Saturday, April 11, 2009

What's Progressive About it?

The comments on my last post about progressive taxation suggest that I should have made myself a lot clearer about what was I proposing -- and spelled out what other options there are. In brief, I suggested we return to a graduated set of tax rates that levy a higher proportion of income from those who earn more and a lesser share from those who earn less.

This is "progressive" in a very simple, mechanical way: the rates progressively get higher, according to income. This has been the basic framework of U.S. taxation of income since the Supreme Court declared such levies constitutional in 1913.

Taxes became ever more progressive and leaned ever heavier on the upper income strata from Presidents Franklin Roosevelt to Carter, then reversed under Reagan and under the second Bush -- both of whom cut the upper tax rates sizably (to benefit the wealthy), as I mentioned in my post.

There have also been "regressive" forms of taxation. The most common one is the sales tax: everybody who buys X pays a certain percentage of the price. This is regressive because it ignores the disparity in ability to pay. Rich people buying X pay a smaller proportion of their income in sales taxes, while poor people pay a higher proportion -- so even both pay the same amount of money, it hurts richer consumers less than it hurts poorer one.

In the 1996 and 2000 presidential elections, Steve Forbes proposed a modified version of the "flat tax," a levy of 17% on all personal and corporate earned income above $33,000. This is the sales tax principle applied to income.

Like sales tax, it is regressive -- otherwise you can bet your sweet patooties that Forbes, now publisher of the eponymous business magazine, would not have proposed it. This would have meant that folks paying the lowest tax rate at the time, 15%, would have experienced a tax increase, while those paying at the highest rate, then 39.6%, would have had their taxes cut by more than half!

And it would have bankrupt the government faster than you can say "George W. Bush" or "Ronald Reagan." Guess who wins there? Those who have big incomes and don't need anything from government, except the occasional war on which to make profits.

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