Is Progressive Taxation Discriminatory?

As I mentioned earlier, the next few weeks I’ll be focusing on taxes, specifically progressive taxation. Progressive taxation is where the state taxes people at different tax rates depending on their wealth or income. This is usually justified in one of three ways.

1. Consumption taxes, such as sales tax, are inherently regressive, because people with lower incomes spend a greater proportion of their income on goods and service. If we make income tax progressive, we can make the overall tax rate equal. Therefore, we should make income tax progressive. 

2. The only way we can fund useful social programs is through progressive taxation. The middle class is either too small or not rich enough to support the burden. Therefore, the rich must be taxed at a higher rate. 

3. Alternatively, a proponent of progressive income taxation can bite the bullet and say it’s all about redistribution.

In any democracy, there is the risk of the majority exploiting the minority. Hence our having a Bill of Rights and the rule of law. Now income tax as it currently is practiced violates the rule or law because it is arbitrary. Once you adopt the principle that some should pay more than others, you still must decide:

1.Who should pay more?

2. How much more should they pay?

There are principled ways you can answer the first question. For example, you could say, if your income is over the poverty line, you should pay a higher rate. Or it could be double or triple the poverty line. 

But is there really a difference between a person that’s a dollar under the poverty line and another person that’s a dollar over the poverty line? I think not. Yet we will tax them at different rates because one happens to be just a bit better off than the other.

There is almost no principled way to answer the second question. Once you say, different people can be subjected to different tax rates, you still have the problem of deciding what those rates ought to be. The only principled way to answer this question is by taxing income progressive in order to cancel out the regressive effect of consumption tax. But that’s not what happens. Often top rates, particularly during wartime, sky rocket. So how are top rates decided?

Thankfully, this last question is an historical one. In the next few days I will follow up with a post looking at income tax debates as reported in the Congressional Record and Hansard.