Sunday, August 21, 2011

Want a Broader Tax Base? Reduce Income Inequality

The current tax orthodoxy amongst congressional Republicans has been simple: no more taxes, period. But some Republican presidential contenders realize that's unsustainable. And they've finally hit on a tax increase they can support: raising taxes on the bottom 50% of American workers. The language is "broadening the tax base", and the argument is that these are Americans who pay no income tax at all (though of course they pay other taxes, such as social security and sales taxes), because their incomes fall below the minimum required to trigger tax liability.

Libertarian blogger Radley Balko* concurs with those who find it worrisome that half the country pays nothing in income taxes. The problem, as he sees it, is that "an increasingly small percentage of earners fund the government, we’ll soon have a majority of people who pay no tax voting for more and more government services they benefit from, but don’t have to pay for." The reason we want to broaden the tax base is to ensure that everybody (or at least as many people as is feasible) have "skin in the game", that is, have an incentive to care about governmental expenditures.

The concern is legitimate, but it doesn't necessarily take us where Balko thinks it does. Let's put aside for the moment the fact that just because a majority of Americans don't pay income taxes doesn't actually mean that majority controls policy (both because of apportionment issues, and also because of structural concerns which disproportionately reduce the influence the bottom 50% have in political institutions). And also put aside the fact that taxation is not the only way that one can have "skin in the game" -- poorer Americans are more likely to be dependent on governmental services for the provision of basic needs, and thus have every reason to care about the efficacy of such services (Balko's main concern is less effected by this, because his primary worry is that government will do more, not that it will do what it does poorly -- though he suspects it will).

That fifty percent of Americans don't pay income tax is not because our tax code is set up to say "the poorest half of Americans pay nothing". Rather, the income tax system simply decrees that people who make below a certain threshold pay nothing income taxes, presumably because we feel that taking money away from people who earn that little represents too much of a hardship. And, as income inequality continues to skyrocket, the number of people who fall below that demarcation is now hovering around 50%.

But if we started seeing rising wages and earnings amongst the working class, that number would drop as more Americans earn enough to join the ranks of taxpayers. In other words, to the extent conservatives are really concerned that as many people as possible have "skin in the game", the current income tax structure in turn gives conservatives an incentive to care about an issue important to liberals: income inequality. One can broaden the tax base by taking more away from the already-poor. But it seems the better option is to broaden the income tax base by broadening the income base -- rendering fewer people poor in the first place.

And aside from the fact that this is simply more humane -- there is a threshold level of income below which we don't think a family is earning enough to support itself to a standard commensurate with our status as the greatest country in the world -- I think the incentive question cuts in its favor as well. I already explained above that the poor already have lots of incentives to care about how government works, and, regardless, it's far cheaper to incentivize them to act anyway. By contrast, there are very few notable points of leverage society has on the rich to get them to care about the living standards of the poor. To the extent that they are genuinely concerned over an emergent democratic majority which pays no taxes (to be honest, I'm dubious that they're actually that concerned), that's a very rare opportunity to make a trade.

* I want to say that, while obviously I strongly disagree with Balko on issues such as this, I have a lot of respect for him as a libertarian who actually puts his money where his mouth is -- he devotes as much if not more attention to aspects of governmental power which harm the poor and marginalized as he does to decrying regulations which hurt primarily the rich and powerful. His work on police brutality and the death penalty, in particular, has been stellar and admirable.

1 comment:

PG said...

Did you miss this GOP talking point 9 years ago? It was generally shorthanded as "lucky duckies" because of the WSJ oped.