Liberal Tax Justice
Charles M. Blow, of the New York Times, had an interesting set of tweets about tax justice over the weekend. The tweets provide helpful anchors for discussing the ins and outs of theories of tax justice. So that's what I will do here.
Blow objects to tax rates over 50%, not because he thinks they hurt growth or something like that, but because he thinks they are unfair in and of themselves. This flies in the face of the more conventional liberal view on tax justice, which states that the entire enterprise of measuring tax justice by looking at tax rates is incoherent. That case is very persuasive and worth discussing in some detail.
A person's disposable income is determined by the following formula:
Factor Income + Transfer Income - Taxes
Factor Income refers to labor income (wages and salaries) and capital income (interest, rents, dividends, and capital gains). Transfer Income refers to social income, such as old-age pension, disability pension, and food stamps. Taxes refers to taxes paid.
Tax rates are typically defined as: Taxes / Factor Income. According to Blow, when tax rates so defined reach higher than 50%, that is some injustice.
The problem with that view is that it assumes Factor Income is some special thing that is deeply yours divorced from government policymaking. But this is simply not true. Each person's Factor Income is just as much a function of our publicly-imposed economic institutions as their Taxes and Transfer Income are. For it is government that creates and enforces things like property law, contract law, corporate law, bankruptcy law, securities laws, labor laws, employment laws, and every other economic institution that determines how Factor Income is distributed in the first place. Because the distribution of Factor Income is usually a result of government policy, it is an odd thing to fixate on as the baseline for determining whether another government policy, taxes, are just.
It's clear from Blow's tweets that his hesitation on taxation is driven by desertist intuitions that say people are owed the income that they "earn," which is to say that they are owed what they "produce" through their labor. Strangely Blow doesn't take this all the way to its logical libertarian conclusion and say all taxes are unfair theft of people's labor, but that's nonetheless the intuition he appears to be operating off of.
The problem is that an individual's Factor Income is not any sort of indicator of what they "earned" through their "productive labor" or whatever. For one thing, capital income (which is around 30% of the nation's factor income) is totally unearned and is actually called "unearned" or "passive" income for this reason. Capital income is income you receive because of what you own not what you produce. Additionally, the great majority of the national income each year is attributable to breakthroughs in knowledge and technology that nobody alive had anything to do with. In what sense does anyone "earn" the large portion of their income that is owing to advances in engineering, electricity, and computers that were made by people long since dead? Because of their egos, rich people like to believe that their high factor incomes are totally self-made, but the reality is that they didn't build that.
For these and other reasons, dividing Taxes by Factor Income to determine how much tax justice there is in the world is silly and also inherently arbitrary. Why is a 50% tax rate the great dividing line? Why not 49%? Why not 51%? Is tax justice simply a function of our mental cravings for the symmetry of half-and-half?
Instead of playing the tax rate game favored by Blow, what makes more sense is to say that you cannot define tax fairness in isolation, but that you must look instead at the relationship of the tax system to the overall economy. Taxes are but one institution among hundreds of economic institutions that collectively determine how income is distributed in society, not its own special thing deserving of its own special considerations. If you believe in equality, as liberals often claim to, then a just tax system is one that, in concert with other economic institutions, helps to create a fairly equal distribution of disposable income. In societies where the distribution of Factor Income is extremely unequal, like the US, "tax justice" may very well require high tax rates in excess of 50%. And that's fine.
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