• A prerequisite for a flat tax discussion

    Tom Ashbrook spent 45 minutes with Ben Carson yesterday. Jon Cohn entered the conversation briefly, which was the best part of the program.

    I generally like it when Ashbrook gives his guest room to express his or her views without debating every point. A little pushback is a good thing, though, to help draw out the best arguments, and Ashbrook usually strikes the right balance, in my view. He did not rebut Carson’s dismissal of Keynesian economics or evolution. That was probably wise. However, he seemed to want to engage on the flat tax, but came up embarrassingly short.

    TA: You’re a smart guy. I mean, isn’t it ideology either way? Isn’t a flat tax an expression of a kind of ideology as well?

    BC: I think the flat tax, proportionality, is fair. Describe to me how proportionality is not fair?

    TA: Um, I’m not here to carry the torch for what people might say. You know, if you’ve got those billions of dollars and you can afford to chip in when the country needs it —  you know a progressive tax can be understood as proportional. It depends on your ideology in assessing it.

    BC: Proportionality, if God thought it was fair, I think is fair too.  The onus is on somebody else to prove to me why God is wrong in his assessment of what is fair.

    Oh boy. At the very least one of these guys, if not God, should know what Mark Thoma explained recently.

    What is the basis for progressive taxation? One principle of taxation (there are others) is “equal marginal sacrifice,” i.e. that the last dollar in taxes paid by the rich and the poor should cause the same amount of pain.

    Thoma then quotes Miles Corak explaining a passage from Alfred Marshall’s Principles of Economics.

    In other words, losing a dollar when you already have many causes less pain than when you have only a few. Marshall’s argument is the basis for both the substance and the method of a good deal of basic micro-economics: it explains the “law of demand”—why lower prices induce people to buy more—but also why tax rates should rise with income.

    Economists judge the functioning of the tax system in a number of ways: certainly the system should not be administratively cumbersome, and it should, to the greatest degree possible, not cause individuals in a well-functioning market to change their behavior. It should also treat equals equally. Finally, the tax system should raise more revenue where it will cause the least pain. And this last concern, when coupled with Marshall’s reasoning, suggests that tax rates should be progressive: as income increases, the greater the fraction that should be paid in taxes.

    Learn this one, Tom Ashbrook.

    @afrakt

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    • Marshall never argued it and I’d hope no economist does. The diminishing marginal utility of the dollar can justify a flat tax or even a regressive tax. I’ll let Arthur Piqou explain:

      “All that the law of diminishing utility asserts is that the last ₤1 of a ₤1000 income carries less satisfaction than the last ₤1 of a ₤100 income does. From this datum it cannot be inferred that, in order to secure equal sacrifice . . . taxation must be progressive. In order to prove that the principle of equal sacrifice necessarily involves progression we should need to know that the last ₤10 of a ₤1000 income carries less satisfaction than the last ₤1 of a ₤100 income; and this the law of diminishing utility does not assert.”

      One could claim that the wealthier are less responsive to tax rates than the less wealthy. From the studies I recall, that may be true at the very high end, i.e, the 0.1%. But below that, the opposite may be true. That would justify a regressive tax.

      I’m a convert to the flat tax. I see absolutely no reason for multiple brackets. I hesitate to call it progressive because flat taxes are also progressive. A 40% flat tax with a $30K deduction would be more progressive than the current scheme.

      I do see reasons for a flat tax. Like the liberal argument in favor of universal entitlements, a universal tax universalizes sacrifices and benefits, removing class warfare from the debate entirely. As Milton Friedman said, it’s one thing if the top 10% volunteered to pay more in taxes but it’s quite another for the bottom 90% to decide that the top 10% should pay more. I don’t see it as a morality play as Friedman does, but I agree insofar as it’s a horrible social dynamic to promote.

      • Do you have a link for that Pigou quote?

          • Thanks. I asked Mark Thoma about this and he referred me to
            http://taxprof.typepad.com/taxprof_blog/files/tax_fairness.pdf and, in particular, pages 13-14. The gist, he says, is that conclusions vary by type of sacrifice (equal proportional, equal absolute, equal marginal, etc.). For the most part, but not always, progressivity is justified.

            • The marginal utility argument in my opinion is not a good justification for a progressive tax system. Suppose for a moment that the marginal utility of income is not a constant across the whole population (and that we have sure way of testing it). Arguing that everyone should be taxed so that they feel the same pinch would be to argue for different tax rates for different people on the same income level. Further, people with a higher marginal utility are likely to work more and earn higher incomes. We could have a situation in which a high-income earner would be taxed at a lower rate because the pain inflicted on him by taking even 10 of his beloved dollars away is a much greater personal distress than taking 10 of a low-income earner who does not much care about money.

