“Why I believe in progressive taxation”

The debate continues…

The following article was originally published Jan. 5, 2012 on Occupy Newfoundland and Labrador’s website.

My recent appearance on NTV news to expose the premier’s false statements about our tax system prompted a critical response from a viewer. The email is a genuine and thoughtful critique of progressive taxation, and expresses a view that I think is widely held (even by some Occupiers). I reproduce the letter below, followed by a defense of progressive taxation.

The argument…

Dear Mr. Baird. I think you got that statement on NTV backwards.  A higher rate tax on the wealthy is “regressive” not “progressive”.  

The problem you leftists have is that the wealthy include guys like me who have spent the last 30 years building businesses that have created dozens of jobs. We are the wealth/job creators that help all Canadians enjoy the standard of living they have. The day you go create your own work and stop living off the government is the day that you will realize that taxing the job creators in a higher manner is the day you kill those jobs. You may disagree, and everyone is entitled to their opinion, but thats how it works.

Another problem you Down on Wall Streeters have is that in general you expect “the government” to support you. Well, who is the government? Why, its you and I of course. I would say half of my relatives are living off the government or agencies of the government (ie WCB). They have this sense of entitlement that someone owes them, that someone should take care of them even though most of those are quite capable of working. I paid enough taxes personally in each of the last 10 years to support a dozen of these relatives. If you add in the corporate taxes I pay  the number gets substantially higher. To say that I should be taxed even more sends what message Mr. Baird? If those relatives put half of that creativity that they utilize getting free benefits, that I ultimately pay for, into finding or making work this would be a much better place to live.

Really, is this what you think the world should look like. Then why should I work, when Big Brother will pay all my needs.

I think that the statistic is something like 80% of all jobs (in) this country are created by small/medium sized businesses. So your answer is to take a guy like me who has worked his rear end off like most small business owners and creates this small part of the economy and take away more than the 50% you already take just so we can all be equal? Really, thats your solution to anything? I think you might be living in the wrong country if thats what you believe. Thankfully you are a minority and one day when you are older and wiser you might think differently.

Like we see with our neighbours to the south, the sense of entitlement continues to grow and every time you ask someone else to pay more so you or your Down on Wall Streeters can live more comfortably the sooner the whole thing will fall apart.  That is what we see in the excited states.

No need to reply as I am sure you disagree and have heard this all before.

*name omitted*

In response…

Let me begin by saying that I do have a job – one that I work hard at and which pays me rather well. When I call for progressive taxation, I am calling for more taxes on myself. I am not motivated (nor are the Occupiers I know) by narrow financial self-interest. I am motivated by a desire to make the world a better place and I believe that progressive taxation is one means of getting us there.

1) “We are the wealth/job creators that help all Canadians enjoy the standard of living they have.

This compelling slogan is a fundamental axiom of right-wing ideology. It is compelling because it contains a degree of truth: successful businessmen typically do work hard, employ others, and contribute more than most to the economy, so perhaps it is unfair to deprive them of the fruits of their labour.

But are businessmen truly the sole or primary “creators” of wealth and jobs? A counterargument, popularized recently by Elizabeth Warren, is that our public institutions also play a basic role in producing prosperity. A successful businessman depends on a legal/justice system to enforce laws and contracts. He depends on infrastructure like roads, ports, electricity, and running water to produce his products and bring them to market. He depends on schools to train an educated workforce from which he hires labour – indeed he was most likely educated in public school himself.  Consider how our hard-working businessman would have fared if he were born in rural Uganda and then ask yourself whether he created his wealth all by himself. No man is an island and no man becomes wealthy all on his own. Taxes play a vital role in maintaining the public institutions that make prosperity possible.

2) The basic reasoning behind progressive taxation is the “law of diminishing marginal utility“; an extra thousand dollars makes a much bigger difference to a poor person than to a rich person. In fact, studies have shown that beyond a threshold, more income makes very little difference to happiness. For the very wealthy, earning money becomes about status and keeping up with the Jones’ rather than about improving material well-being. All else being equal, transferring money from the rich to the poor will increase overall welfare.

3) Of course, all else is not equal. If we raise taxes on top earners, won’t that discourage them from working hard?  In fact, the answer is ambiguous because of “the income effect“: if taxes are raised, this makes high earners poorer, which makes each additional dollar more valuable, which helps encourage them to work harder. Some researchers have argued that public welfare is optimized at top marginal tax rates above 70%, as was recently implemented in France. There are of course some practical problems with this level of taxation (e.g. tax avoidance), but reducing work incentives is not necessarily one of them. Even if you believe tax rates have a strong effect on work incentives, raising tax rates for the rich allows you to lower them for the poor and middle class, which would further boost their incentives.

4) It is also questionable whether the work done by high income earners is really such a benefit to society.  We’ve all seen how highly paid Wall Street types were payed big bucks to devise clever ways to explode the economy. Perhaps that ingenuity would have been better directed toward different ends. Some research finds that creative people are more productive when they are motivated by a sense of purpose in their work, rather than by financial rewards.

5) Luck also plays an important role in financial success. People who enter the labour force during a recession suffer lasting damage to their career.  And lets not forgot the importance of being born into a wealthy and influential family.

6) There is also the argument that inequality is directly harmful to public welfare in a number of ways. Research has found that unequal societies suffer from higher levels of crime, mental illness, stress, distrust, diabetes, and more. Unequal societies may also be detrimental to democracydiminish class mobility and equality of opportunity, and stifle innovation.

For all these reasons I believe that progressive taxation leads to a fairer, happier and more prosperous society.

Tom Baird is a mathematics professor at Memorial University and a participant in Occupy Newfoundland and Labrador.

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