Aside fromt eh fact that I think utilitarian and ability to pay arguments are "fairness’ arguments. I would throw in Rawlsian original position arguments, which seem to lean towards progressive taxation
It really doesn’t. Any effect of the home mortgage deduction would have been pretty much instant. The deduction simply boosts the price of homes, and has, in theory at least, been priced into the market yonks ago.
How so? How would a Rawlsian view argue for a system that is progressive as far as a percent paid more than a system that is progressive on a dollar basis, i.e. a flat tax? In both systems, the rich pay more. The only question is do we adhere to a straight-line relationship or one that is curved. Why does a Rawlsian view argue more for the latter?
A lot of people buy homes not understanding that though, and believe they are getting economic benefit from the deduction - so whether its true in an economic sense or not, it does influence behavior. How often have you heard “I can’t pay off my mortgage, I wouldn’t get the tax deduction!”?
That’s actually true though - paying off your mortgage may well be irrational in a purely economic sense. It certainly is for me, as long as I have any other debt to pay (maybe not student loan, because the rates on that are so low).
But all it does is increase the price of a house. It’s great for people who already owned and neutral for everyone else. I agree it has a (minimal) effect on confidence, but its main effect is altering the amount of mortgage a person can pay. If the average person can afford, say, a $1,500 a month mortgage, and mortgage tax relief is abolished, that same average person can now afford, say, a $1,200 a month mortgage. The house that was previously selling for a price which would require a $1,500 a month mortgage will now sell for a price requiring $1,200 a month. No real change, except for the current owners, who wills ee their equity fall.
Of course, abolishing it would result in somewhat of a redistribution of income, as people pay different levels of income tax.
Because, with the Rawlsian argument, the only real justification for unequal distribution of resources is if that inequality promotes the welfare of the worst off in society.
In a zero sum game, the rawlsian solution tends to be to divide resources equally.
If you have one cake and two kids, you let one of them cut the cake and the other one pick which piece he wants and the kid doing the cutting tries to cut the cake as close to equally as possible. Well the same dynamic occurs if the pieces of cake are assigned randomly.
To the extent that inequality fosters incentives to increase the size of the cake, the Rawlsian view only sees this as a positive if in the process of increasing the size of the cake, everybody’s piece gets at least a little bit larger.
Its called the difference principle.
This principle argues for more than mere proportional taxation, I suppose you could get to the same place by having a higher flat tax and giving out benefits in a progressive manner but in the end the government is an instrument in redistributing resources in a progressive manner, by taxing progressively, resources progressively or both.
And the justification for Rawls’ Difference Principle, is that it would be the rule that a group of people would accept if they were to form a society without knowing ahead of time their place in that society. The value of economic growth is accepted as is inequality, but all moves away from equal distributions of income have to benefit the least well-off member, even if only a little. (The other principle involves “…an equal right to the most extensive scheme of equal basic liberties compatible with a similar scheme of liberties for others.” )
Killer argument against the flat tax: the remainder of the tax system is regressive. Sales taxes and social security taxes hit the poor, middle and upper middle classes harder than the rich. So if we want the entire tax system to be proportional, we will need a progressive income tax, in practice. Of course, there may be radical overhauls of the tax system that bypass this – my point is that just tacking on a flat income tax produces a situation where the middle class will pay a higher proportion of taxes on their income than the rich.
A business in Noerhtern Ireland pays UK taxes at UK rates which are uniformly higher than US rates. Half of all US corporations pay zero income tax. Exxon and Google paid nothing in tax last year.
And all these wealthy people who just pack up and leave the country – how come all the wealthy people who still live in America don’t all move to Alabama? After all, it’s got a great climate and is full of lovely people. Why do they continue to live in high-tax enclaves on the coasts? Maybe tax rates aren’t the only determining factor in where they live?