Taxing The Rich: A Liberal Argument For A Progressive Tax System To Grow The Economy

Conservatives will play the “class warfare” card if you dare mention a tax increase on the rich. And if you talk about income inequality, well, this means you are simply envious, and you are trying to “punish success.” But for this conservative “logic” to be rational, wouldn’t we have to consider the current progressive tax system to also be unfair? — Well, as it turns out, that is exactly what many conservatives say about progressive taxation, but it doesn’t mean their assessment is sound.

There are three big issues conflicting with the simple conservative view that taxes punish success.

1. You must ignore how tax brackets work.
2. You have to accept the premise that higher tier incomes are an absolute indicator of success and productivity.
3. You must fail to understand the decreasing utility of each dollar as you make more dollars.

So let’s tackle each of these issues first, saving a moral argument for my closing remarks.

SO HOW DO THOSE TAX BRACKETS WORK AGAIN?

There are a lot of “flat tax” proposals floating around in conservativeland, and the conservatives pitching these plans want us all to know that a flat tax is a fair tax because it treats everyone the same. “[T]hey say, it would simplify paying taxes. Baloney. Flat-tax proposals don’t eliminate popular deductions,” says former labor secretary Robert Reich. Most of the flat tax proposals are not true flat taxes because they typically have deductions, just as the current tax system does. So to the average American, that means filling out forms and filing taxes by April 15th, so nothing much would change, except the small little detail that most of these flat tax proposals reward huge windfalls to the wealthy in the form of lower taxes, usually with the tab being picked up by the poorest tax payers. But even if these flat tax proposals were true flat taxes, there is nothing fair about a poor person paying the same tax rate as a rich person, as I will explain.

“[T]hey say a flat tax is fairer than the current system because, in [Herman] Cain’s words, a flat tax ‘treats everyone the same.’ The truth is the current tax code treats everyone the same,” says Reich “It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket.”

This means everyone is treated the same for every dollar that is the same. When a middle-class worker making $40,000 a year earns his 40,000th dollar, it’s taxed at the same rate as the 40,000th dollar earned by a rich person making $4,000,000 a year. People say they are in a tax bracket, when they are more likely in multiple tax brackets. When people refer to their tax bracket, they are referring to the highest bracket for which they pay tax. But everyone pays the same amount of tax for the same amount of money earned. So I’m not exactly sure how you call this unfair, unless you have a fundamental misunderstanding of how tax brackets work, or if deception is a required component of your ideology.

And this means when conservatives decry the tens of millions of Americans who don’t pay federal income taxes, these conservatives are either uninformed, or they intend to use ignorance as means to a deceptive end. First, even if someone is not paying federal income taxes, they are still paying state and local taxes, sales tax, gas tax, and if they are so lucky, real estate taxes. Second, the reason people don’t pay federal income taxes is because they make too little.

“No one pays any income taxes on the first $20,000 or so of their income,” says Reich. Make sure that sinks in. Reich is saying that no one (and that includes the rich) pays any tax on that first $20,000 of income (give or take depending on deductions and current tax law). So the rich are getting the same benefit (if you want to call it that) the poor are getting, it’s just that the poor wind up paying no tax because their income cuts off well before that of the rich person. The poor person should be so lucky as to be able to have an income high enough to qualify for the luxury of paying federal income tax.

So you still aren’t sure how income tax brackets work?

Below is a modified tax bracket table. These are not the real brackets, but instead simplified for the purpose of this explanation.

Let’s say we have these two tax brackets:

Tax Rate - Taxable Income
.....25% - $0 to $50,000
.....30% - $50,001 to $100,000

Let’s apply a common misconception using the above table, and for the sake of simplification, let’s assume there are no deductions and your entire income is subject to federal income tax.

So let’s say your name is Bob and you make $50,000. By referring to the above tax table we can see that you are currently paying a 25% tax rate. That means you owe $12,500 in federal income taxes. Now let’s say you’ve done great work this year, so your boss is giving you a raise of $2,500. But oh no! That raise will put you in the 30% tax bracket! Your new salary is $52,500, which means at 30%, you will now owe $15,750 in federal taxes! WTF? That’s $3,250 more in taxes! That wipes out your raise and then some! Oh the humanity! God damn it, conservatives were right, we ARE being punished for success!

Well, just a second there, professor. Because that’s not how tax brackets work. In the above scenario, because the first tax bracket ends at $50,000, that means the first $50,000 in income would be taxed at 25%. Any income over that amount would then be taxed at 30%, which in this case means the $2,500 raise is taxed at 30%. That means you ACTUALLY owe $13,250, which is only $750 more. ($50,000 x .25 = $12,500) and ($2,500 x .30 = $750) So you still kept $1,750 of that $2,500 raise. You are not being punished for success, but conservatives count on this common misconception to sell economic policies that benefit only the rich.

DOES MONEY EQUAL SUCCESS?

