A Moral Justification for Progressive Taxation

I argue that we progressively use more tangible and intangible resources from the government to acquire your income, and therefore, one ought to pay taxes at a higher and higher rate if they make more and more money.

If you google “justification for progressive taxation”, you will see plenty of arguments in favour of and against progressive taxation. I have listed some of them below. While I am mixed opinion about them, I found none of them to be compelling enough to pick any side. In this blog post, I will provide a new ethical justification for progressive taxation with which I hope even libertarians will agree (ha!).  I will first explain how much taxes you should pay for tangible services from the government, and I will then elaborate on intangible services from the government. I will then argue that the exact money you owe to the government is incalculable due to the intangible services, but this lead to a conclusion that a progressive taxation system is closest to being a fair system.

The most common (utilitarian) arguments in favour of progressive taxation are as follows:

1. The rich can afford to pay more, so they should pay more. (completely disagree)
2. It spurs economic growth because the rich do not spend all the cash they make, but the poor do. (partially agree)
3. It enables social mobility. (partially agree)

The most common (libertarian) arguments against progressive taxation are as follows:

1. It unfair because everyone should bare the responsibility for providing the revenue equally. (disagree)
2. It punishes success. (partially agree and partially disagree)
3. It is income redistribution, and therefore, theft. (partially agree and partially disagree)

Why taxes? A flat tax, to be specific …

Everyone know that you pay taxes in order to provide for the services that the government. Simple! Everyone uses roads, bridges, communication networks etc. in order to earn their income. Since everyone uses them, you ought to equally pay for those service.

Why a flat tax rate?

Your income does not get deposited into your bank account out of the blue. Every dollar you earn comes from someone (you or someone else) has used the resources provided by the government. For example, the same road takes you to Walmart and Circuit City. Part of the reason for Walmart making more money than Circuit City is that more people used the road to go to Walmart rather than Circuit City. Therefore, Walmart has to pay more taxes; it used more resources from the government to make that money. Thanks to Walmart making more money, the government had to spend proportionally (assumption) more money to build and maintain the infrastructure.

Sublinear, linear, or superlinear spending: An argument for taxing consumption:

In the paragraph above, I assumed that government spending on the infrastructure to enable your income is proportional to your income. One can critically examine the claim. Because of economies of scale, one an argue that the cost to build and maintain an infrastructural setup is a sublinear function of the number of people using it, i.e., it takes less than twice as much money to build and maintained a road if it is being used by twice as many people. On the other hand, one can also argue that with a greater number of people using the roads, there are additional needs for maintaining law and order, traffic signals, etc., which do not follow necessary conditions for economies of scale to apply.  For instance, a Wall St. trader benefits immensely from the stock exchange, but a cook woking in a restaurant next door doesn’t.  Therefore, it makes more sense to tax consumption rather than income. Perhaps, we could have a system that taxes consumption alone, or we could have a system with minimal flat (or regressive, due to economies of scale) tax rate for basic resources and additional tax for consuming certain specific resources, or we can have a progressive taxation system. I believe these options do not make any major difference if the number are chosen properly. If statistics can prove me wrong, I would be glad to look at them.

Intangible services

In addition to the infrastructure and law and order maintenance for which an exact dollar amount may be calculated, government provides other services such as the protection of intellectual property rights, copyright laws, bankruptcy protection etc. Without these services, the industry in which you work would not have succeeded in making more money than others. Intellectual property rights are, perhaps, the most important factor in enabling companies to make money. If you happen in work in such industries (pharmaceutical, oil, information technology, finance, medical, mining, etc.), you make money than the rest of the population because you use such services provided by the government. The construction worker who makes less money does not need those services, and therefore, should not be held accountable to pay for them. In today’s system, if one makes a lot of money, it is almost certain that they benefitting from those intangible services way more than the rest of the population. Unfortunately, an exact  dollar amount may not be calculated for those services. This is exactly where progressive taxation system makes sense. One can argue about the exact rate of tax and how they should grow, but a progressive system is more fair than the rest.