FISCAL FITNESS: Should the rich pay more?

Major tax reform is rapidly gaining momentum. According to Business Week magazine, "The campaign has struck such a populist chord that a massive restructuring of the tax laws seems inevitable."

The tax reform debate is bound to be heated and contentious. Deciding who should pay and how much taxes is one of the most basic of all public policy issues. It is also a topic fraught with dilemmas.

Should the wealthy pay more taxes than others? Most people would say yes, but how much more? And one question rarely even considered, Why should they pay more?

Another way of looking at the issue is to ask, "How much should each of us pay for government?" In a market economy, everyone is charged essentially the same price for the same item. Such a system is almost universally considered fair and generates relatively few ethical arguments.

The amount we pay for most goods and services is in proportion to how much we use. With most items it's a matter of quid pro quo, this for that. There's a close connection between benefits received and price paid.

When we cannot rely on simple exchange, we find ourselves in a bind. There are significant problems inherent in every other known alternative.

The way we pay for most government services isn't nearly as elegant as ordinary exchange. Even though most citizens receive roughly the same benefit from government activities, the amount of taxes paid varies widely from person to person. (Gasoline taxes are one exception, since we pay in proportion to how much we use the roads and highways.)

When paying for government services, different people are charged different prices. In contrast, when you ask about the price of a new car, the salesman doesn't ask, "What is your income?" The price of any given car is not adjusted according to the buyer's income.

If all prices were adjusted according to the buyer's income, income differences would be effectively cancelled out. Making more money wouldn't do you any good because the price you paid for everything would just go up proportionately.

One major gap in the tax burden debate is this: In seeking a meaningful answer to the question to who should pay how much tax, shouldn't we consider how a person acquired the money he has?

In our economy, most people acquire their incomes by producing goods and services. The act of earning the money results from your making a contribution to society. What you produce adds to society's well being.

Bill Gates, the founder of Microsoft Corp., is reportedly worth $10 billion. He has, however, improved the efficiency of the economy several times more than $10 billion. His accomplishments are just the most dramatic example of what most of the other participants in the economy do day in and day out.

Of course, people do not become wealthy in isolation. Gates would not be a billionaire if he operated within an underdeveloped country. Is his paying higher taxes a way for him to pay back the economic environment that has been so good for him? Sounds good, but does it really make sense?

Usually discussions about the tax burden boil down to this: Mr. X should pay more taxes than Mr. Y because Mr. X has more money than Mr. Y. A difference, however, in and of itself, justifies nothing. To put it mildly, that's a morally lazy argument. There needs to be more to it than that.

When explaining why he robbed banks, the infamous Willie Sutton reportedly said, "That's where the money is." Much of the rationale for distributing the tax burden is not much more legitimate or sophisticated than Sutton's comment.

If we do decide that people with more money should pay more taxes, that still does not tell us how much more they should pay. It doesn't take a progressive tax (higher percentages for higher tax brackets) to get the rich to pay more than others. A proportional tax of 10 percent results in someone with 10 times the income as someone else to pay 10 times the taxes.

What's fair? Should a person with 10 times the income pay 20 times more taxes? Thirty times?

These are some to the questions we will need to answer as tax reform takes shape. Whether we move to a flat tax, a value-added tax or a national sales tax, we face tough issues concerning fairness, efficiency and incentives.

____________________

◼ FISCAL FITNESS: Should the rich pay more? - North Coast Journal July 1995

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.