Conservatives have two central tenets in their tax reform agenda. The first is to simplify the tax code by eliminating tax expenditures – government spending through the tax code – that come in the form of deductions and exemptions. The second is to move from a progressive income tax to a flat income or consumption tax. But conservative politicians often conflate these goals, suggesting that "simple" and "flat" are one in the same. Tax expenditures are what complicates the tax code, not progressive rates. While we should aim to eliminate expenditures, especially those that benefit those who are relatively well off, progressive tax rates are justified economically and morally for these reasons:
Efficiency. What is the optimal amount of public goods and services the government should provide? If the government creates a rule that says everyone must pay an equal share of their income, revenue will be restricted to the rate that the lowest earning workers can afford to pay.
Consider the case of a married couple with drastically different earnings. One spouse earns $40,000 per year, while the other earns $400,000 a year. If the couple goes Dutch, they will restrict their shared consumption. However, if the couple adopts a rule that the higher earning spouse pays more, then they can enjoy a higher level of shared consumption. This means they will consume a better house, better car, and better lifestyle.
Happiness. Advocates of progressive taxation often say “Rich people can afford to pay more.” What they really mean is that $100 means more to a person making $5,000 a year than it does to a person making $500,000 a year. This means that allowing poor people to keep a larger share of their income will result in a happier society than making everyone pay the same rate.
Justice. If people deserved most of their income, there would be a good case that they should be able to keep it. However, people don’t morally deserve their income because almost everyone’s income results largely from factors beyond their control. For example, the poorest Americans are richer in absolute terms than the richest Indians. This isn’t because Americans are that much more hardworking than Indians, but because Americans have access to a superb set of institutions and a grand scale of specialization and trade within our borders.
The knowledge and technology we have that allows us to be rich is the result of a multi-millennia human project and social cooperation. Other factors — such as our genes, parents’ income, our order of birth, year of birth, and even month of birth — have enormous impact on our future earnings.
Because people don’t morally deserve their income, it means that society can fairly ask the wealthy to pay more. Doing so allows us to produce more public goods and services that benefit everyone, while creating a more happy and just society than if we asked everyone to pay the same. But, we still need to be concerned about incentives. We don’t want to make rates so progressive or so high that they make it unattractive for people to be productive. Fortunately, this is an empirical question, and all the evidence suggests that the wealthiest among us are doing quite well, and their lot is improving.
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