Sun Jun 22nd, 2008 at 11:19:19 PM EST
I am not sure if I am allowed to add a diary to the Socratic Economics series at will, but since I have a question and it is about economics, I figured I'd throw it up there.
Some friends and I are having a debate about the moral justification for progressive taxation, as opposed to a flat tax, a consumption tax, and even no taxes.
Personally, while I understand the pragmatic arguments for progressive taxation and on balance am decidedly in favor of it, I have always felt rather ambivalent about its moral justifiability.
The strongest moral argument I find in favor of progressive taxation is that based on compound empowerment.
Though informally I had been familiar with the basic idea, I first learned the term compound empowerment in an essay, "Progressive Taxation: Some Hidden Truths", by George Lakoff and Bruce Budner of the Rockridge Institute.
Progressive taxation--taxing the wealthy at higher rates than the poor--is a moral issue. Like many moral issues, it sparks heated debate.
Consider Bill Gates. He started Microsoft as a college dropout and has become the world's richest person. Though he has undoubtedly benefited from his unusual intelligence and business acumen, he could not have created or sustained his personal wealth without the common wealth. The legal system protected Microsoft's intellectual property and contracts. The tax-supported financial infrastructure enabled him to access capital markets and trade his stock in a market in which investors have confidence. He built his company with many employees educated in public schools and universities. Tax-funded research helped develop computer science and the internet. Trade laws negotiated and enforced by the government protect his ability to sell his products abroad. These are but a few of the ways in which Mr. Gates' accumulation of wealth was empowered by the common wealth and by taxation.
As Warren Buffet famously observed, he likely couldn't have achieved his financial success had he been born in Bangladesh instead of the United States, because Bangladesh had no banking system and no stock market.
Ordinary people just drive on the highways; corporations send fleets of trucks. Ordinary people may get a bank loan for their mortgage; corporations borrow money to buy whole companies. Ordinary people rarely use the courts; most of the courts are used for corporate law and contract disputes. Corporations and their investors -- those who have accumulated enough money beyond basic needs so they can invest -- make much more use, compound use, of the empowering infrastructure provided by everybody's tax money.
Ergo, while the top 10% of the U.S. population receives 48% of the country's income, it is morally justified that they pay 69.7% of the taxes, as per this chart:
What do others here thought of this argument for progressive taxation? Does it hold up? Is it enough on its own as moral justification for progressive taxation? Or must it be combined with other arguments such as marginal utility and vertical equity to make a sufficiently strong panoply of arguments for progressive taxation?
[editor's note, by Migeru]
Socratic Economics is an occasional series of questions posed in a Socratic effort to understand economics. Previous entries:
- Socratic Economics I: Why GDP growth above all else? by Colman on June 29th, 2006
- Socratic Economics II: What is Money? by Migeru on September 28th, 2006
- Socratic Economics III: Is full employment possible? And how? by A swedish kind of death on August 31st, 2007
- Socratic Economics IV: How is inflation calculated? by A swedish kind of death on October 11th, 2007
- Socratic Economics V: Supply and Demand by Migeru on November 7th, 2007
- Socratic economics VI: all I know is I know nothing edition by kcurie on November 22nd, 2007
- Socratic Economics VII: Guaranteed Living Income by Migeru on January 8th, 2008
- Socratic Economics VIII: The Blue Screen of Death by JakeS on Friday April 11th, 2008
- Socratic Economics IX: National Accounts by Migeru on May 31st, 2008
- Socratic Economics X: Is "compound empowerment" a valid argument for progressive taxation? by marco on June 23rd, 2008
Other diaries which should have been added to the series...