Thursday, September 23, 2010

Americans Want to Be More Like Sweden

A just-published study by economics and business professors from Duke and Harvard shows that Americans have little to no idea how unevenly wealth is distributed in this country. Moreover, Americans across ideological and economic spectrums, *want* there to be a more equitable distribution of wealth. When given a blind taste test using pie charts representing various divisions of wealth, more than 9 out of 10 Americans said they’d rather live in a country with a distribution of wealth like Sweden’s than live in one like the United States. Sweden: tastes great, less exploitation!

No doubt, some will claim this study is trying to foment “class warfare.” I always get a kick when I hear wealthy conservatives cry about “class warfare” anytime someone mentions that a more equitable and rational fiscal policy might be appropriate. It’s sort of like Hitler blaming Britain and France for starting World War II because they declared war on Germany, when all Germany did was merely invade Poland. Creating a system in which the wealthiest Americans are given every advantage above and beyond what their mere accumulation of resources provides is just fine and dandy, but having the temerity to point this out is “class warfare.” Priceless.

One way of creating a society more in line with what the majority of Americans across the political and economic spectrum would like would be a much more progressive tax system (something more like we had in the 1990s, or even more so in the 1950s, both times of incredible prosperity). Unfortunately, the powers that be have created a system in which a hedge fund manager pays the same functional tax rate as the sanitation worker or school teacher.

But isn’t that fair? Wouldn’t that be the answer? Have everyone taxed at the same rate? After all, that would mean that the wealthiest people *would* pay more in terms of raw dollars. It’s so equitable, so elegant, so . . . much b.s.

If the fact that the biggest proponent of instituting a flat tax rate is Steve “Moneybags” Forbes doesn’t cause you to be suspicious, consider the following points:

  • Dollars get less valuable the more of them you have. $1000 is a lot more to someone making minimum wage than it is to Steve Forbes.
  • Despite the fact that a “flat tax” gives the appearance of fairness by asking people to pay the same percentage (resulting in wealthy people paying more in raw dollars than the middle class), it is not fair because just as dollars become less valuable the more of them you have, so does any given percentage of income become less valuable as that income becomes larger.
  • Example: imagine a flat tax rate of 25%. Someone making $40,000 a year pays $10,000 in taxes. That has a huge effect on the actual life of that taxpayer. They will live in a smaller house, buy a cheaper car, take fewer trips, have far less disposable income as a percentage of what they take home, etc., than they would if they took home $40,000 per year. Now imagine someone making $400,000. They would pay $100,000 in taxes: the same rate, but the tax would have far less effect on their lifestyle. It could possibly affect the exact size of their house, whether they bought a new Mercedes or Lexus each year or every other year, etc., but one would be hard pressed to notice a tangible difference. The effect becomes still less if one imagines someone earning $4,000,000 paying $1,000,000 in taxes. And for someone like Steve Forbes, the only noticeable difference between living on gross vs. net income after paying 25% in taxes would be whether to wipe his delicate hiney with gold leaf or platinum foil toilet paper.
  • There is nothing inherently simple about a flat tax. One can have a tax system based on a flat tax rate, but still have innumerable exemptions, special clauses, and byzantine rules for figuring the income that will be taxed at that flat rate.
  • There is nothing inherently complex in a progressive tax system. One can decide to treat all income equally, get rid of all exemptions, and have a series of tax brackets for different income levels. Easy peasy.
  • The notion that a progressive tax system is both good economics and good ethics is not some crazy, wild-eyed, leftist idea. Plenty of wise, pro-capitalism folks have recognized this. To wit:
  • The ancient Athenians (the guys who invented democracy) asked the wealthiest citizens to pay additional taxes above and beyond those who were less wealthy. In particular, the wealthy were to pay extra taxes specifically to furnish Athens with triremes (the ships that protected Athenian trade throughout the Aegean) and for public festivals. The reasoning? Those who profited the most from living in a democracy owed the most to make sure it stayed free and prosperous.
  • Adam Smith (not exactly a rabid Marxist, and not just because he lived a century before Marx) said, “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion. "
  • Mitt Romney, for Chrissakes, the putative front runner for the 2012 GOP presidential nomination, himself said that a flat tax is “unfair.”

So progressive taxation is not undemocratic. It’s not anti-capitalism. Heck, it’s not even anti-Republican! And it’s a way to create a more perfect union, one that allows us to get our financial house in order, make sure all Americans are able to enjoy the benefits of living in the greatest democracy in the world’s history, yet still encourage entrepreneurship (provided that those who succeed big help with the upkeep of the system that allowed them to profit, thereby ensuring that others will have the same opportunity).

We should be taking steps to make our tax system more progressive (it’s already flat in practice). It’s the sensible thing to do.

Which is why Washington will almost certainly not do it (unless we make them).



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