair:

the decreasing utility value of money


utility is a measure for the degree of happiness or benefit something of value gives you.

It is true that the more you have of something, the less utility value each additional unit carries. This is called "diminishing returns". For example, you like chocolate ice cream, and you enter into an ice cream cone eating contest. After eating one cone, you gain a certain amount of satisfaction. After eating your second, you gain satisfaction, but it is less than the original. Once you've devoured the third, you're starting to get sick of eating ice cream. You barely choke down the fourth, and refuse the fifth because you just don't want to eat any more chocolate ice cream.

This principle is also true with money. The richer you become (the more dollars you have), the less utility value each extra dollar has.

For example, if a person making 30,000 dollars a year gets a 3000 dollar raise, it will mean a significant increase in the person's standard of living (total utility). They might be able to put money down for a new car to replace their old clunker, or take a trip to Hawaii, or move into a better appartement, eat at fancier restaurants. This is a 10% increase in income, but because the person has relatively few dollars, the utility increase is very high.

Now take a person making 3 million dollars a year. Suddenly they get a 300,000 dollar raise (that's 10% of their income, the same as the poor person). The utility difference between 3 million and 3.3 million is not significant. At 3 million dollars, the rich person is probably living in the most luxurious house they desire to, they probably eat at the finest restaurants available already. They most likely have a lot of their income ivested, put to the purpose of making even more money. An extra 300k a year is not going to mean much to their standard of living.

Now, if you tax each person at a rate of 10% (lets assume both their salaries have reverted to the original 30k and 3 mil) the poorer person will bear a higher utility burden from this tax than the rich person, because the poorer person's marginal dollar carries more value than the rich person's. Therefore the flat tax rate of 10% is unfair.

If we want to maximize society's standard of living, we need not to equalize the percentage of income people pay in taxes, but rather to try to equalize the utility burden borne by each income bracket. this means charging the rich a greater percentage of their income, and probably charging the poorer person less of a percentage.

[AP]

1. That's exactly right. Not only that, it only makes sense that people

who reap the biggest rewards from society should be willing to pay a little more into the pot to perpetuate the system that is rewarding them so grandly.

[K-W]

2. Everyone should have to sacrifice equally.

You are absolutely right. There was a time when working class people would be all over this argument, but everything is so twisted now.

[Stinky The Clown]

3. How about what I call a Progressive Flat Tax

Now please understand ... I can't even keep my check book balanced, okay, so you're not listening to a math major or an economist here ....... okay?

It seems to me we can have a fair tax *and* a flat tax. The difference is, the progressive variety would involve a sliding rate based on income. Following is an example. The break points and percentages are just for example. I have **no** idea what the right numbers and percentages are, but in the end, the revenue goals for the government should total *more* than it now does, by eliminating a lot of the loopholes on the top earners. And since corporations are treated as persons, the very same rules would apply (unless there are reasons such as some incentives, like job creation, alternate fuel research, etc. that benefits the common good). But even if corporations get incentives, they still have a minimum tax ... maybe half what they would have paid.

$0 - $50K - no tax at all ... none
$50K - $100K - 3% tax plus allow the mortgage deduction, medical deduction and tuition deduction
$100K - $200K - 4% tax plus allow for mortgage and medical deductions
$200K - $500K - 6% tax plus mortgage deduction
$500K - $1M - 8% tax with no deductions
over $1M - 10% tax
over $5M - 12% tax

Again, take this as a concept, not a thought out proposal.

This seems to me to be fair, very progressive, and with sufficient latitude to allow the government to incentivise good corporate citizenship, but with a minimum tax to disallow unfounded tax games to be too, too detrimental and allow corporations and high earners to wind up paying no tax.

The percentages would be determined by looking at history and basing the percentages loosely on what an *average* person in a given tax bracket would have deducted in the past, apart for the specific deductions shown.

All in all, I see this as fair, easy to understand, likely less burdensome on low income levels and maybe even to allow a reduction in the IRS bureaucracy.

[Nile]

4. Progressive Flat Tax is not that kind of like Jumbo Shrimp?

:crazy:

[hfojvt]

5. your tax there is neither flat nor progressive

and also a huge tax cut for people like Teresa Kerry who currently pays at a 19% rate.
I still say that a high tax rate is a disincentive for theft. Michael Eisner made $400+ million in one year. I consider that he stole that from his workers and his shareholders. You will never convince me that he EARNED $12.90 per second (!!!!%#@*) of that year.
Would he have stolen that money if he had to pay a marginal tax rate of 70%?
Look at CEO salaries before and after the Reagan tax cuts.
Consider that his salary is $100 million and he thinks about stealing another $300 million. He is not stupid, he knows that will mean another $210 million in Federal taxes, and another $30 million in state taxes. Why bother if he only gets to keep $60 million of the $300 million?
Now that the company has another $300 million it does not have to use temp labor, or cut employee health benefits, or raid their pension fund.

[Blue Wally]

7. No

"and also a huge tax cut for people like Teresa Kerry who currently pays at a 19% rate."

Top rate is currently around 35%.

[tx_dem41]

8. Why bother if he ONLY gets to keep 60 million???

You need to ask this? You are buying into the conservative line that progressive tax rates are disincentives.

[Stinky The Clown]

9. First, it seems that after deductions, no matter the published rate

the wealthy pay far less under our current system. Some, if they have a good accountant, pay nothing.

Second, I said very clearly I have no idea what the rates ought to be. Pick a rate ... whatever. 12% .... 19% ...... 91% .... just pick a rate. As I said, the goal is to *increase* revenue to the US on the backs of the top earners (corporate and personal).

The point was the concept ....... the top earners have to **actually pay taxes* .... publish a rate and the *must* pay it. No deductions. None. No loopholes. None.

[Blue Wally]

6. Not enough money to run the government

In your proposal. When the tax was really "progressive" the top rate was 91% on all income over 250K-350K a year.

The problem with those kinds of top rates are that over a certain "price point" people just quit trying to make more.

[ProfessorGAC]

10. This Has Always Been The Argument

From the beginning of the notion of a progressive tax system the argument has been essentially what you posit, here.

It was correct then, and it's correct now.
The Professor