Smarter progressive taxation
Aug. 17th, 2011 07:47 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
pktechgirlbackupI am broadly in favor of a progressive tax system, by which I mean people with more money paying more money, not just in absolute numbers but as a percentage. This sentence deliberately vague, because progressive by what measure is surprisingly hard to define. Not only is progressive taxation the right thing morally, it's the only thing practically. I do, however, have some problems with the income tax system we currently have.
First, it punishes income volatility. Logically, it shouldn't matter whether you get paid on 12/31 or 1/1, but if you do really well one year and really poorly on the other, the date that check clears matters, because you'll pay a higher rate on it if you receive that income in the good year (in the extreme, it could be a third of the check, more if it's subject to FICA, more still if there's state or local taxes). This has a number of negative features:
Second, it requires collecting a lot of information. As a libertarian, I find this downright unsettling. But it also presents a lot of practical problems. It's not too bad if you're working strictly W2 jobs and maybe have some interest income, but if you freelance, or own your own business, or work in several states, it's a paperwork nightmare. The time it takes to manage this is not free, it comes at the expense of productive activity (as does the time it takes to audit it). And it's an additional discouragement for entrepreneurship.
My third point is not a criticism of the income tax but is a criticism of some of its proponents. When discussing progressive taxation I would like to propose the following rules:
Many European countries use a VAT (similar to a sales tax), but that is, depending on how you count, neutral or regressive, and definitely not progressive. I have two potential solutions, both of which have their own problems.
1. All property tax, all the time.
Pros: Property ownership is already public, and easy to track. It's not perfectly progressive but will ultimately hit people with wealth and income harder than people without. Hard to cheat at, except for property valuation games.
Cons: determining current value of property is a nightmare, not sure why I'm fine with property taxes but dislike wealth taxes.
2. Progressive consumption tax
Imagine if the second 10k you spent had a higher sales tax than the first 10, and third 10k even more so. It's as if everything you didn't spend went into a 401k.
Pros: Progressive. Doesn't discourage work, investment, or entrepreneurship.
Cons: easy way to do it still involves giving government creepy amount of information. Hard way involves lots of paperwork and leaves openings for cheating, although not necessarily more than those already available for income and sales tax.
First, it punishes income volatility. Logically, it shouldn't matter whether you get paid on 12/31 or 1/1, but if you do really well one year and really poorly on the other, the date that check clears matters, because you'll pay a higher rate on it if you receive that income in the good year (in the extreme, it could be a third of the check, more if it's subject to FICA, more still if there's state or local taxes). This has a number of negative features:
- Higher income levels are more variable and pro-cyclic, meaning the government loses revenue when it needs it most.
- it discourages entrepreneurship. Let's say there's a 50% chance a new business I'm considering starting will do awesome, and a 50% chance it fails. Let's further pretend I have a gainfully employed spouse or abundant savings, so each dollar is worth exactly the same to me. In a frictionless world I should start this business if the rewards of it going awesome are double those of my next best alternative (if X is the rewards of my day job, E[own business] > 2*x*.5). But that's only true if they're taxed at the same rate. If we have a progressive structure, the risky option needs to have that much more upside.
- To steal terminology from Chris Rock, this extracts money from the rich but leaves the truly wealthy unscathed, because they have enough money to spend some of it smoothing out their income. I do not believe there is any way around this: money buys you flexibility.
- By the same token, it punishes new wealth more than old. If all of your relatives are in a position to loan you money if you have a truly catastrophic emergency, you can get away with a smaller emergency fund, and put more of your money into forms that are tax-advantaged but liquidity-disadvantaged (and the same goes for your relatives).
Second, it requires collecting a lot of information. As a libertarian, I find this downright unsettling. But it also presents a lot of practical problems. It's not too bad if you're working strictly W2 jobs and maybe have some interest income, but if you freelance, or own your own business, or work in several states, it's a paperwork nightmare. The time it takes to manage this is not free, it comes at the expense of productive activity (as does the time it takes to audit it). And it's an additional discouragement for entrepreneurship.
My third point is not a criticism of the income tax but is a criticism of some of its proponents. When discussing progressive taxation I would like to propose the following rules:
- You may not justify increasing the income tax by talking about what percentage of wealth the most wealthy have.
- You may not justify increasing the income tax by talking about what percentage of pre-tax income the highest earners have unless you also specify what percentage of the income tax they pay and what you think the ideal percentage is. Especially since there's a reasonable story and some evidence that progressive taxation and a strong safety net increase pre-tax income disparity.
Many European countries use a VAT (similar to a sales tax), but that is, depending on how you count, neutral or regressive, and definitely not progressive. I have two potential solutions, both of which have their own problems.
1. All property tax, all the time.
Pros: Property ownership is already public, and easy to track. It's not perfectly progressive but will ultimately hit people with wealth and income harder than people without. Hard to cheat at, except for property valuation games.
Cons: determining current value of property is a nightmare, not sure why I'm fine with property taxes but dislike wealth taxes.
2. Progressive consumption tax
Imagine if the second 10k you spent had a higher sales tax than the first 10, and third 10k even more so. It's as if everything you didn't spend went into a 401k.
Pros: Progressive. Doesn't discourage work, investment, or entrepreneurship.
Cons: easy way to do it still involves giving government creepy amount of information. Hard way involves lots of paperwork and leaves openings for cheating, although not necessarily more than those already available for income and sales tax.
