Debate Over Tax Rates

Marco Rubio’s tax cut proposal has led to debate over how to determine whether a tax plan is progressive or regressive. Rubio’s critics hold that any tax cut that benefits the rich more than the poor is regressive; since the rich have more income than the poor, cutting taxes more or less naturally comes out as regressive by this definition.

For example, Rubio’s tax cut benefits someone in the top 1% by $223,000. Clearly, a middle income person cannot get a tax cut this size, because such a person doesn’t have an income of $223,000, much less pays $223,000 in taxes.

Rubio holds that one ought to instead look at the effect of tax cuts as a percentage of income.

Dylan Matthews at Vox holds that “who gets more money ‘numerically’ is actually what matters here. Tax cuts cost money. That money can either go to poor people, or it can go to rich people.” This is a badly underdeveloped argument.* It doesn’t at all follow directly: it matters who gets more money because “that money” can either go to rich people or poor people? We must be skipping steps. Does it matter because of some theory of distributive justice? Does it matter because of some impact it has on the world? If you say one thing is more important than another, it must be with respect to some moral goal or outcome you see as important, or it must be intrinsically important. In any case, it implies you have some larger idea about what is important. “Money can either go to rich people or poor people” really doesn’t get us anywhere.

Nevertheless, we can find clues in Matthews’ rhetoric as to what he must mean.

In the first place, consider his claim that “That money” can either go to the rich and the poor. If we’re talking about tax cuts, it can’t. The poor hardly have any money, and they hardly pay any taxes, so obviously they can’t get a tax cut of $223,000. But if you look at it not as cutting taxes, but as the government giving out money it had all along, it’s a different matter: we have “that money,” and government has to decide how to divvy it up. In that case, it would seem quite unjust to give more of it government to begin with, as does his choice of the phrase “who gets more money,” rather than “who keeps more money.”

Matthews’ assumption that tax cuts are a thing given us by government may simply reflect a status quo bias that treats current tax rates as natural, or it may be based on an unacknowledged assumption that all money ultimately belongs to government. But surely the latter isn’t right. In that case, what justification is there for government to allow some of us more money than others? Perhaps as an incentive to work, but then it is government deciding how much of different kinds of work and products we need, which of course is no good…or else it’s free market exchanges that determine how much people make, in which case the money is no longer coming from the government, after all.

If I am right and taxes are a cost, incurring this cost requires justification of some kind. “Tax cuts for the rich” rhetoric treats high taxes on the rich as a benefit; the tax cut is bad intrinsically because it brings down taxes on the rich, and not (only) because it has the effect of preventing desirable spending.

We should judge the fairness or rightness of a tax policy based on where it leaves tax rates. That’s really all we need to worry about. Thus if we think a steeply progressive tax code is good, and a tax policy leaves the code in a steeply progressive state, well then what’s not to like about it? We don’t need to worry about where the tax code was before, and so don’t need to worry about whether the tax cut is progressive or regressive, even in Rubiovian percentage-of-income terms. Otherwise, again, we are engaging in status quo bias, and/or failing to regard taxes as a cost requiring justification.

* and characteristically Voxian: he spends seven paragraphs and two gigantic charts establishing what we already know, that Rubio’s cuts benefit the rich more than the poor in dollar terms, and only blips an argument on the actual subject of disagreement.

***

Ezra Klein, on the other hand, approaches the matter sensibly and argues against Rubio’s tax cuts on the ground that they would require cut or elimination of desirable programs. He seemingly frames this as a defense of the “tax cuts for the rich” argument, but actually it is an independent argument.

Klein’s argument is that Rubio’s tax cuts will force us to cut programs for the poor, especially since he wants to eliminate the deficit and doesn’t want to cut defense spending. Klein says Rubio hasn’t offered spending offsets. It’s always reasonable to criticize a politician for this, though that won’t stop them from all doing it. But there’s no particular reason to assume the cuts will all hit the poor (or that by fiating his tax cut into existence, we have to also fiat his zero deficit aspiration into existence.) Maybe we means test Medicare and social security, or just cut them across the board or otherwise reform them. Maybe we cut the highway budget drastically. Maybe we take 10% off the top of everything.

In fact, one of the difficulties of the whole policy wonk project is that you can never say what the actual opportunity costs are of anything. Say I want to spend $20 billion on curing cancer. There’s really no counterfactual where we can say what we would have done otherwise, and thus “where the money comes from.” Perhaps it means we get rid of farm subsidies, perhaps it means we don’t do universal preschool when we otherwise would, perhaps it means we eventually increase taxes $20 billion.

Of course it would seem that the same problem applies to individual decisions, but there’s a difference: if I spend $10, I don’t know exactly how I “would have spent” the $10 otherwise, but I at least have some idea of my current priorities, and the kind of thing I spend $10 on. In the case of government, there is no one single actor. Some people are lobbying for a cancer cure, some people are lobbying for agriculture subsidies, some people are lobbying for a tax cut. How much power different groups and actors have determines the result. So it is not “let’s get rid of the least important federal spending and use the money to cure cancer,” but “let’s spend money to cure cancer and see where the chips fall.” A perfectly scrupulous Presidential candidate who always offsets everything in his budget proposal will not solve this problem, because Presidents do not unilaterally set budgets.

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