Taxing By Fortune

B1298-NH4

Taxing By Fortune

In most general addresses to the American people, Romney and the Republican party justify the preservation of current tax rates for the rich by stating that “overtaxing” the rich actually hurts the poor and the middle class, since rich people create jobs and opportunities for everyone else. This justification is a direct appeal to non-rich voters, but also an indirect appeal to rich voters whose enthusiasm for lower taxes does not stem from their increased power to expand the economy, but rather their indignation at the fact that their hard-earned money might be siphoned away by a government that “punishes success”. Look up any article about why higher taxes for the wealthy is bad, and you’ll probably find a statement like this:

“Of course, one might ask in general what is fair about taking wealth away from those who have earned it through their own industriousness and hard work and spreading it around to others who didn’t earn it.” (Michael Tanner, National Review)

If the “You didn’t build that” fiasco a few months ago is any indication of the common Republican attitude about success, many Republicans largely attribute their success to hard work and individual drive—things that anyone can conjure up to achieve similar results. To some extent, most people, regardless of political affiliation, tend to claim credit when good things happen and blame everyone and everything else when bad things happen—in psychology, this tendency is called self-serving bias (claimin’ and blamin’). These mistakes can help keep people’s self-esteem and motivation high, but they can also be problematic: self-serving bias can overgrow people’s egos or keep them from taking responsibility for failing. The negative effect of this bias is also apparent when wealthy people object to higher taxes that essentially punish them for being self-made catalysts of success.

Self-made catalysts of success? Not so, unless we buy the proposition that “all men are created equal” not only in regard to rights, but also in regard to luck and opportunity. People vary, beyond their will, in lots of important ways: intelligence, looks, health, upbringing, specific instances of good luck, specific instances of bad luck, so on, so forth. We all have a responsibility to be as productive as possible with the hand we’re dealt—and in this sense, merit must be rewarded, lest we embrace a communist ideal—but someone with a pair of threes is not going to outplay someone else holding a straight flush. Not all people possess the tools needed to reach the upper echelons of wealth, no matter how hard they try.

Progressive taxes with particular emphasis on taxing the rich should not be thought of as “punishing success”—rather, they should be thought of as “equalizing luck”. If everyone lived a million lives, everyone would get (more or less) their fair share of luck. But, we live one life, and people vary widely in their potential for success and suffering. “Taxing by fortune” shouldn’t refer to how much money someone has, but rather how much luck someone has. Sure, such a tax isn’t perfect—some people really do work harder for their wealth than others—but it’s certainly more fair than not.

(Note: I do believe that taxes can be *too* progressive, but in the U.S., I doubt we’ll face that problem for some time).

We can also consider the fairness of progressive taxes from another angle. Progressive income taxes help us achieve a flatter “standard of living” tax. Money has diminishing marginal utility, such that a 25% income tax affects poor families and rich families differently. Poor families could use the extra money to buy healthier food, better clothing, and other things that significantly influence their standard of living. Rich families could use the extra money to increase their access to luxuries, which also influence their standard of living—but, a lot more money is needed for the same increase. Plus, standard of living is related to happiness (happiness is important, right?), and research suggests that money doesn’t make you much happier, once you have enough to feel secure. Harvard psychologist Daniel Gilbert notes that “Americans who earn $50,000 per year are much happier than those who earn $10,000 per year, but Americans who earn $5 million per year are not much happier than those who earn $100,000 per year.” (Newsweek, “Why Money Doesn’t Buy Happiness”)

Money is more tangible and measurable than variables like luck, standard of living, and happiness; however, this does not mean that it is more important when constructing government policy. Raising taxes on wealthy U.S. citizens may seem unfair from a surface perspective, but in a deeper sense, it is a movement toward essential and meaningful fairness.

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