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Justifying Progressive Tax Rates

On March 10, 2011, in Uncategorized, by admin

The Atlantic’s website carries a blog by a conservative/libertarian who writes very well on a wide variety of topics, and who sometimes covers economic issues with great insight. Of course, I’m talking about Andrew Sullivan. (What, you didn’t think… of course not. Don’t be ridiculous.)

A smart writer – even one you don’t always agree with – also has smart readers. (Of course, the flip side is that a clueless writer who gets the facts wrong all the time also has clueless readers who get the facts wrong all the time.) Here’s a bit of a letter one of Sullivan’s readers readers sent him, reproduced on Sullivan’s blog:

I’m a bit late with this, but I wanted to respond to your post yesterday in which you wrote:

“To many on the right, this inequality is a non-issue, and in an abstract sense, I agree. Penalizing people for their success does not help the less successful.”

Let’s look at this issue another way: A homeowner who owns a $1 million home will pay more for insurance than will the owner of a $200,000 home. The insurer is not penalizing the first homeowner for his success. The first homeowner simply has more to lose and therefore pays more. If you believe the core function of government is to provide a stable environment (physical, financial, legal, social) in which society can flourish, the wealthy have more to lose from government’s absence. Penalizing the successful wouldn’t help anyone. Underwriting the successful costs money.

Later in the post, Sullivan goes on to inadvertently disrespect Hauser’s Law. Sullivan’s blog is not an “econ blog” but I think it has better economic insights than a lot of blogs that are, even if I often disagree with his politics.

15 Responses to “Justifying Progressive Tax Rates”

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  5. [...] Justifying Progressive Tax RatesCross posted at the Presimetrics blog. [...]

  6. Kaleberg says:

    What you really want is a wealth tax. Most people hold assets in terms of government protected land, shares and debt of government chartered collectives, government back securities, government issued currency and the like. Those things require courts, armies, police forces, registries and so on. I suppose the government could put a cap on how much wealth it would protect for an individual, perhaps only the first few million, after which you have no recourse if your property is stolen or destroyed. Unfortunately, we went for an income tax rather tha a wealth tax, but high incomes are highly correlated with great wealth, and even more so lately. A flat tax ignores this. A progressive tax takes this into account. That’s why economic growth is higher when peak rates are highest. You can’t hide wealth from taxation by keeping it idle as easily.

  7. Kaleberg says:

    What you really want is a wealth tax. Most people hold assets in terms of government protected land, shares and debt of government chartered collectives, government back securities, government issued currency and the like. Those things require courts, armies, police forces, registries and so on. I suppose the government could put a cap on how much wealth it would protect for an individual, perhaps only the first few million, after which you have no recourse if your property is stolen or destroyed. Unfortunately, we went for an income tax rather tha a wealth tax, but high incomes are highly correlated with great wealth, and even more so lately. A flat tax ignores this. A progressive tax takes this into account. That’s why economic growth is higher when peak rates are highest. You can’t hide wealth from taxation by keeping it idle as easily.

  8. Lee Moore says:

    Whether or not progressive taxation is a good idea, the insurance example is a poor justification for it. The $1 million homeowner will indeed pay more than the $200,000 homeowner – roughly five times as much in fact. The insurance analogy justifies a flat rate tax, not a progressive tax. But humans are not houses and on the diminishing returns theory, someone with an income of $500,000 a year will not value whatever protections the government might offer for his life, health and property at twenty times the corresponding value assessed by someone with an income of $25,000 a year. Perhaps Warren Buffet enjoys his life three times as much as I do mine (though I greatly doubt it) but he certainly doesn’t value it at tens of thousands of times the value I put on mine. The insurance analogy leads inexorably to the conclusion that tax rates should be regressive, so if you favor progressive taxation it would be advisable to think up a different analogy.

    • Mike Kimel says:

      Lee Moore,

      Perhaps the commenter at Sullivan’s needed an added sentence, or I should have added on in as I was thinking it was missing that sentence but I assumed others would see it too. What I think it needs is this:

      the $1 million dollar homeowner pays a greater proportion of his income in homeowner’s insurance than the $200,000 homeowner, who in turn pays a greater percentage of his income in homeowner’s insurance than the guy who is renting an apartment in East LA. Of course, that breaks down when you’re talking homes worth a certain amount ($10 million at up?) as at that point less and less of a person’s income goes to their home.

