The Case for Progressive Income Taxes

Recently, there was a study of 54 countries' tax system and happiness in the citizenry.  This study found a positive correlation between a more progressive tax system and happier citizens.  Regardless of what you think about this study, I want to lay out a separate case to keep the progressive income tax.

A progressive tax system is one where the tax rate increases as income goes up. The idea is that the more money people earn, the more disposable income they have after covering the basic costs of life. Thus they can afford to pay more taxes. The U.S. has a progressive income tax system, with federal income tax rates that currently range from 15% to 35%. (Our top income tax rate has been as high as 91% in the past.  It is important to note that this is simply income from labor.  Income from capital is taxed at a much lower rate, either 5% or 15%.

There is a lot of rumblings in the GOP about how we need a "fairer" tax system.
Generally, fair means a flat tax in which the same tax rate is applied to all income made from labor.  What they don't want to tell you is that this means the rich pay a lot less and the middle class (including some of the upper middle class) and poor pay more.  Currently, the rich pay the vast majority of all the tax revenue in this country and the GOP, including Mitt Romney, want to remedy this travesty.  Also, about 50% of people do not pay any federal income tax either because they are too old, too young, students, don't make any money, or rely on a series of tax expenditures to lower their tax burden.  For example, a family of 4 that makes $50,000 doesn't pay any federal income (this is a very pro-family, pro-children policy for the GOP, and lowers the tax burden on poorer people for the Dems).  This has been a rallying cry for the GOP since $50,000 isn't that poor.  It is important to note that a lot of people who benefit from this don't appreciate it since they pay other taxes such as Social Security, Medicare, sales/excise taxes and state/local income taxes.  It is fair to say that this family does not pay federal income tax, BUT it is not fair to say they do not pay taxes, especially since Social Security/Medicare taxes (about 10%) make up the largest portion of taxes paid by most people.

While we can spend an eternity debating the details of the tax system, here is a general case for the progressive system for federal income taxes:

1.  The same amount of money matters less to rich people than poorer people.  Therefore, rich people can afford to a greater proportion of their income.  Poorer people have to spend a far larger portion of their income for basic necessities than richer people.  Therefore, they do not need as much money.  While this sounds a little socialist, consider this: during the recent recession think about how many richer Americans lost half a million/one million in net worth.  Then think about middle class people who lost their job paying $60,000 annually.  While losing half a million sucks, its not the end of the world for those rich Americans while losing a good job is often the end of the world.  Also consider this: this is the system we currently have and the rich are still able to get way ahead in life.  If this doesn't convince you: think about times when you were 10-12 and had 20 dollars...that was probably a lot of money.  Think about how much $20 means to you now...likely not that much or at least less than if you were 12.

2.  Other taxes are regressive and progressive federal income tax needs to balance that out.  Social Security is a regressive tax.  It is a flat tax up to a certain point and a non-existent tax afterwards.  Sales, excise taxes are regressive (because lower income people spend more of a proportion of their income on consumption than richer people).  Property taxes are largely flat, so is Medicare.  If we have a flat tax federal income system, we would have a slightly regressive tax system overall, not a flat tax system. 

3.  Having a flat tax would alter the tax code in favor of the rich and to the detriment of the middle class and poor.  See here and here.

4.  A flat tax has to be fairly high in order to be revenue neutral.  The rich pay a lot of taxes, even after the use of highly paid tax planners. Raising the rate on middle class/poor people won't raise that much revenue, simply because the income made by those people