That’s one decent argument for why income tax should be progressive. But another argument, which I don’t hear put forth nearly as often, is that it’s inherently more fair for the overall tax structure (income tax + sales tax + property tax + whatever) to be progressive.
That is, even if it were true that everyone pays about the same percentage of their income in total taxes, that wouldn’t be fair, because the marginal utility of a dollar goes down the more dollars you have. If you’re poor, losing, say, 20% of your income might be a crushing blow, with a great affect on your quality of life. But if you’re rich, losing 20% of your income isn’t going to affect your lifestyle nearly as much.
Wouldn’t the most fair tax system be one in which the cost to everyone (in terms of total utility, or affect on their quality of life) is equal? In other words, a tax which is “flat” in terms of utility, but highly progressive in the usual “cents paid per dollar earned” sense.
Yes, but comparing the marginal utility across classes is an impossible task. It could mean one less Pacific Island for Bill Gates while a poor family has to choose between food and medicine. How do you equate those two choices to make them equally difficult?
One problem with this is it is impossible to compare utility between people. For example I have a brother in law who enjoys wine and has a bunch of bottles in a wine cabinet. I don’t like to drink wine and only use it for cooking. Therefore taxing both of us a bottle of wine would affect his utility much more than mine even though he has many more bottles of wine than I do.
Likewise, if I had 1/1000th the money Warren Buffett has you would never see me at work again. Yet he has been a millionaire for over fifty years and still goes to work every day. This seems to indicate he values money more than I do. Taxing him at a different rate than me because he has more money might still decrease his utility more than it does mine.
As for marginal utility, it can be measured by various means - but won’t be identical ever for every person in the same income class. You’d need n=1 tax tables with a lot more information behind them than we’d want to give - how important is your hookers and blow budget to you, anyway? So it is a goal we can never attain perfectly.
But there are other goals. For instance sin taxes are regressive, but might be worthwhile to promote social good. Mortgage interest deductions skew things, but might be worth it. So even if everyone were dedicated to fairness the tax code wouldn’t be perfectly fair by every metric.
I would think the goal was a workable (and working) tax system to generate operating revenue for the government, not ‘fairness’…whatever that actually means.
I would say we should base it on how much we think that amount of money is worth utility-wise to the average person if they were at that income level.
So yes, an extra dollar may mean more to person X than person Y (even if their income is the same), but in general we could try to estimate the relative value of a dollar for the average person if they were to make $30k per year, vs. the value of a dollar for the average person if they were to make $1 million per year.
I’m thinking of “The average person (across all incomes), were they given an income of X”, not “The average person who actually does happen to make an income of X.” Otherwise, for the individual with the highest yearly income, we’d be averaging over a group of 1.
Surely you agree that fairness factors in to debates on what the tax structure should look like, no? There are lots of ways to generate operating revenue for a government, and they aren’t all equally fair.
Sure, we’ll never all agree on exactly the relative value of a dollar for someone at income level X vs. income level Y, but I’d consider it progress if everyone agreed that in an idealized world this is what our tax structure would look like. Then we could debate what function to use to approximate the marginal utility of a dollar.
Right now, you have some people who complain that the rich are overtaxed, because they pay an average tax of such-and-such percent, and others who complain that the rich are undertaxed because they only pay an average tax of such-and-such percent. I’m saying without factoring in utility that both of these arguments are wrong.
In the column I linked in the OP, I doubt Marilyn Vos Savant meant “The wealthy pay a truly stunning amount of tax [based on considerations of utility]”. I suspect that what she meant was that the percentage of their income is large, compared to the percentage paid by the poor or middle class. In assessing the fairness of the tax code, I would argue that that isn’t what matters.
Fairness is a term that means different things to different people and thus is subjective. I think that a working or workable system is going to have some levels of ‘fairness’ in it, depending on how you use that term, but is always going to be more fair or less fair to some individuals. Overall, however, the bottom line, as far as I’m concerned is…does it work? Is it realistic? And are both of these factors in play for the majority of a population?
Or, to put it another way, the tax system in the US works for the majority. Most would say it’s relatively ‘fair’ for some usages of that term (the way I judge that is that both liberals and conservatives, left wingers and right wingers, rich poor and middle class constantly complain about it, but that this grumbling is pretty low key for the most part, and there really isn’t a huge movement to fundamentally change the system, simply where to set the bar to be more ‘fair’…to whoever is doing the grumbling, by and large) . Most people in the US would NOT think the tax system in many European countries are ‘fair’ (anecdotal, based on my own experiences with how much Europeans pay in taxes and on friends and relatives who have moved to Europe and been shocked by the amount of taxes they were paying…and by the fact that Europeans also bitch about what they pay). The converse is also true (based on Europeans usual response to our own taxes and tax structure). What both systems have going for them is that they work, at least for the majority of their citizens…and they bring in the needed revenue to their governments, at least usually.
