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December 30, 2011

Who Really Earns Income? [Truman North]

In considering tax policy, the dominant school of thought in federal income taxation policy is that of a progressive tax structure—that is, those who are able to create the most wealth are subject to greater taxation than those who are unable to do so. (While income from investment and inheritance has been called “unearned” income, it is more appropriate to call this “non-labor” income. The nature of the question presumes facts not in evidence about the very concept of earning itself. Certainly and in any case, someone “earned” the income at some point.) This taxation goes to fund federal government actions authorized by the several branches and the vast and growing administrative state of the federal government, each with its own agenda and laws and regulations.


The fundamental disagreement that underlies the question of whether and how much of a progressive tax structure we impose is actually this: who do we believe creates wealth? The government, or the private individual or group? If it is the latter, then equality and liberty will necessarily prohibit both progressivity (and regressivity) of the tax code and the vast extra-Constitutional transfers of wealth such a tax code has made possible. If it is the former, then no rate or structure of taxation is off-limits; whatever the government leaves for its subjects is more than fair. As we have seen recently from the nexus of statism and academe, there are a number of power-mad pixies who believe you exist to feed the state.

In Politico, progressive activist Robert Borosage makes the case for a more progressive federal income tax and higher taxes generally by showing what those taxes would presumably buy. Specifically, he speaks of the core Democratic constituencies which would be subsidized by the president’s ~$450B American Jobs Act stimulus plan: teachers, construction workers, the working poor in general, unionized federal government employees, the long-term unemployed, and so forth. To Borosage, the alternative to subsidizing government through these expenditures is the extinction of the middle class.

His arguments are based on Keynesianism without embracing Keynes’ prescription for lowering taxes in lean years; they are rather half-baked. This is a common conceit among the tax-and-spend set on both sides of the aisle. His disdainful presumption that no private concern could possibly fund anything that government does now is clear. He conflates cause with effect, blaming lack of spending on the high poverty rate. He accuses Republicans of cutting popular social programs while praising the president for suggesting that we could save money by… cutting those same programs. His sins are of both the commission and omission variety. Although it is a shoddy piece, even by the standards of Politico and even by the standards of pop culture, it is nonetheless representative of the American left as embodied by the Democratic Party*.

Over in National Review Online, Veronique de Rugy shows in graphical form evidence that our current federal tax regime is already highly progressive. De Rugy, an economist and an adjunct scholar at the Cato Institute, also gives reasons as to why this is the case: social engineering and wealth redistribution through the tax code means that almost half of tax filers pay no federal income tax. She argues against the steepness of the current regime and the imposition of new income and capital gains taxes. Her thesis is that job creation requires that those with capital take risks and therefore employ people.

Even Marxists recognize that labor demand is a by-product of the MCM’ cycle of capital, and that less capital means fewer jobs.

De Rugy, however, also fails to tell the whole story: while federal income taxes are highly progressive, many state and local taxes (and fees) are highly regressive, hitting everyone for the same numerical value regardless of income and therefore hitting those with smaller bank accounts disproportionately hard. Therefore, proponents of a progressive federal income tax might make the argument that such a tax structure serves to normalize the relative tax burden. This argument has little gravity, however, when we consider that every cost, not just tax burdens, fall disproportionately upon the poorer. That’s what it means to be poor!

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A more centrist exposition on our current tax policy comes from reporterette Caroline May in the pages of the Daily Caller. She cites the non-partisan Tax Foundation’s research from the middle of the last decade, which finds that America has the industrialized world’s most progressive income tax—more progressive than France, Belgium, or Switzerland.

Her first argument against progressive tax regimes is one of implication: that a progressive tax regime implies a large or growing public sector; and that as a public sector continues to grow, it seeks revenues from those less-able to bear the burden. In other words, taxing the rich leads to taxing the middle class and the poor, as government power and scope expands.

Her second argument against progressive tax regimes is that they do not provide the additional revenue that they promise. Each time marginal rates are raised on people who have the facility to avoid them, they will. And some those who would otherwise generate income which would qualify them for the higher marginal rate decide instead not to create the additional taxable income at all—a loss for the private as well as the public sector.

While neither of these arguments is particularly intuitive or sexy (and in fact the first makes a veiled threat), they have the advantage of accurately describing what does happen in the real world.

Only De Rugy and May have research to back up their claims, while Borosage’s article falls apart in many respects upon cursory examination. Therefore, when considering these two points of view (with additional evidence for the position of De Rugy provided by May), there is no question that a progressive tax structure is neither fair nor desirable. However, in the realm of political debate, there are lies, damn lies, and then there are statistics. And given the clever bait-and-switch Ms. De Rugy performs to conflate federal income tax with taxation overall, there’s a possibility that her statistics fall neatly into that third category.

Furthermore, the relative palatability for various viewpoints is incumbent upon a person’s belief about the font of wealth creation: Does it reside in the public, or private sector? The answer to that question will likely determine which position is more attractive.

*However, it is not only the Democratic Party who believes that the alleviation of inequality is a legitimate goal of government. Indeed, it is pervasive conventional wisdom.

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