Progressive taxation as 'good manners'?
Tax Justice; The Ongoing Debate
Edited by Joseph J. Thorndike and Dennis J. Ventry, Jr.
The Urban Institute Press, 2002, 296 pages
Reviewed by Frank Conte

In 1953, two professors Walter J. Blum and Harry Kalven, Jr. published a seminal work, The Uneasy Case for Progressive Taxation. The short essay was published as the nation, fresh from Dwight D. Eisenhower’s victory, was considering a constitutional proposal for a “max tax” that would cap federal income tax rates at 25 percent. The proposal was popular among voters and elected officials. But as with almost any effort to change the Constitution, the “max tax” soon fell off the political map. But a debate over tax justice or “fairness” ensued.

Drawing on political history, Blum and Kalven found that after nearly a half century, “Progressive taxation is now regarded as one of the central ideas of modern democratic capitalism and is widely accepted as a secure policy commitment which does not require serious examination.”

But to economists such an idea was neither comforting nor rigorous. What the authors sought was not sociological validation of the graduated income tax but sound economic reasoning. They found little encouragement for the idea of a graduated income tax in the corpus of economic analysis: The graduated income tax, they found, yields little revenue, clutters the tax code, and stifles risk-taking. “It is hard to gain much comfort from the special arguments, however intricate their formulations, constructed on notions of benefit, sacrifice, ability to pay or economic stability” wrote Blum and Kalven.

Having thrown up their hands in despair in part because fairness is hard to define, economists watched as political considerations framed the debate over fairness. Adam Smith, the political economist, did not help matters by simultaneously maintaining two contradictory goals for a viable tax policy. Taxation of individuals “ought to contribute to the support of government, as nearly as possible, according to their respective abilities [ability to pay], that is in proportion to the revenue which they respectively enjoy under the protection of the state [benefit taxation]. “

Should we treat all people equally (the so-called horizontal view)? Or should we, at some point, treat them differently on the basis of “ability to pay” (the so-called vertical view)?
The debate over tax policy and fairness became the domain not of economists but of political philosophers – some of whom carried on about using the tax system as an instrument of redistributive justice. It is a debate that owes much to the divergent political philosophies of two Harvard colleagues, the libertarian Robert Nozick and the egalitarian John Rawls. Theologians have had their say too. For some liberal clergymen taxation was a means of coercing the sinful into good works to help the poor. Other religious leaders believed that true charity ought to be voluntary and independent of taxing authorities.

Today, tax fairness is driving tax reform. As the momentum builds for the idea of flat tax rates on income or consumption taxes, many left-of-center tax scholars would like to retain equity in such proposals.

The nine scholars who contribute to Tax Justice: The Ongoing Debate, a very readable compilation of arguments in favor of vertical equity, are aware that the tide toward radical tax reform is drawing attention away from progressivity. The scholars believe the move toward the flat tax and consumption tax rubs up against a genuine American bias in favor of progressive federal income taxes.

In the opening essay, the dean of American tax experts, Richard Musgrave, argues that “it may be the better part of wisdom to stay with the income base and push for improvement, rather than undertake a massive and untested conversion to consumption.” This is a fine argument. But it doesn’t actually resolve the efficiency problems associated with progressive income tax rates nor their effect on saving and investment. Musgrave maintains that proponents of a flat tax are over-hyping tax simplification. The broadening of the tax base under a flat tax would eventually hurt the poor. Besides, he says, “little would be gained, since liabilities under progressive rates need not be computed but are read off from readily available tax tables.” This is an artful dodge that sidesteps the efficiency argument and the deadweight losses associated with tax preparation. The amount of money Americans spend at H & R Block is money that can be better spent elsewhere. Musgrave never attempts to analyze Congress which derives its power from its ability to grant tax favors to special interests – an abuse that a flat tax would certainly curtail.

At least two other contributions stand out in this volume. Dennis J. Ventry’s “Equity versus Efficiency in the U. S. Tax System in Historical Perspective” is a great survey of the tax debates only if it reminds us of the high marginal tax rates that never fell below 90 percent in the 1950s. Barbara Fried’s contribution, “Why Proportionate Taxation?” is a sharp critique of classical liberal thinking on tax policy. For Fried, libertarians – having ruled out most progressive schemes –– appear to paint themselves into a corner by slip-sliding into the world of “head taxes” or poll taxes where each citizen would pay the same amount regardless of income. This most regressive of all taxes is a political disaster. Just ask former Prime Minister Margaret Thatcher who besmirched her career by introducing such a tax late in her term.

Americans stand in awe of the entrepreneur and other creators of wealth — recognizing that the superiority of capitalist incentives create the conditions of broadly shared prosperity. At the same time, the majority of Americans maintain, as the authors repeatedly note, a moral and aesthetic passion for equity, a passion that trumps economic efficiency, particularly when it comes to intergenerational endowments and other inheritances of wealth.

Since the founding of the republic, Americans have gone to great lengths to remind aristocrats and the nouveau riche that with wealth comes a greater responsibility to the public fisc. This contradictory attitude toward upward mobility shifts to reflect times of prosperity and times of financial crisis.

In the middle of this contradiction, Americans tend to realize that the case for progressive taxation is indeed a very uneasy one. That uneasiness has been more pronounced in part due to the schools of thought — from the rise of public choice theory to supply-side economics that emerged to challenge the faltering consensus that taxes do not matter. The passion for asking the rich to demonstrate good manners by acceding to high marginal rates is not immutable. As history shows, both liberals and conservative administrations have used fiscal policy to emphasize economic growth. As the tax economist W. Eliot Brownlee observed, only in the 1960s did tax reformers realize that it was time to abandon progressivity in favor of promoting economic growth. As President Kennedy proved, when he called for tax cuts, equity considerations were not always paramount. Since that time, postwar policymakers have found a middle ground as they traded objectives by broadening the base (by closing loopholes) and lowering marginal tax rates. The Tax Reform Act of 1986 is one example.
Nonetheless, any tax reform initiative, including calls for a flat tax or a modified consumption tax must incorporate some element of fairness to succeed. (Any serious flat tax must incorporate exemptions for low-wage workers, for example).

It is easy to dismiss the imperfections of vertical equity and progressive taxation as mere utilitarian sentiments which, if unchecked, mark the beginning of the end of individual liberty in the United States. But this is the nature of democracy and, as Churchill pointed out, the alternatives are intrinsically lacking.

Rich in history and theory, Tax Justice: The Ongoing Debate is a well-reasoned challenge to supply-side economists who have argued successfully over the last 20 years that “soak-the-rich” taxation has raised the cost of capital, inhibited investment and delayed improvements in productivity. As tough as it is to move the concept off the stage, equity considerations in tax policy have their limits.