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.”

If you say one thing matters more than another, you must have an overall moral theory telling you what is important. Matthews doesn’t exactly tell us his theory of distributive justice, but his claim that “that money” can either go to the rich or the poor gives us some hints.

If we’re talking about cutting taxes, “that money” can’t mostly go to poor people. Poor hardly have any money, and they don’t pay much in, so obviously they can’t get a tax cut of $223,000. But if you look at tax cuts as the government giving out money it had all along, rather than refraining from taking away money that belonged to someone else, it is a different matter. We have “that money,” and government has to decide how to divvy it up.

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: If government cuts taxes, it is giving us something we didn’t have before. Or it may be based on an unacknowledged assumption that all money ultimately belongs to government.

But if government justly owns all money, what justification is there for government to “give” some of us more money than others? Perhaps government wants to give us an incentive to work hard, or to work in highly valuable professions.  Is government to decide how much of different kinds of work and products we need, and provide us a salary?  Nobody seems to want that.  Instead, it’s mostly free market exchanges that determine how much people make.  But in that case, how can we hold that all money originally belongs to government?

If all money belongs to government, taxes aren’t a cost.  Taxing the rich can be good intrinsically.  But if taxes are a cost, they need to be justified by the benefits they bring. “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.

If I’m right that money doesn’t originally belong to government, and that we should avoid the status quo bias of treating past rates as sacrosanct, then 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 cut leaves the code in a steeply progressive state, it’s not a problem.

***

Ezra Klein, in contrast to Matthew, approaches the matter more sensibly. He 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” rhetoric, 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. 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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