October 9, 2011

Liberal words "regressive tax" are flawed

Did the game Monopoly get it right?
Liberals' circular thinking drives me nuts some times. They get stuck on a talking point and cannot see the inherent flaw in their argument.  CNN's State of the Union hostess Candy Crowley argued with Herman Cain this morning about his 9/9/9 tax plan being regressive.  Liberals love the words regressive tax to be applied to anything other than the most punitive 'progressive' tax that skews the country towards socialism.  Just what is a regressive tax, and why was Crowley 180 degrees wrong in comment?

This is key because it is so wrong, but it is so commonplace.

According to Wikipedia definition,
Regressive taxes tend to reduce the tax incidence of people with higher ability-to-pay, as they shift the incidence disproportionately to those with lower ability-to-pay. The opposite of a regressive tax is a progressive tax, where the marginal tax rate increases as the amount subject to taxation increases. In between is a flat or proportional tax, where the tax rate is fixed as the amount subject to taxation increases.
Crowley has accused Cain's 9/9/9 - clearly a flat tax as being regressive. Regressive sounds terrible and it's used as a pejorative against anyone who wants anything other than the rich being taxed more than everyone else. In other words, everything other than a progressive tax will eventually be labeled regressive. Read further in Wikipedia's definition;
The term is frequently applied in reference to fixed taxes, where every person has to pay the same amount of money. The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. In other words, if the activity being taxed is more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax may be considered regressive. To determine whether a tax is regressive, the income-elasticity of the good being taxed as well as the income-substitution effect must be considered.
The elasticity and substitution points ares important but I'll leave those for another time.  Let me focus on the point Crowley made. She used an example of her buying a dress and a multi-millionaire buying the same dress and both paying the same (9%) sales tax on that dress.  If the dress were $100 they would both be paying the same $9 in taxes. That is flat, it is not regressive.  But she means it in the liberal song book way where a flat tax is also considered regressive.

Let me explain how she sees it (and she does believe it as her emphatic nature of her question to Cain clearly showed).  If she makes say $10,000 per year (a ridiculous assertion to be sure, but for explanatory purposes let's leave it) and the multi-millionaire makes $10 million per year, then the impact on their respective budgets of buying that dress would be different.  The $9 in tax would represent 0.09% of her annual income spent on taxes.  For the rich person it would represent 0.00009% of their income, clearly a much smaller burden and therefore the tax is regressive.

But there are a few flaws with that line of thinking.  First, and most obviously, looking at the dress in isolation is faulty because it is part of a bigger picture.  The rich person isn't going to buy one dress.  She's probably going to buy 50 dresses because she can afford to do so.  So her actual tax burden is $9 times 50 or $450.  She's paying more taxes but doing so at the same rate.  This also applies to her buying more expensive food, golf club memberships, loads of shoes and a yacht.

If we assume that both the wealthy person and the poorer person spend 50% of their income on purchases of any kind, then we have the poorer person, Crowley in this case, will have spent $5000 and been taxed at 9%, or have paid $450 in taxes for the year.  The rich person would have spent $5 million and paid $450,000 in taxes - that's hardly regressive! In order to pay less taxes the rich person would have had to have spent less than the poor person.  We all know that wouldn't happen.  But at the macro scale, the tax is still flat - both are paying to the government the same proportion of what they make.

In this example it was a sales tax, but the same is true if it were an income tax - the only difference is that both the rich person and the poor person would pay more because they were paying it on their income and not on what they spent.

Another flaw with the regressive taxation argument is that it applies to the purchase of that dress as well.  The dress represents 1% of the income of poor Crowley and only 0.001% of that rich woman.  Why, the very sale of the dress itself is regressive.  The shame:  Capitalist regressive pricing!  Shouldn't the store be forced to charge Crowley less for the dress than the rich woman?  That would make not only the government progressive but the rest of the economy too! Of course, that makes perfect sense - to a liberal.  And you know someone, somewhere has that in the back of their mind as the penultimate goal of progressivism.  It is absurd, but it is existential.

One last quick point.  The other way of looking at the equation is to say if both the rich and poor dress purchasers have a limit to their overall disposable spend pattern - say a hard cap of $5,000 per year on a basket of goods based on the fact that it only takes $5000 to live.  In that case the rich person has to do something else with her money.  While I'd like to suggest she buys CNN to throw Crowley off the air, she's likely to invest it into something that produced more wealth for her.  In order to do so she must create wealth which means she must add value to existing material or conditions or circumstances.  That requires labor.  Since she's rich and lazy, she's not going to do it herself, she's going to hire people to build a factory and to work in that factor to produce something with that excess $9,995,000 plus taxes that she didn't spend on food and shelter and that dress.  That means more people working, making more money, and paying more taxes.  That helps unemployment and the government deficit - provided America is a good place to invest in production - meaning competitive taxation and business friendly economy.  Otherwise that incremental labor benefit and indeed the benefit of all that capital likely go oversees.  Punish the rich and they go elsewhere - make the environment friendly to them and you have a win-win situation.

There you have it - progressive taxation is a fraud.  Regressive taxation isn't what it is being portrayed as, and flat taxes are indeed fair.  The real argument should not be over taxing the rich more, it should be over taxing everyone equally and finding a manageable taxation rate that works for everyone.

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