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Thursday, March 24, 2011

The Fairness of Progressive Taxation

Chris Dillow defends progressive taxation:

The fairness of 50p, by Chris Dillow: Over in the twitterverse, a Very British Dude has asked whether I think it reasonable to confiscate by force more than half of someone’s marginal earnings. ... I’d suggest three possible answers here, which vary in force depending upon the precise type of the rich:
1. A high tax is a dividend, paid to the state in return for its investment in the things that made you rich.
Even if the state did not educate you, the chances are that it educated your colleagues and customers, whose education benefits you. The state has provided the domestic peace that has enabled the economy to grow and thus give you the chance to get rich; very few of the UK’s top earners would be so rich had they been born in sub-Saharan Africa. It has provided laws - such as patents and copyright protection - that allow artists and entrepreneurs to profit from their efforts and talent. And in various ways the state helps to sustain capitalism and hence profits and high earnings.
Why shouldn’t it demand payment for such benefits?
2. The state’s force is a form of countervailing power. Some (many?) of the rich owe their fortune to the fact that they are powerful. Most egregiously, this power consists of an ability to extract cash from the state. When the government taxes bankers or the bosses of BAe, Serco or Capita, it is merely getting its money back.
 In other cases, high earnings come from a power to extract rents from either shareholders or workers... In these cases, state power corrects for private power.
3. Inequality is a form of market failing. Imagine we were all behind  a veil of ignorance, not knowing what talents we’d be born with. Isn’t it plausible that, behind such a veil, people would agree to enter into insurance contracts such that if they got lucky or talented they would pay out to the unlucky and untalented? People would, surely, agree to pay out a proportion of the £1m-plus a year they would earn as Premiership footballers in order to soften the misery of being born with no marketable skills.
You can therefore regard redistributive taxation as, in effect, the sort of insurance payments that would be made, if such contracts were  feasible. In this sense, the tax merely fills in for the missing market.
These arguments do not get us to a precise tax rate. But they do suggest a case for some degree of progressivity in the taxes.
And let’s be clear. A 50p tax is not massively progressive. Overall revenues are equal to just over 37% of GDP. Under a purely proportionate tax system, then, we would all pay 37% of our income. ... Expecting a tiny proportion to pay 50% (yes, for some the marginal rate is 62%, but the average rate is lower than this) strikes me as not wholly unreasonable.

    Posted by on Thursday, March 24, 2011 at 10:08 AM in Economics, Equity, Income Distribution, Taxes | Permalink  Comments (154)


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