Friday, August 12, 2011

Are Libertarianism and Progressive tax systems mutually Incompatible?

How can I possibly be a libertarian and support progressive tax rates at the same time?

I suppose that when it comes to personal liberty and the preservation of my rights, I am a libertarian. When it comes to my attitude towards taxation policy, I support progressive income tax rates.

I believe that social order is necessary and that anarchy is an unrealistic utopia that cannot function properly in practice. Therefore I believe that people must come together and establish rules for the benefit of society.

In the absence of rules and authority, the balance of force is destabilized and a power vacuum emerges, sucking in the biggest dog in the pack. Among animal populations, humans included, there are always individuals with a stronger desire for power, and they invariably find their way to the event horizon of power vacuums.

This is exactly what happened during the French Revolution. The old social order was destroyed, and an absolutist monarch beheaded. And everyone wanted a piece of the new Republic. Cue in Robespierre and the Jacobins and their Reign of Terror. It became a bloodbath. Soon, people were clamoring for a new order. People wanted a dictator to come in and restore a semblance of civilization. Who better to answer the call than Napoleon Bonaparte. After a decapitated monarchy and a failed democracy, France was now an Empire ruled by a tyrant. A tyrant so power-hungry, that he remade the European geopolitical landscape, and set the stage for the system of alliances that ultimately led to nationalism and militarism that eventually exploded into the first World War. But of course, the German defeat of 1918 and the extremely punitive war reparations imposed by the Treaty of Versailles only served to destroy the Weimar Republic, which re-emerged as the Third Reich, which prompted the emergence of two superpowers that would wage a cold war for the next four decades.

It is then easy to understand that this endless cycle of wars and violence is nature's way to seek to restore balance.

Is it possible to have balance without the need for all these bloody wars?

I believe so, but it is not easy to achieve in practice.

To secure our rights and our property, we come together as citizens and establish amongst ourselves governments. But as we must divide labor and specialize as cooks, engineers, farmers, teachers, writers etc., so must choose representatives to run the day-to-day affairs of our governments.

The danger here is that since the primary purpose of government is to serve the people and protect their rights, we must take care not to build within government power structures that can be misused against us, and we must be vigilant in making sure that the individuals in government work with our best interest in mind. We do not want a government that will confiscate our guns or enslave us. We do not want a government that will be filled with corrupt bureaucrats. We do not want a judicial branch that has the power to execute people.

I do not believe that a nationalized health care system would be a threat to our liberty. I do not believe that a progressive tax system where the rich pay a higher percentage would be a threat to our liberty. For to prevent the birth of a new monarchy, we must make sure that no one appropriates too much wealth, lest we see the emergence of a ruling elite class.

Yes, people should be able to profit and benefit from the fruit of their labor, but I also realize that to allow government to operate and build schools and bridges and nursing homes, taxation is a necessary evil, as few people will subscribe to a system of voluntary donations. Who can then afford to pay taxes the most? The wealthy of course. It is not to say that no one should be allowed to be rich, of course not. But simply that the tax burden should be born by those who have more to spare.

For example, suppose that the basic necessities of life (food, housing, transportation) in a town cost a thousand dollars per month, and that the town government needs 1100 dollars per month to operate. A 10% flat tax would take 100 dollars from Grandma who only earns 1000 dollars per month, and leave her with insufficient funds to pay for basic necessities. On the other hand, a wealthy individual - named Bob - who earns 10,000 dollars per month, but who lives frugally, paying only for necessities, would pay 1000 dollars in taxes, but still be left with 8,100 dollars when all is said and done. Would that be fair? What if the Grandma, earning only 1000 dollars owed 0%, and Bob, who earns 10,000 dollars owed 11%? Then Grandma would be able to afford basic necessities without suffering, and Bob would still be left with 8000 dollars, after paying 1100 dollars in taxes.

That is why I support a progressive taxation system instead of a flat tax.

Now of course, this scenario only assumes 2 tax payers. Let's complicate it a bit and add a third taxpayer, named Arthur, who earns 5000 dollars per month.

Grandma pays 0% = $0, Arthur pays 5% = $250, Bob pays 8.5% = $850

Why should Arthur pay only 5% while Bob pays 10%? Because if the difference between paying 0% and paying 10% was 1 dollar of income, and the 0% upper limit was 4999$, and Agnes earned 4999$, Agnes would be paying $0 and be left with $4999 after taxes, while Arthur would be paying $250 and be left with $4750 after taxes. So because Arthur would be penalized by $250 for earning just $1 more than Agnes. But if Arthur owed 10%, he would pay $500 and be left with $4500, which would be an even worse penalty. That is why a progressive tax system is comprised of many small incremental jumps in tax rates, to limit the unfairness of falling into a higher tax bracket.

So let's make the brackets narrower, so that no bracket should be more than 1% than the bracket below it to improve this situation.

For example;
$[0 , 1000] : 0%
$[1001, 2000] : 1%
$[2001, 3000] : 2%
$[3001, 4000] : 3%
$[4001, 5000] : 4%

In this theoretical system, the first $1000 that you earn is tax free. Then the next $1000 is taxed at 1%, the next $1000 at 2%, and so on and so forth.

So if you earned $3000 per month, you would owe $30. If you earned $3500, you would owe $45. If you earned $4000, you would owe $70. And if you earned $4001, you would owe $110. As you can see, there is still a $40 penalty for earning just $1 over the previous tax bracket upper limit, but it is better than the original $250 penalty that Arthur had.

The bottom line: the more brackets the taxation system has, and the smaller they are, the fairer this tax system is for everyone.

Ideally, we would come up with a mathematical curve formula instead of rigid brackets, which would be even better as it would practically eliminate these 'bracket jump' penalties. But in any form, it is still fairer than a flat 10% tax on everyone.

The numbers in these tax brackets are not a formal proposal, they are simply meant as a basic example to illustrate the mechanism and compare its fairness to the 'flat-tax'.

A flat tax is not fair. A truly progressive tax is.

A progressive tax system is compatible with the ideals of a just libertarian society.

1 comment:

  1. How can I possibly be a libertarian and support progressive tax rates at the same time?

    I read it all, but I was able to answer this immediately: because your head isn't up your own ass.

    Also, this is only income tax. The poor always pay a disproportionately higher percentage of their income in sales tax, gas tax, and other forms, because these are essentially flat taxes for everyone to pay (with exceptions, like property tax). I sometimes wonder if sales tax should be done away with, but then I think... what if we complicate the world even more and make progressive sales tax. No, no... it's easier to just have no sales tax.