Why Advocates of Large Government Should Oppose Steeply Progressive Taxes

As though advocates of large government are going to listen to me, but I’ll make the argument anyway. Here, I am intentionally ignoring the conservative arguments against large government and taxation in general.

Several politicians have in recent months and years proposed various new or enlarged taxes on the rich: wealth taxes, inheritance taxes, higher-income tax rates on top income earners. These politicians usually claim the government needs more money from the rich to fund large, expensive government services.

I posit that highly progressive taxation (a system that taxes mostly a relatively few people, such as the “rich” or “wealthy”) is an unreliable way to fund large and expansive government services. Large and expansive government services require, after all, a large, steady, and predictable funding mechanism. A government seeking to provide broad government services to a wide swath of the population cannot assure the continuity of government services if the funding underlying it is volatile and unpredictable. A taxation system that depends on a narrow portion of the population (such as the “rich” or “wealthy”) tends to be volatile and unpredictable.

A few years ago, the California government official tasked with providing budget numbers to the legislature realized that he needed to pay close attention to announcements of anticipated initial public offerings (IPOs) from privately held companies because such a large portion of the state’s income tax revenue came from these one-time events under California’s steeply progressive income tax system. He noted that the income tax revenue from such IPOs varied considerably from year to year, depending on the number of companies that decided to go public and market conditions at the time of the IPO. This made long-term state government budget planning difficult. (This San Francisco Examiner article goes into more detail.)

While governor of New York State, Andrew Cuomo observed that something like 40% of New York State’s income tax revenue came from about 25,000 taxpayers (out of a state population of 19 million people), and that if even a small portion of those 25,000 taxpayers moved out of state, state income tax revenues would be significantly impacted. New York State also has a steeply progressive income tax system.

There is also the often-cited observation that in an income tax system, extremely wealthy people often have considerable discretion over when to take actions that would create a taxable event. This makes income tax revenue from a small number of high-income taxpayers erratic.

The number of very wealthy people who die in a given year will vary quite a bit, creating volatility in an inheritance tax revenue stream. The wealth that “wealth taxes” clip off a few uber-rich individuals target will vary considerably year to year, creating volatility in a revenue stream based on “wealth taxes.”

The Scandinavian countries, often cited as models for large and expansive government services, generally have very broad taxation schemes that are not especially progressive. The governments of those countries depend on tax revenue from a broad swath of the population. Even people of modest means generally pay substantial taxes, which provides more stable government tax revenue with which to fund large and expansive government services.

A government that intends to provide reliable, broad government services needs a reliable, broad revenue stream. This is achieved only by taxing a broad swath of the population and commercial activity. A broad income tax, a broadly applicable sales or “value-added” tax, a per capita head tax, an “asset tax” applicable to the assets of all people, not just the wealthy. Supporters of large and expansive government services should support broad taxation on a large portion of the population, and oppose steeply progressive taxation schemes that rely on a small number of taxpayers.

The cynical part of me is ready to acknowledge that most advocates of steeply “progressive” taxation schemes are not so much interested in funding government services as they are in vindictive redistribution of rewards from the diligent to the indolent out of jealousy and envy. No one even pretends to claim this as a path to overall societal economic success.