By Steve Gillman

Yesterday we looked at whether we really have a progressive tax system when taking into account the various tax loopholes, and ended on the question of whether we should have a progressive system. In other words, should the rich pay more taxes than the middle class and poor? Let’s quickly revisit the issue of loopholes, and then look at how a true flat tax could be seen as progressive.

Some would argue that taking advantage of loopholes in tax law is justified, even in the gray areas of potential tax evasion, because of over-taxation. That may be a valid argument. Of course it assumes that we are over-taxed or that some are taxed unfairly. What if we close all the loopholes to the extent possible, and then set the tax rates?

In this case, many would still argue that a flat tax is the most fair policy. After all, if the tax rate is 20% on all income, a man who makes 40,000 and pays just $8,000, while a man who makes $100 million would pay $20 million in taxes. In other words, we already pay progressively more as our income rises, even if the rate at which we pay is the same. To state it in it’s most simple form: 20% of a lot of money is more than 20% of a little bit.

On the other hand, this argument really says more about our hypnotic fascination with numbers than anything about fairness. The $20 million or $8 thousand each of the two individuals pay in the above example are not somehow “proven” fair relative to one another simply because we can somehow show an equivalence using a number. There is no actual, logical argument for the same percentage rate of taxation being fair. It just “feels” more fair to some.

One thing we can say, which gets to the most important principle involved, is that a wealthy man will generally receive much more value in government services than a poor man, and so in fairness he should pay more in taxes. To understand this, imagine if the government didn’t enforce patent and trademark law–just two of the services they provide. What would Bill Gates be worth if everyone was free to copy the technology produced by Microsoft? How much could his company make if after all the research it paid for, anyone could rip off the ideas and sell the technology cheaper?

Clearly, Gates is worth billions largely because of the government that protects his rights and his wealth. In general, the wealthy will always gain more benefit from government. When the police stop a thief from robbing a middle class home, they have saved the family thousands of dollars. When they stop the robbery of a billionaires home, they may prevent the loss of millions in artwork and other valuables. Thus, even if there were not the injustice of a bias towards the rich in law enforcement (they clearly get more attention paid to them when they need it), there is always more value in the protections they receive because there is more to protect.

This clearly points out the fairness of the wealthy paying more in taxes. We could add to these examples the obviously higher value of ports, highways and such that the wealthy receive compared to the poor–who don’t export much or transport millions in products after all. In any case, if the rich should pay their fair share, that means paying more than those who have less and make less. The answer to the question, “Should the rich pay more taxes?” is yes… but how much more?

There is no clear answer here, nor should we expect one. It is easy to say that those who get more service should pay more. It’s rational. But when we are outside the marketplace, there is no exact way to determine a fair price. A flat tax sounds like a nice compromise, but we should see it as just that. There is no inherent moral or financial logic that excludes other schemes.

For example, we could reasonably say that without a stable system provided by government most large accumulations of wealth would be impossible. Anarchy may provide a kind of freedom to those who have nothing and don’t want a peaceful ordered society, but it sure can’t provide for the honest accumulation of wealth based on one’s mental and physical efforts. In a state of anarchy, it is likely that only a few will have great wealth, and probably through dishonest and violent means. Government provides a valuable necessity if we value peace and prosperity and the protection of life and liberty.

How valuable? If we consider a man who has ten million dollars in income each year, it is a safe bet that he would have less than a tenth of that if there were no government–and more likely only a hundredth. On the basis of that, we can say that if the government took three-quarters of his income he would still be clearly better off in such a system than in anarchy. And that is just the personal economic argument. He also has his life and liberty protected.

This does not suggest that we should have such a high rate of taxation. In fact, there are good reasons to keep taxation at more reasonable levels. To start with, an economy as a whole is damaged if taxation is too high, and the poor suffer the consequences of this as well as the middle class and wealthy. In fact, it has been proven again and again that when tax rates are too high, economic activity is dampened to the point that tax revenue actually declines. Who could argue that we should have a system that makes all poorer while collecting even less money for government services? Only those who wish to punish the wealthy for their economic success–and I am not one of these people.

Choosing the actual tax rates, then, is arbitrary from the view of fairness. We could hardly make it worse for those taxed than what they would face without government. I want a police force to stop a thief from taking my paycheck, or to enforce a contract when I sell my house or buy a new one. Most people share these desires. On the other hand, there are economic and political reasons for how we tax and at what rates. My own ideas about a fair an workable system will be the subject of tomorrow’s post. In the meantime, feel free to comment below if you have your own answer to the question of should the rich pay more taxes… and how.