Adam Smith and progressive taxation
Some of the knee-jerk commentary in response to my paper has been about what an ideal, or fair, tax system should really look like. These people question progressive taxation. To them, I quote Adam Smith from The Wealth of Nations (from Wikipedia):
The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.
My criticism of your study isn’t with its assertion of what constitutes fairness (although I do disagree with your view) but rather your sneaky manipulation of statistics to cull out numbers that suit your presumably predetermined conclusions.
Also, even if we grant that some form of progressivity in the taxation system is fair or desirable, you don’t provide any framework for how we determine when this progressivity would become “too steep” nor do you seem to entertain the possibility that progressive taxation of the wealthy might have other deleterious impacts on the economy as a whole. Water drains downhill for a reason. So too with money pooling in certain places. If we interfere with natural processes that occur out of the free choices made by individuals because we happen to see social ills elsewhere, there are bound to be some consequences. You seem to brush these all aside in the name of helping the poor. That’s all fine and well, but the road to hell is paved with good intentions.
Hi Aaron,
Thanks for engaging in your blog on my paper. Unfortunately you do not allow comments on yours the way we do here.
What you call “statistical manipulation” is my breaking down of the top decile into subgroups. I disagree that it is problematic to compare the rates for the top 1% with the rest of the distribution. In fact, much of the action is within the top 1%, and if you read Saez and Veall, or Brian Murphy’s latest paper, the action is even higher than that. In 2005, the top 1% was family income of about $265 K or more so I think that is a fair cut-off (I’m not calling $80,000 professionals “rich”).
I felt limited by the ability of Statistics Canada’s Social Planning Simulation Database and Model to carve out higher quantiles than the top 1%, but if I did you would find that tax rates way up there are even lower.
Ultimately, this is an empirical paper of the sort pioneered by Irwin Gillespie, and my assumptions are defensible based on the literature and even somewhat conservative. I could have chosen assumptions like greater capital mobility that would have made the whole distribution more regressive but stuck pretty much where the literature is (for example, see Kesselman and Cheung’s literature review or the original VGV paper, both of which are cited in the references.
Some fundamental principles of taxation:
1. The tax system should be simple, efficient, and fair.
2. The tax system should level the playing field between the rich and the not-so-rich entities,
3. All other taxes, levies, tolls, and methods of obtaining revenue should be completely abolished except penalties for committing crimes and other offences such as polluting the environment.
The above, in a nutshell, should be the fundamental principles that a tax system should be based on.
A tax system based on the above principles will result in a tax system in which the the tax RATE will be based SOLELY on the ability to pay as measured by the revenue (gross earnings) of the entity being taxed. In other words, we will be applying a progressive tax on revenue and no deductions for expenses of any form will be allowed.
In fine, we will have only one tax, namely, a Revenue Tax as opposed to a plethora of taxes such as income tax (note that in this piece we define Income as follows: Income = Revenue – Expenses), property tax, sales tax, value added tax, road tolls, motor vehicles registration tax, business tax, driving licence tax, and payroll deductions.
Kabeer Ahmed Sayeed