John Locke Update / Research Brief

Tax Progressivity: First Do No Harm

posted on in Economic Growth & Development, Economics & Environment, Spending & Taxes
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A progressive tax system is based on the premise that it is a moral imperative for government to tax people at increasingly higher rates as their incomes go up.  The approach of the self-described social justice advocates is to claim moral superiority in calling for increases in taxes on higher income earners, as opposed to lower tax rates for lower income individuals, and to make the tax system more progressive, which is synonymous with fairness. Note that the tax rate structure can be made more progressive by lowering the bottom rates as opposed to raising the top rates, but this is rarely if ever advocated. Their fixation of top rates suggests that the goal of these “social justice” elites is to penalize those with higher incomes, rather than help those on the bottom rung of the economic ladder. Until around 2012, this was the moral compass that was used to guide tax policy in North Carolina.

In 2013, North Carolina’s Republican majority, along with its newly elected Republican governor, rejected the “punish the rich” notion of social justice, which seeks to use the tax code for purposes of income redistribution. It repealed the then-existing progressive rate structure, which had the highest top rate in the region, and put in place a proportional or flat rate tax, a system that applies a single rate to all taxpayers. The flat tax is also rooted in a theory of social justice, one that is much more consistent with the notion of social justice that this country was founded on, namely that everyone should be treated equally under the law. These changes set the flat rate below the rate that had previously existed for the lowest income taxpayers, meaning that everyone’s rate was reduced. Subsequent reductions in the single rate have, consistent with this more appropriate concept of justice, also been applied to all taxpayers. But despite (or maybe because of) this fact, the state’s progressives have been, almost universally, opposed to these changes. They typically charge that the rate for top income earners is too low.

Given the philosophical roots of their approach to taxation, namely that it should not only be used to raise necessary revenues for the government but to redistribute income from higher to lower income earners, it is understandable the social justice warriors would oppose any changes that do not accomplish this, even though people at the lowest income levels end up paying less in income tax. For them, there is no moral value in allowing people, no matter how poor or rich, to keep more of what they earn. Social justice, from this perspective, has nothing to do with the right to keep and use as you wish, the fruits of your labor.

While Republicans in the state legislature have jettisoned the leftist approach to social justice in designing the structure of marginal tax rates, they have not completely rejected the idea of building progressivity into the tax system. Their approach has been, since 2013, both philosophically and economically on more solid ground than the left-wing view of progressivity, which is, in fact, rooted in Marxist economics. The Republican’s approach has been to continuously grow the standard deduction (what is sometimes called the zero tax bracket). The larger the standard deduction, the more progressive the average or effective tax rate becomes. (For a detailed explanation of how this works, see John Locke Foundation Spotlight “Progressivity and the Flat Tax.”) Since 2013, while continuously reducing the single tax rate from 5.8 percent to 5.49 percent with the proposed 2017-2019 budget reducing it to 5.25 percent (low-income taxpayers were paying 6 percent prior to 2013), the General Assembly has increased the standard deduction from $6,000 (prior to 2013) to $15,000 to $17,500 in 2016. In the budget currently under consideration, the standard deduction would go up again to $20,000 beginning in January of 2019.

First, from a philosophical perspective, this approach applies the correct concept of social justice, namely that all taxpayers are treated equally under the law. The standard deduction is available to all taxpayers regardless of income.

But from an economics perspective, it adheres to what doctors call the Hippocratic oath—“first do no harm.” The leftist view of progressivity is not only immoral from a social justice perspective, in that it discriminates against taxpayers simply based on how successful they are as a worker or entrepreneur, it also does damage to the economy. In particular, it reduces economic growth and therefore wealth and job creation. It does this by punishing, and therefore discouraging, all kinds of income earning activities. To tax anything is to discourage it and to tax incomes at increasingly higher rates is to discourage income earning and therefore growth creating activities. Oddly enough, a slower growing economy is itself regressive in that it tends to hurt people at the bottom end of the economic ladder more than the wealthy.

While, from an economics perspective, the approach to progressivity taken by the Republicans is unlikely to have a growth-enhancing impact on the economy, it will, at least, do no harm. With the personal exemption of $20,000, all earnings starting at $1 above that amount will be taxed at the same flat rate. And, If progressivity is going to be a political goal for Republicans, the path that they have taken and continue to take is the only one that is consistent with both social justice, properly construed, and economic growth.

 

Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He also holds the title of Lecturer at… ...

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