  9. Lee Moore says:

    Whether or not progressive taxation is a good idea, the insurance example is a poor justification for it. The $1 million homeowner will indeed pay more than the $200,000 homeowner – roughly five times as much in fact. The insurance analogy justifies a flat rate tax, not a progressive tax. But humans are not houses and on the diminishing returns theory, someone with an income of $500,000 a year will not value whatever protections the government might offer for his life, health and property at twenty times the corresponding value assessed by someone with an income of $25,000 a year. Perhaps Warren Buffet enjoys his life three times as much as I do mine (though I greatly doubt it) but he certainly doesn’t value it at tens of thousands of times the value I put on mine. The insurance analogy leads inexorably to the conclusion that tax rates should be regressive, so if you favor progressive taxation it would be advisable to think up a different analogy.

    • Mike Kimel says:

      Lee Moore,

      Perhaps the commenter at Sullivan’s needed an added sentence, or I should have added on in as I was thinking it was missing that sentence but I assumed others would see it too. What I think it needs is this:

      the $1 million dollar homeowner pays a greater proportion of his income in homeowner’s insurance than the $200,000 homeowner, who in turn pays a greater percentage of his income in homeowner’s insurance than the guy who is renting an apartment in East LA. Of course, that breaks down when you’re talking homes worth a certain amount ($10 million at up?) as at that point less and less of a person’s income goes to their home.

  10. [...] Them is the Enemy How the US Press Corps Lost Its Way Closing the Talent Gap. (about teacher pay) Justifying Progressive Tax Rates (the first paragraph will make you [...]

  11. [...] Them is the Enemy How the US Press Corps Lost Its Way Closing the Talent Gap. (about teacher pay) Justifying Progressive Tax Rates (the first paragraph will make you [...]

  12. Lee Moore says:

    Hi Mike

    I’m not an expert in how the % of income spent on housing changes as you go up the income scale. My amateur assumption would have been that it falls with increasing income, mostly because the % of income spent on everything falls with increasing income – rich people save more than poor people. (I assume that housing insurance costs are pretty much proportional to housing cost.) So I doubt you’re right about there being a bulge in the % of income spent on housing in the $200,000 to $1 million property range. As a mere anecdote, I know lots of rich people who live in fairly cheap houses. Also I don’t think introducing renters into the equation adds much. Their homeowner’s insurance costs are concealed within their rent.

    Generally I don’t think seeking justifications for progressive taxation from analogies with market transactions, whether spending on houses or anything else, is going to fly. Market transactions just aren’t progressively priced. If anything they’re regressively priced. You may pay for more per unit for better or fancier goods or services, but you don’t pay more per unit for more of the same units. Generally you pay less – discounts for bulk etc.

    I think if you’re seeking a moral justification for progressive taxation from the world of economics you’d do better exploring the point I mentioned before about diminishing returns from additional income. Just as Warren Buffet won’t value the government’s protection against thieves of his 20,356,422,901st dollar as highly as I value its protection against thieves of my 124,674th dollar, he won’t suffer as much if the government confiscates his 20,356,422,901st dollar as I will suffer if the government confiscates my 124,674th dollar. You may be able to construct an “equality of tax pain” function from a progressive tax system.

  13. Lee Moore says:

    Hi Mike

    I’m not an expert in how the % of income spent on housing changes as you go up the income scale. My amateur assumption would have been that it falls with increasing income, mostly because the % of income spent on everything falls with increasing income – rich people save more than poor people. (I assume that housing insurance costs are pretty much proportional to housing cost.) So I doubt you’re right about there being a bulge in the % of income spent on housing in the $200,000 to $1 million property range. As a mere anecdote, I know lots of rich people who live in fairly cheap houses. Also I don’t think introducing renters into the equation adds much. Their homeowner’s insurance costs are concealed within their rent.

    Generally I don’t think seeking justifications for progressive taxation from analogies with market transactions, whether spending on houses or anything else, is going to fly. Market transactions just aren’t progressively priced. If anything they’re regressively priced. You may pay for more per unit for better or fancier goods or services, but you don’t pay more per unit for more of the same units. Generally you pay less – discounts for bulk etc.

    I think if you’re seeking a moral justification for progressive taxation from the world of economics you’d do better exploring the point I mentioned before about diminishing returns from additional income. Just as Warren Buffet won’t value the government’s protection against thieves of his 20,356,422,901st dollar as highly as I value its protection against thieves of my 124,674th dollar, he won’t suffer as much if the government confiscates his 20,356,422,901st dollar as I will suffer if the government confiscates my 124,674th dollar. You may be able to construct an “equality of tax pain” function from a progressive tax system.

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