If increasing taxes on the rich means punishing success, then it’s not unreasonable to assume conservatives equate money with success. On one level this obviously is true, that is, if you are measuring success as a dollar figure. But the problem for conservatives is when they start using “productivity” and “success” interchangeably. Remember Mitt Romney’s “47 percent” comment, or how about makers vs. takers, or the idea that there is a “productive” class and a “non-productive” class? All of these are examples of pitting so-called “productive” and “successful” people against so-called “unproductive” and “unsuccessful” people. But what is success? What is productivity? And who’s productivity is responsible for that success? Can these words be used interchangeably?

In conservativeland, money equals success, but money also equals productivity. For conservatives, it’s an oversimplified set of human capital equations. — Greater productivity leads to greater money leads to greater success. Lesser productivity leads to lesser money leads to lesser success. — Simple right? Of course, you have to ignore that it takes the combined productivity of all low and middle-income workers to produce the widget that makes the “productive” and “successful” CEO a lot of money. So to use faulty conservative logic, we could say taxing low and middle-income workers is also punishing success. Except those workers aren’t feeling so successful in our modern “trickle down” economy, tax or no tax.

WHEN YOU MAKE MORE DOLLARS, EACH DOLLAR HAS LESS RELATIVE VALUE

A dollar is a dollar, right? Well, it is true from a monetary perspective that each dollar is worth, well, a dollar. But the “utility” value of each dollar is not equal, and is entirely dependent on your income level. “Utility is a measure for the degree of happiness or benefit something of value gives you,” says CTLawGuy on DemocraticUnderground. “[T]he more you have of something, the less utility value each additional unit carries. This is called ‘diminishing returns.'”

There is a set cost of living that is the same for every person (allowing for geographical variations), regardless of whether you make $40,000 a year or $4,000,000 a year. Gas costs the same, milk costs the same, electricity costs the same, and rent costs the same. Yes, the rich person can “afford” a bigger place and therefore a bigger rent, but we are talking about basic cost of living, and that does not include luxuries such as a larger crib. But even though the basic cost of living is the same dollar amount for every person, this amount causes varying levels of “pain” depending on income level. Let’s say the basic cost of living is roughly $20,000 a year. That is 50% (half) of a $40,000 income, but it’s only 5% of a $400,000 income and only 0.5% of a $4,000,000 income. This is “the decreasing utility value of money,” says CTLawGuy. “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.”

AND THEN THERE’S THE MORAL ARGUMENT

The rich do not live in a vacuum. They are as much a product of our society and economic system as anyone else. The difference is that a rich person was able to gain an advantage in one or more areas where a poor person was not. But this was only made possible by living in a free and civil society, and that comes at a cost. A progressive tax is one of those costs. A progressive tax is one of the prices we pay for a civil society.

“A person can work extremely hard and try their best to start a business or get a good job,” says Secularist10 on Hubpages. “But if that person is illiterate and has received no formal education, and if he lives in a country with no electricity, rampant crime, and no paved roads, bridges, trains or airports, no matter how hard he works, it will be almost impossible for him to amass significant wealth.”

This is similar to the passionate speech by Elizabeth Warren when running for Senate in Massachusetts. “There is nobody in this country who got rich on their own. Nobody,” said Warren. “You built a factory out there – good for you. But I want to be clear. You moved your goods to market on roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. — You built a factory and it turned into something terrific or a great idea – God bless! Keep a hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”

The idea here is that regardless of the amount of hard work an entrepreneur puts into a start-up business, that business would not be possible in a place like Afghanistan. It is the economic and social fabric we’ve woven in the United States, and in other first-world democracies, that makes it possible to start a business, become successful, and make a lot of money.

But economic policies over the past several decades have allowed for massive inequality in both wealth and incomes. We don’t expect to have a perfectly equal society, but economic growth after the Great Recession is sluggish in part because of the reduced purchasing power of the middle class. If we keep believing a billionaire is worth every last dollar, it makes it easier to squeeze the poor and middle class, keep their wages stagnant, all to appease stockholders and line the pockets of wealthy executives. And if businesses will not step up to the plate and address the problem of inequality, and so far they have demonstrated willful ignorance, then government must do what it can for the health of the country to build a more stable economy, with a robust middle class.

Nobody is saying you can’t get rich. If you start a business and that business makes you a lot of money, I say kudos to you. But it is unacceptable for people to be out of work and starving in the wealthiest nation on the planet. And adding to that insult is the claim that we are trying to punish success or wage a class war because we propose a tax increase to ease the suffering. That there is suffering means we are not doing everything we could be doing. And yes, it will come at a cost. And I don’t know about you, but on my pain-o-meter, the cost of allowing people to starve is registering much higher than the cost of a tax increase on the rich.

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Conscience of a LiberalEconomyGovernmentPoliticsTax FairnessWealth Inequality

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