Leftist trickery on taxation

Recent political events have drawn attention to the question of what constitutes a fair system of taxation.

President Barack Obama’s “Buffett Rule” proposal for raising taxes for the highest income earners comes to mind, as does the Occupy Wall Street protesters’ demand that the “bottom 99 percent” not be fleeced by the richest 1 percent.

One of the more controversial events of this kind was Democratic Massachusetts Senate candidate Elizabeth Warren’s August campaign speech, in which she made the case for taxing top earners more heavily.

“There is nobody in this country who got rich on his own,” she said. “Nobody. You built a factory out there? Good for you.

“But I want to be clear: You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for.

“Now, look, you built a factory, and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it.

“But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”

I agree with the many Democrats, liberals and progressives who believe Warren has done a good job of explaining the leftist perspective. I disagree, however, with all of the important things she said and, thus, with her conclusion.

Warren makes three major mistakes in her reasoning. The most important mistake comes near the end of her remarks, when she refers to “the underlying social contract.”

In reality, none of us has seen or read, let alone signed, any such contract, even though it is a commonly used metaphor for the responsibilities people try to impose on others in democratic societies.

While this may seem like a very technical point, it is significant because it means the door is open for people like Warren to decide what the contract says or what it should say whenever they look at the country’s situation and don’t like it.

The above relates to Warren’s second major mistake. She tries to pretend all of the federal spending she wants the rich to pay for is essential for transportation, education and police and fire protection, even when that could not be further from the truth.

She conveniently neglects to mention that most of those services are financed at the local and state level and hopes her audience won’t pick up on this multi-trillion-dollar sleight of hand.

Warren’s third major mistake has to do with her implication that the federal income tax system has not been sufficiently progressive in recent years.

We can’t technically say she is wrong about whether the system is progressive enough because we don’t all agree on the values system with which we should evaluate it. But we can say she is wrong to believe that the system has been growing less progressive.

That is because the top marginal tax rate — which was reduced during George W.  Bush’s presidency — is not a relevant measure of progressivity. The reason is that the rich often pay less in taxes when marginal rates are higher because they find ways of generating more income abroad. They then frequently bring more of their income to the U.S. when marginal rates are lower.

A more relevant measure was calculated by Michael D. Stroup of the National Center for Policy Analysis in 2008. He points out that “every major tax bill (since 1993) — both Republican and Democrat — has increased the progressivity of the federal income tax system.”

Stroup’s metric is the Tax Progressivity Index, which calculates the ratio of various income groups’ share of income earned to the share of taxes they pay. It shows that while high-income earners have continued to earn an ever-larger share of the total income, their share of taxes paid has increased more rapidly.

While some may have been dazzled by Warren’s argument, I remain unconvinced.
If she wants us to believe that anyone should be taxed more to fund unsustainable expenditures, such as bloated entitlement systems and unconstitutional wars, she’s going to have to do better than this.

­— jarlower@indiana.edu