Progressives are increasingly preoccupied with income inequality, and their current hero, Sen. Bernie Sanders (I-Vt.), favors increasing the tax system's progressivity. So, in this 103rd year of the income tax, it is timely to note that there still is no intellectually sturdy case for progressive taxation.
Arguments for it are invariably arguments for increased equality of social outcomes. Because individuals have different vocational desires and different aptitudes for adding value to the economy, inequality is inevitable. Because individuals have different social sensibilities, opinions will differ about what degrees of inequality are intolerably unlovely (more about this aesthetic metric in a moment). But inequality, even when unlovely to some, is unjust only when it arises from unjust social arrangements. So, the degree to which inequality is morally troubling depends on the degree to which the process that allocates wealth does so according to political influence and rent-seeking rather than merit and self-reliance.
Society should prevent extreme privation, no matter how far the top earners are from those near the bottom. But who is to decide, and how are they to decide, the ideal spread between the top and the bottom of income distribution? The argument for progressive taxation must demonstrate this: Such taxation does not do more harm by slowing economic growth than faster economic growth would do good by its distributive effects.
Although the argument for progressive taxation usually begins with a moral judgment about social conditions, it usually becomes a moral assertion about equitable sacrifices. It asserts that money has declining marginal utility that $1,000 subtracted from a wealthy person's income diminishes that person's happiness, or society's sum of happiness, less than would $1,000 subtracted from the income of a person with a modest income.
But this ostensibly scientific, meaning empirical, generalization about how people value money often conceals moral judgments about how people ought to value money, or again, an essentially aesthetic judgment about the "social value" of expenditures by the wealthy and the non-wealthy. When these moral judgments are codified in tax policy, they conflict with this idea: "It is one of the virtues of a free society that, within the widest limits, men are free to maximize their satisfactions according to their own hierarchy of preferences."
So wrote two University of Chicago law professors, Walter J. Blum and Harry Kalven Jr., in a famous 1952 essay, "The Uneasy Case for Progressive Taxation." Their understanding of a free society is shared by many conservatives, including many Republican presidential aspirants, who favor a "flat" or proportionate income tax: If taxpayer A earns 20 times more than taxpayer B earns, taxpayer A pays 20 times more dollars.
Proportionate taxation always is what progressive taxation never is: simple. What justifies progressive taxation, and characterizes progressivism, is confidence that at any moment in society's endless evolution, what is equitable can be known and society can be fine-tuned to achieve it. Which is how we got our baroque tax code.
As Blum and Kalven noted, "It is the very nature of majority rule that the majority can vote distinctive burdens for the minority." It is, however, the nature of reality that burdens imposed on the wealthy minority can injure the majority by impairing economic incentives, thereby suppressing growth. Progressive taxation reduces the rewards of investments and the real rate of return on savings, thereby encouraging consumption over saving and hence over capital formation. When progressive taxation slows economic growth, it makes inequalities of wealth more durable by retarding the accumulation of new fortunes. And by encouraging constant tinkering with the tax code to perfect equity, progressive taxation gives a patina of altruism to rent-seeking by economic factions, whereby government enriches those sophisticated at manipulating it.
Because other arguments produce only "uneasy" cases for progressive taxation, this is the argument of last resort: All striving occurs in, and all success is conditioned by, a social context. Each individual's achievement, like each individual, is derivative of society, which is entitled to socialize conscript whatever portion of each individual's acquisition that society calculates is its rightful share. Because collective choices (provision of education, infrastructure and other public goods) facilitate individuals' strivings, the collectivity, represented by government, can take as much of created wealth as it decides it made possible. Being judge and jury in its own case, government will generously estimate its contributions and entitlements.
The arguments for progressive taxation range from the feeble to the sinister. The case for it is not uneasy; it is nonexistent.