PROGRESSIVE TAXATION
In Theory
These are the most common type of taxes on income because they appeal to politicians and low income people alike. It only seems fair. Those who earn the most must pay the most. Politicians maximize their income and with it their vote purchasing capability. Low income people receive the maximum benefit taxation can provide and politicians allow. This is reality; however, it is not all the reality there is. In the economy, there is always a price to be paid.
In Reality
The truth is that the more money is syphoned out of the economy, the lower everybody’s standards of living become; poor, rich and everybody in between. This is particularly true if we tax rich people the heaviest. We have seen the reasons for this in our lesson Those Bastards the rich people. The more “progressive” (aka socialistic) a government is, the worse its economy does. We have also seen this in the lesson Austrian Economics In Pictures. This is a direct consequence of “progressive” taxation. This type of taxation is the most destructive of them all. The decrease of standards of living is so staggering that the benefits low income people receive are negligible (i.e. ridiculously low) when compared with the benefits an un-taxed economy would provide.
Almost all economic theories (with one notable exception: the Austrian School) have no opinion as to who should bear the burden of progressive taxation or in what proportion. They indicate that it depends on “income inequality”, taxpayers’ responses (i.e. tax evasion) and somewhat of alternative taxation systems (i.e. odd taxes).
The main issue, “income inequality” was dealt with; in the lesson Don’t talk to us about society. Taxpayers’ responses were dealt with, in the lesson The Sweet Spot Of Taxation. With regards to alternative taxation systems, they are so rare that we won’t even bother. In the end, there isn’t a single reason that still holds. However, Austrian Economics does provide guidance as to how the distribution should be: we should all share the burden and the burden should be exactly ZERO. In this manner, we all benefit.
As the world stands today, we have two choices summarized by these two examples:
- A billionaire has bought an island in the Caribbean. You, on the other hand, cannot afford to pay your rent. However, we are all OK (according to politicians) because the taxation system is “progressive”.
- A billionaire has bought three islands in the Caribbean and a private submarine. You, on the other hand, just bought your first apartment. Neither you nor the billionaire are paying any taxes, but they are all better off for it!
Which choice do you prefer?
We are also told that taxes should be proportional to income or property values. Taxes are somehow supposed to be related to how the market operates and therefore be fair. At least this is how some politicians and economists try to justify them. The more expensive something is the more you have to pay for it. However, pricing in the market is not proportional to income. In other words, Queen Elizabeth of England and I pay the same 3 pounds for a cup of coffee. In their backwards world, the Queen would have pay 10,000 pounds for her cup of coffee because of her stratospheric income! Of course, most modern politicians and their economic and image advisors (spin doctors) have stopped used such a silly argument. They have dropped all pretenses of justification and they are contempt with simply imposing taxes on us. So much for fairness and rationality!
Lastly, we have the issue of inflation. Most taxes are not corrected for inflation and, when they are, they are so in jumps. This behavior is understandable because politicians try very hard to avoid upsetting voters. Each time a tax goes up, they lose votes; remember that a correction for inflation rises all taxes for poor and rich alike. So, they wait until the very last moment before increasing taxes. Although this delay benefits poor and rich alike, there is a crucial difference. Typically, rich people are closer to the government, many of them having direct contracts with it. This means that they are not only benefiting from poor’s people taxes (since they are being paid from them) but they are also among the first ones to receive newly printed money. With this money, they can buy goods and services at current prices. Once this money makes its way through the economy, it will be worth far less. By the time poor people receive it, inflation will be higher and they won’t have the same purchasing power. Rich people will pay taxes with high valued money after they bought what they needed at current prices. Poor people, on the other hand, will have to do with devalued money; it not being sufficient to buy what they need. This means that poor people will be hit harder by tax increases than rich people.
And you thought that “progressive” meant progress! You sucker!
Note: please see the Glossary if you are unfamiliar with certain words.
Continue to Taxes And Myths - Part 3
