Why the Rich Should be Taxed More: Flat Taxes, Progressive Taxes and Income Inequality
The rich are not as affected by taxes
The rich, being rich, are not as affected by a rise in taxes as the poor or middle class. They can afford it. This is a seemingly obvious point that is often forgotten in this debate.
Imagine two working people. Joe makes $30,000 and Joseph makes $1 million per year. What happens when each of their taxes are increased by 5 percent? Joe will have to pay an additional $1,500, and Joseph an additional $50,000.
For someone who makes only $30,000, food and housing are major costs. $1,500 could be Joe's entire food budget for several months. But since there is not much of a price difference in the food that a low earner and a high earner buy--a potato is basically a potato--Joseph is not at risk of going hungry. He may need to shop at the gourmet deli for a few months instead of eating at 5 star restaurants, but he will be fine.
In other words, although a low earner spends $1,500 on food in several months, it is unlikely that a high earner spends $50,000 on food in the same time period. The same could be said of housing, travel/ commuting costs and other living expenses. Few multimillionaires are hard-pressed to come up with the rent by the 30th of the month. Public transport costs the same for everyone. And a high earner's car service is an optional luxury he does not need to get to work.
Even in the worst scenario, it will not severely impact the physical health or wellbeing of a millionaire or billionaire to live in a one-level 2 bedroom condo in the suburbs, as opposed to a duplex overlooking Central Park.
In other words, although the incomes grow by orders of magnitude, human needs (food, water, shelter, heating, medical care) do not. So all that extra money left over after our basic needs are taken care of, which is normally spent on luxury items, can be tapped safely without worrying about the physical wellbeing of the higher earner. They can afford it.
This does not justify excessively taxing the rich just because they are rich, and just because they have lots of "unnecessary" money. But it does mean that increasing taxes on the rich is more reasonable than increasing taxes on the poor, other things equal.
The rich will always pay more in taxes
Some call for a flat tax. A flat tax is a situation where everyone pays the same tax rate. Thus, a person making $20,000 a year and a person making $2 million a year will both pay a 10% income tax rate, for example. There are a number of problems with a flat tax, but that is beyond the scope of this essay. The point here is that even with a perfectly flat tax, the rich will pay much more, total, in taxes than the middle class or poor.
An argument that has become popular among conservatives recently is that the rich collectively pay the vast majority of all the tax revenues the US government receives, and this is unfair. We should try to "level the playing field" and get more lower-earners to "pay their fair share." What they don't realize is that even with a totally flat tax, the rich will still account for the vast majority of tax monies the government collects. The reason for this is simple: the rich have the vast majority of the income. Since the rich will always account for most taxes, this objection to a progressive tax is meaningless.
High inequality and low interclass mobility are bad
Progressive taxation helps to reduce income inequality. A more egalitarian socioeconomic structure has been associated with many positive effects in public safety, health, and other measures of social wellbeing. More equal societies tend to have lower drug abuse, lower teenage pregnancy, lower crime and longer lives, for instance.
Inequality in the US is at historic highs, and interclass mobility is at historic lows (see chart below). Progressive taxation in itself helps to reduce inequality, and the tax revenue enables the government to further reduce it by redistributing some of the income in society toward the poorer classes in the form of healthcare, education, infrastructure, police protection, fire protection, skills training, small business loans, student loans, and countless other tools.
Interclass mobility at historic lows in the US
The impact of inequality on social wellbeing
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