              The argument for progressive tax rates has to have some social component, and trying to use classical economics to argue for progressive tax rates seems too much of a concession to today’s economic dogma.

              The reason behind a progressive tax system has to be a feeling that a flat tax rate does not do enough to address inequality in a society. This can be motivated by a value- or result-oriented ethic. The value-related ethic would be an intrinsic rejection of inequality: I don’t like it when some is stinking rich and the other dirt poor. The results-oriented ethic would look at the effect of inequality on social mobility, which (at least for the poor) is negative: I think that the poor should have a decent chance to move up the social ladder. For this also think Sen’s capability approach.

              Whatever look you take, there is a reason to argue that a flat tax rate does not suffice. But the fact is that it remains a value-based judgement (although one could do research on the mobility question – with different outcomes for different societies). There may be some people who do not like the idea of having to resort to uneconomic values, but I am quite ok with it. Even as an economist.

            • I’m OK with it too. Ben Carson needed something to take back to God. Tom Ashbrook came up short. I thought he should at least know this argument. It’s not the only one!

            • “The gist, he says, is that conclusions vary by type of sacrifice (equal proportional, equal absolute, equal marginal, etc.). For the most part, but not always, progressivity is justified.”

              Don’t you think that the moral case for a redistributive tax code is more logically coherent and compelling than a computational case derived from ad hoc assertions about the predicted subjective marginal utility that people will derive from whatever fractional increment of their income that the government takes away through taxes?

            • I don’t think the two are so easily separated. One’s morals can be founded on a belief in certain assumptions that underlie economic reasoning. Deep down, belief is belief, whether dressed up with mathematics or Latin. I do not believe I ever thought or claimed otherwise. Why do people think that equations are antiseptic?

    • G*d also said women should live in separate tents when they have their period. Try selling that to the public. However, if Ben can arrange for us to return to an agrarian culture where we are all farmers and/or shepherds, where life expectancy is 30 and health care consists of leaches and animal dung applied to wounds, I am willing to try a flat tax, though I think 10% just to pay for a bunch of priests seems kind of high.

      Steve

    • Given that Mitt Romney paid less than 15% of his income in tax, it’s quite possible that a flat tax would be more progressive than the complicated contortion we have now.

    • I find Tom Ashbrook to be very unqualified to do most of the interviews that he does. IMO he need to study some courses in economics, political science and general science etc. He needs to get a broad education.

      Of course he is not that much worse than the typical journalist. It would be better if we could listen to economists and political scientists interviewing people on public policy, Doctors interviewing people on medical care even actors and singers interviewing actors and singers. We have much more of that in sports where are our priorities?

      Our journalists are seldom skeptical enough because they have to be kiss ups to get the interviews. They usually do not know enough to even know the right questions to ask. If you do not believe me consider the success of Barbra Walters.

      If you see academics debate a subject the points are often completely different from those made on network news shows. I.E anti ACA academics don’t talk about death panels.

    • BTW I think that we would better served by a progressive consumption tax were the taxpayers are taxed on their annual spending. It would greatly simplify taxation. It would encourage saving and investment which makes us all richer.

      http://un-thought.blogspot.com/2011/10/how-is-this-for-progressive-consumption.html

      http://un-thought.blogspot.com/2013/01/another-reason-to-tax-consumption.html

    • “I don’t think the two are so easily separated. One’s morals can be founded on a belief in certain assumptions that underlie economic reasoning. Deep down, belief is belief, whether dressed up with mathematics or Latin. I do not believe I ever thought or claimed otherwise. Why do people think that equations are antiseptic?”

      Belief is belief, but not all beliefs are based on claims that are equally consistent with the soundest evidence. I think you’d agree that the less sound the evidence that ethical reasoning is based upon, the less likely it is that the conclusions derived from that reasoning are to be either true or ethically defensible. If that’s not the case, then the vaccine denialist parent who refuses all vaccines for their child is acting just as ethically as the parent who acts in accordance with the accumulated weight of ~300+ years of empirical evidence and biomedical science.

      The only thing I’m against as it pertains to this topic is attempting to transmute debatable assertions and subjective value judgments into something other than opinion by assigning them numerical magnitudes, abstracting them into variables, and grinding them through a tautological computational exercise.

      Does anyone really believe it’s possible to know in advance how much subjective utility that a given individual will derive from a given increment of income, or that such a value, if it could be determined, would be constant for a given person over time?

      I’m not attacking you here – but let’s at least be honest and admit that arguing from formalized representations of “equal marginal” vs “equal absolute” sacrifice is nothing more than starting with an ethical axiom and dressing it up in the language of mathematics and economics, as opposed to reaching an ethical conclusion on the basis of objectively true economic and mathematical axioms.

      .

    • BTW – you might enjoy reading through the comments at the Thoma link.