Progressive taxation, continued

Let's explore some arguments against progressive taxation.

One of the arguments against progressive taxation is that when taxes increase on the wealthy, and in particular, on businesses, job growth is stifled.

Bunk.

Jonathan Weisman of the Washington Post explored this issue in 2004. You can read a copy of his article here. What the article makes clear is that while Republican economists continue to insist that higher marginal tax rates stifle job growth and create unemployment, historical analysis proves that claim to be false. The best claim on this issue made by Republicans, (expressed in the article by Eric Engen, a Republican economist), is that higher marginal tax rates would stifle job growth "if you could hold everything else constant."

Pesky reality. You can't hold everything else constant. And some of those things that are not constant impact how a progressive tax policy, with higher marginal rates, impact employment and the economy as a whole.

When the government takes in more tax revenues, it can use those revenues to do things that fuel the economy and create jobs.

• It can reduce the national debt, thus reducing the amount of our annual budget we pay to service the debt. This means that long term, the government has even more revenues to utilize.
  
• It can stimulate job growth by funding things like infrastructure projects. Someone has to be hired to build roads, bridges, etc. When the government isn't paying for road construction....people that work in road construction are unemployed, or displacing people in other industries.
• It can stimulate economic demand by reducing the tax rates on the majority of the population. This provides them with additional disposable income, which they tend to use to purchase non-essential goods and services, that they otherwise could not afford and therefore would not buy. Again, someone has to be employed to make those lattes and televisions and knickknacks. In turn, the baristas and television engineers, etc., have money to go out and spend on meals out and new cars. Then the chefs and servers and car salespeople can go out and buy books and sneakers, etc. And the best part is that their employers are benefiting too. If a restaurant can serve 200 customers a night, the owner of that small business stands to make more money, even if their taxes are higher. If there is no one who has the money to go out to eat, tax rates could be 0 and that restaurant owner would still go out of business.
  
• It can provide a social safety net that also serves to stimulate the economy. As an example, let's look at the issue of subsidizing low income housing. A person who cannot afford housing on their own lives on the street. He or she is unlikely to be able to maintain employment. He or she contributes no money into the economy in the form or rent or a mortgage payment, thus, no profits for a landlord/mortgage holder. If the government subsidizes the cost of housing so that the person can afford a place to live, they provide profit to the landlord/mortgage holder. They are more likely to be able to maintain employment, and thus, pay taxes. They are more likely to be able to send their children to school, which in the short term creates teaching jobs, and in the long term, produces a contributing member to society.

In addition, a reality check on jobs is needed. Let's take the example of the restaurant. If a restaurant doing brisk business needs a total of 50 employees, that is how many will be hired. If the restaurant owner has the 50 employees they need, a decrease in marginal tax rates will not induce them to hire any more employees just because they have higher profits. They will only hire the number they need.

The restaurant owner is also not going to base decisions on whether to expand (by opening another location, for example) based on tax rates alone. If the economy cannot support expansion (i.e., there is not a suitable location, or there aren't enough potential customers, or the market is over saturated with that product/service) then the owner will not expand. If the economy can support expansion, the owner will expand.

Another argument is that progressive taxes decrease savings rates. However, this too is not borne out by historical analysis. Our savings rate in 2006 was the lowest in 73 years (yes, that's since 1933). Yet, marginal tax rates were decreased in 2001 and 2003. How could this be? Again, it's a matter of the "all other things remaining constant," i.e., pesky reality. The combination of deregulation of the markets and the consumption bubble fueled by deceptively cheap credit served to create an environment of negative savings, even in the midst of lower marginal tax rates.

Another argument is that progressive taxes lower the incentive to work and gain wealth. Again, I cry bunk. When higher marginal tax rates existed under Clinton, the wealthy did not suddenly say "Oh, forget it. I'm not investing anything." They enjoyed the prosperity fueled by the stock market just like everyone else. When we all do better, we all do better. The wealthiest 5% fared better under Clinton than Bush. So did the rest of the country. If that's the result of the wealthy having no incentive to work and invest, well, that's fine with me.

The final argument I will address is that the rich pay more in taxes, as a percentage of total tax revenues, than the middle class or the poor.

Well, yes. Under a progressive tax system, that's kind of the point.

But is it fair?

Well, the top 20% of the US owns 84% of the wealth in this country. Meanwhile, they shoulder 63.5% of the total tax burden in the country. So no, it's not fair. They should be paying more.

When Republicans make the argument that the wealthy pay more than their share in taxes, they talk about federal income taxes. Federal income taxes are the most progressive tax we have in the U.S. They conveniently forget to mention property taxes, state taxes, gas taxes, sin taxes, sales taxes, and governmental "fees." Why? Not because they don't exist. It's because those taxes are regressive, and therefore, damage their argument.

Republicans also rarely discuss another dirty little secret of the wealthy - tax avoidance through diversion of income. The wealthy have access to tax shelters (legal or illegal) that are not available to or practical for the middle class or the poor. Some examples: off shoring, complex trust agreements, and phony business transactions. Thus, the income reported by the wealthy is very often much less than they actually received. This makes it seem like the percentage of taxes they pay on their income is higher than it actually is.

Now, of course, there are limits. If the government took 100% of income in the form of taxes, sure, that would decrease job growth, and discourage innovation, and stifle the economy. Good thing that no one actually proposes that. It is reasonable to argue about what the ideal level of taxation is. It is not reasonable to suggest that every tax increase, or indeed, any tax at all, is socialist, marxist, communist, etc.