Politics are a bit raw in the US these days, and while I spent the summer in Seattle I got into a few discussions about the current campaigns and public policy in general.
One of the most unexpected positions I found was that of people being in favour of a flat rate tax. Twice I heard people independently defending flat taxes –one rather superficially, because he believed that a flat tax “should be enough” to cover the needs of society, and the other as a matter of principle and fairness. That’s the one that caught my attention: I’ve heard the arguments based on the simplication of the tax code and on the generation of wealth through flat taxation, but never that flat rates were morally defensible.
The argument goes as follows: The income an individual receives is a reward for the value that such individual adds to society. The market determines the value of each good and service; since trivial needs are easily satisfied, they are not as highly valued. Therefore, the more we contribute to satisfy society’s needs, the more money we earn. And, roughly, the more effort we apply to fulfill society’s needs, the more value we provide.
Therefore, we all earn our wealth rightfully (as long as it was legal), and it is unfair for the rich to be taxed at a higher proportion than the poor, since their wealth is simply a manifestation of the greater value they have provided to society. A progressive tax rate takes money away from the most productive and helpful citizens, and gives it to the least productive and helpful, which is an injustice to put it mildly.
(To be sure, this argument should conclude with a proposal not for a flat rate tax, but for a flat fee tax, where the government charges the same minimal fee to all its citizens and gets out of their way, like a club membership. But I have yet to hear anybody advocating the morality of a flat fee tax with a straight face.)
Now, the friend that gave me this argument is well-meaning, principled, and not particularly rich. For him, it is not simply an excuse to support selfish tax policies, it’s a consequence of a sincere belief in the free market system. I guess many compassionate, well-to-do people think similarly when faced with the deep inequalities in our economic system. But it’s a naive and erroneous argument, for two reasons.
First, it is false that the money exchanged in a transaction is generally a good approximation of the value provided to society by the transaction. Sometimes it is a good approximation of the value provided to the payer, but inconsequential or detrimental to the payer’s community (for instance, arms trading and stock exchange speculation). Sometimes the value provided to society is impossible to assess at the time of the transaction (as with scientific research). Sometimes the value is far higher than the money exchanged, because the benefitting party is disadvantaged and cannot pay an amount corresponding to the benefit received (for example, most volunteer work). It is then wrong to reason that the value provided to society equals the wealth earned in the process.
Second, it is false that the effort one exerts optimally corresponds to the benefit one will provide to society. We do not have a level playing field: poor citizens have by definition less capital than rich citizens, and hence less leverage to provide greater value to society with the same amount of effort.
So, effort exerted does not correspond to value provided to society, and value provided to society does not correspond to personal wealth. We simply cannot assume that the rich among us have provided greater value to society, or that they have made greater sacrifices for it. We can see, however, the ethical case for using superfluous capital to address society’s ills, through taxing proportionally more those with proportionally fewer needs.