Real justice: keeping what you earn

May. 08, 2014 @ 01:37 PM

With April 15 behind us, North Carolina taxpayers can look forward to a new era, because 2013 will be the final year of the state’s “progressive” income tax. 

Good riddance! For not only does research and sound economic theory demonstrate that progressive income taxes harm economic growth, but justifications of such a tax on “social justice” grounds are easily demonstrated to be without merit.

A progressive income tax features rates that rise as one’s income rises. The more money you make, the less of it you are allowed to keep. 

Leftists are enamored with a progressive income tax, and as such mounted furious -- but insufficient -- opposition last year to tax reform that transitioned North Carolina to a flat income tax beginning with this year’s income.

The progressive income tax is more “fair” because it is based on the taxpayer’s “ability to pay,” or so liberals argue. That is, those that earn the most income not only pay more in taxes in total dollars, but pay a higher share of their income in taxes. “The rich should pay more because they can afford it,” goes the argument. The ability-to-pay rationale has been elevated as unquestioned dogma in the realm of taxation justice.

But the ability-to-pay doctrine falls short of providing a logical justification for progressive tax rates, for multiple reasons.

Economist Murray Rothbard expertly laid out these reasons in his 1970 book “Power and Market: Government and the Economy.”  For starters, the ability-to-pay doctrine fails to take into account an individual’s accumulated wealth -- a factor that clearly affects a person’s ability to pay taxes. “A man earning $5,000 during a certain year probably has more ability to pay than a neighbor earning the same amount if [the first man] also has $50,000 in the bank while his neighbor has nothing.” Thus, using income alone as the metric to gauge one’s ability to pay becomes ambiguous and does not provide a sure guide on the concept. Moreover, an individual’s financial obligations such as medical bills and other debt obligations surely impair one’s ability to pay a hefty tax bill, but this is not taken into account on the liberal’s beloved progressive income tax schedule.

Moreover, some apologists of the ability-to-pay doctrine defend it by comparing taxes paid to government with voluntary donations to charity. In private charity, they say, it is expected that people of greater means contribute a higher share of their resources than those with less. Comparing voluntary charity to tax payments to the government, however, is shameful.

People get to choose which charities they support, and the amount of support each receives. If one believes a charity is no longer serving the community in a way that is appropriate, he can withdraw his support. The same is obviously not true of government. People cannot opt out of paying taxes. As Rothbard wrote: “Government is the very negation of charity, for charity is an unbought gift, a freely flowing uncoerced act by the giver.”

Finally, the ability-to-pay doctrine fails because it harms society by more sharply penalizing the most productive. Those that prove most capable in serving the needs of their fellow man (at least in a free market economy) by efficiently creating goods and services that others value are those who will fall into the highest progressive income tax brackets. “Penalizing ability in production and service diminishes the supply of the service -- and in proportion to the extent of that ability,” wrote Rothbard. The result will be greater impoverishment, felt most heavily by the low-skilled and low-income people who are always hardest hit by a stagnant economy.

In spite of the protests from self-styled, left-wing advocates of “tax fairness,” the ability-to-pay principle fails to provide a logical coherent argument in favor of progressive income taxes. As Rothbard concluded, “Rather than being an evident rule of justice, the ‘ability to pay’ principle resembles more the highwayman’s principle of taking where the taking is good.”

Brian Balfour is policy director at the Civitas Institute, a think tank in Raleigh.