How Do We Really Feel About Taxing the Rich?

Last month the National Bureau of Economic Research released a working paper that explored some of the more puzzling disconnects between the harsh realities of U.S. tax progressivity and how the public views fair taxation.

Matthew Weinzierl of the Harvard Business School argues that modern tax research is the result of utilitarian assumptions.  This means that our tax structure is progressive because, as constituents, we believe that morality is a function of reducing suffering for the greatest number of people.  Support for utilitarian policies has been mislabeled as purely redistributive and polarized along political lines over the last 40 years.  What we don’t realize is that it’s not just taking from the rich and giving to the poor, but the ethical weight we assign to variables such as filial, altruistic, and financial obligations.  Tax incidence, or where the burden ultimately falls, is an important part of understanding how our system actually works.  So while we commonly say income is a measure of proper tax incidence, what we really mean to say is our actual earnings minus obligations and charitable contributions.  Although the left is often blamed for increasing taxes on the rich, for whom the anticipated marginal loss of utility from an increased tax burden is much lower, Weinzierl’s findings suggest that this isn’t entirely true.

 

 

 

 

 

 

 

 

His sample found that [see figure]:

  • 58 percent of Americans prefer tax structures which favor an “equal sacrifice” over current “utilitarian” policies.
  • Only 19 percent

    of the sampled population believes that the poor should be exempt from their share of the aggregate economic burden.

This means that while we support policies that are fundamentally redistributive, most people have reservations about such a system.  Of course the NBER fails to explicitly mention that survey respondents were mostly middle-class, college educated, employed, left-leaning persons.  The share of taxes paid by the poor is where things get really interesting.  For the highest-income earners, who shoulder much of the burden for total tax revenue generation, the current system closely matches respondent expectations.  Weinzierl finds that people who are most sympathetic to providing tax breaks for unique circumstances are also most in favor of redistributive policies.  However, most people would actually reduce the marginal tax increases of higher earners in order to prevent them from behaving like lower-income earners.  Remember that the rich make a disproportionately large amount of money through capital investment.  Higher tax rates provide a disincentive for earners to realize funds, meaning that they pay taxes on only a fraction of their real wealth because they choose not to maximize potential annual income.  Based on these social objective weights, respondents made some fairly startling decisions.  Their preferred system of taxation would  Keep current rates the same for the top 1 percent of earners    Decrease taxes for the top 40 percent of earners by an average of 7 percent.

Moreover, they would increase taxes on:

  • The 3rd quintile by 6 percent.
  • The 2nd quintile 33 percent.
  • The lowest quintile by 38 percent.

An important distinction here is not that we should redistribute wealth based on income, but rather that we should progressively raise taxes on earners who would experience smaller marginal utility loss.  So  while we all listen with bated breath as President Obama talks about the responsibility folks making more than $400,000 a year have to support the less fortunate, as a society, our ideas about how tax policies ought to work are very different.  NBER definitions of utilitarianism were based on John Harsanyi’s work during the middle of the 20th century.  Harsanyi said that whenever we make decisions based on utilitarian ethics (the foundation for our system of taxation) it is important to realize the difference between people’s personal and moral preferences.  The point is that while taxpayers may want to “save the world,” they’re not willing to foot the bill.

 

Comments (3)

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  1. Neil says:

    In my opinion, the GOVT should only tax as much as it absolutely needs to run the country efficiently. While I understand social programs are important and necessary for the effectiveness of our society, it is NOT the role of the GOVT to forcefully take more than it needs to provide anything more than absolute necessities.

  2. Gabriel Odom says:

    But what are these ‘absolute necessities’ of which you speak? I would wager that each individual has a different view of what the government should and should not do. Where I believe that the government should only be the State Department (to manage international affairs) and Department of Defence, others may consider more departments also vital to our national well-being.

  3. H. James Prince says:

    We should privatise welfare.
    If food stamp programmes, TANF, Pell Grants, Section 8 Housing, CMS, et al were all managed privately, then the inefficiency inherent in government management would all but disappear. This would create a smaller tax burden for all – rich and poor.

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