I suppose I should acknowledge that the average person, if you gave them Warren Buffet’s yearly take home, might very well recklessly piss it all away and end up worse off than they started, because they have no idea how to manage that sort of money. I’m thinking of more of an “idealized” average person, like how in court cases people address questions like “would the average person have feared for their life” without (it seems to me) considering that the average person may be dumber than we all wish they were.
At any rate, I’m really saying we ought to have a tax system the intent of which is to weigh equally on every person in terms of utility or quality of life. In practice, we’d disagree on how best to achieve this, but that’s no worse than the current situation where people both disagree over what a “fairness” means in terms of taxation and how best to achieve it.
Well, perhaps, but regardless of how much of a movement there is to change it, their certainly is a fair bit of criticism of the tax code, at least by our political leaders. Some of this criticism is based on “fairness”, some of it based on “complexity” (although when someone advocates “simplifying the tax code” they almost always seems to mean “simplifying it in a way that shifts the tax burden in the direction they think is more fair.”) I am arguing that a lot of this criticism is based on a wrong-headed definition of fairness.
As ‘fairness’ is, again, subjective and going to vary widely (and wildly), you are certainly right…but the point is moot. Sure, there is a lot of criticism about the tax system, and it comes from every group and faction in the country running the entire gamut of US social and political spectrum…which is why it’s probably pretty close to as ‘fair’ as it can get. Certainly there are tweaks that can and will be made, depending on the political winds of change, but a system that can piss off both left wingers and right wingers, conservative and liberals, the poor, middle class, and upper class, but do so only mildly enough to basically annoy them but not make them actually and strenuously agitate for change? It’s probably as close to ‘fair’ as you are going to get with an actual, working system that does what it’s really supposed to, which is to being in the needed revenue to run to government and provide the services expected while having the least impact it can on the prosperity of the country it’s supposed to be service. It’s not SUPPOSED to be an instrument used to bludgeon the rich or right wrongs or be universally fair…it’s supposed
To the OP, I do agree with some detractors who say that “fair” is inherently subjective (but, of course, those detractors are probably unwilling to acknowledge just how subjective almost all things are). On that note, I also readily acknowledge that “benefit” as I use below is also subjective.
This is the only “question” that the debate appears to be framed around, so I’ll try to answer it.
Zero taxes meets your first critereon (how much utility is removed from the poor by 0 taxes? None. From the rich? None) and is probably the only one that could be calculated reasonably. By that definition, it is “more fair” than any tax system that could be practically implemented, but it is obviously not progressive. So is a progressive tax inherently more fair than any alternative? No. Of course, zero taxes is also completely unworkable and I think this demonstrates a significant failure in the drive for “fairness.”
I suspect you really want to debate whether a progressive tax should be employed, and are using a fairness argument to justify it. I’d say one doesn’t even need to use a fairness argument. It’s been demonstrated repeatedly that progressive tax systems produce a substantial long-term benefit for all people - due to simple economics and an increase in the velocity of the dollar - whereas every shift towards regressive taxes (at least in the US, I am less familiar with EU tax history) has produced negative effects for all but a small category of people.
Oh, and yes, having to take your kids out of private school is exactly equal to having them taken away by CPS due to your inability to eat. Clearly.
If a single person with no children living in California works a full time job with benefits earning $50,000 a year before tax, he pays 11.8% in federal income tax and 4.4% in state income tax. If he wants to work overtime, each additional dollar has a federal tax rate of 25% and state rate of 9.3%, without any additional benefits. It may be fair in that working overtime is optional, but more than doubling of income tax rates is not much incentive to do any extra work.
Designing an income tax system is complicated. Is it “fair” to give a deduction to home-buyers unavailable to renters? Perhaps not, but it wouldn’t be “fair” to now cancel the deduction which may be factored into existing prices and plannings.
As for whether it’s “fair” to make the rich pay a higher percentage than the middle-class, pursuing taxation as a morality play will lead only down a rabbit-hole into nonsense. Government taxes in order to raise revenue, to influence the economy via incentives, and to affect valuations. It is up to society and its policy-makers to compare the relative values of a billionaire’s caviar and a poor family’s bread. If the word “fair” enters into your argument, any conclusion you draw is worthless.
Assuming time-an-a-half for overtime, the marginal value of an hour’s work in your example is greater for the overtime than for the regular time. “Not much incentive” would thus seem to be an exaggeration.
We all serve ourselves, yet we all have to contribute e to the collective good. And if you think people are all of equal value, how in the world is it fair to ask one man to work, say, January though May for the state and another just has to work January and February? In fact, doing so penalizing someone for being smarter, more productive, etc. How in the world is that “fair”?