How much tax should the rich pay? | The Economist

Key Concepts

Progressive Taxation: A tax system where the tax rate increases as the taxable amount (e.g., income) increases.
Redistribution: Government policies, primarily through taxation and social transfers, aimed at reallocating income and wealth within a society.
Welfare State: A system where the government protects and promotes the economic and social well-being of its citizens, often through social security, healthcare, and education.
Thatcherism/Reaganism/Neoliberalism: Political and economic ideologies emphasizing free markets, deregulation, and reduced government spending and intervention.
Market Incomes: Income earned before any taxes are deducted or government transfers are received.
Gini Index: A common measure of income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality).
Robin Hood Economy: A term used to describe an economy where governments are actively redistributing wealth from richer to poorer segments of society.
Consumption Tax: A tax on spending on goods and services, rather than on income or wealth.
Economic Rents: Income derived from ownership or control of a limited asset or market power, rather than from productive effort or risk-taking.
Property Rights: Legal rights to own, use, and dispose of property.

Historical Trends in Progressive Taxation and Redistribution

The discussion challenges the common narrative that the welfare state was rolled back and government shrank in the late 20th century due to Thatcherism and Reaganism. Instead, figures on redistribution show a steady increase in progressive policies across the rich world.

United States:
- In 1979, the bottom fifth of earners received 32% of their market incomes in government transfers.
- Today, this figure has risen to 72%, according to the latest Congressional Budget Office (CBO) data.
- The top 1% of earners now pay a higher average rate of federal income tax than they did in 1979, though not the highest rate historically.
Rest of the Rich World (especially Europe and Britain):
- Redistribution has gone even further, particularly since 1990.
- While inequality generally rose in the 1980s, inequality after taxes and transfers has generally decreased in the rich world since 1990.
- This trend is "particularly acute" in Europe and Britain.
- In the UK, income taxes have become significantly more progressive, leading to greater redistribution.
- Inequality in the UK, after taxes and transfers, is now lower than it was in 1986, a fact described as "pretty extraordinary" given the common narrative of ever-rising inequality.
The "Robin Hood Economy": This term is used to describe the current state where governments are undertaking more redistribution than in the past. In America, this offsets rising inequality, while in Europe, it has led to falling inequality in many places.

Impact on Inequality

The CBO data, visualized in a chart, illustrates the impact of taxes and transfers on inequality:

Before Taxes and Transfers: The "dark red line" shows a steady upward trend in inequality (measured by the Gini index).
After Taxes and Transfers: The "pinker line" beneath shows that inequality has been "much flatter" and is towards the higher end of the historical range. This indicates that increased redistribution in America has "lent against this increase in inequality arguably pretty successfully."

The Role of Top Earners

The discussion clarifies misconceptions about the tax burden on the wealthy:

Dependence on Top Earners: Governments, in America and elsewhere, are becoming "way more dependent on the top of income distribution" to pay income tax bills. This is partly because their share of income has increased, but also due to increased progressivity in tax codes.
US Top 1% Contribution: The top 1% of earners in the US pay 27% of federal taxes, while receiving 20% of total income. This suggests that "a lot of evasion is not going on there that really helps them."
Definition of Top 1%: The threshold for a household to be in the top 1% is approximately $600,000. This group typically includes high-earning professionals like lawyers, bankers, and doctors (especially in the US, where doctors' salaries are higher due to regulatory protection), rather than the "super rich" or those engaged in "very very complex tax evasion."

Public Opinion on Taxing the Rich

A poll of subscribers asked, "Do the top 1% of earners pay the right amount of tax?"

69% said no, they pay too little.
13% said they pay too much.
18% thought the level was about right.

This response is noted as not unusual, reflecting a general public inclination for higher taxes on those earning more.

Ethical and Economic Arguments for/Against Progressive Taxation

Henry's Perspective (on the ideal tax rate):

Difficulty in Determining Ideal Rate: It's challenging to pinpoint an "ideal" top tax rate, as public opinion often favors higher taxes on those earning more than oneself, without a clear "limiting principle."
Fairness Beyond Equality: While acknowledging the desire for lower inequality, Henry argues that fairness also encompasses "rewarding effort, hard work, and talent" and "getting out what you put in," aligning with property rights. He suggests that the left's focus on fairness tends to be solely on equality.
Disquieting Poll Results: Henry finds it "disquieting" that public opinion polls would likely show similar results even if the top tax rate were significantly higher, indicating a persistent desire to tax the rich more without a clear economic or ethical boundary.
Economic Uncertainty: Economics doesn't provide a definitive answer on where high tax rates begin to "distort things" or deter economic activity.

Mike's Perspective (arguing against further increases):

Taxes on the Rich are "High Enough": Mike believes that taxes on the rich are "at the very least high enough."
Purpose of Redistribution: He disagrees with the goal of redistribution "simply because a pot of income exists." While supporting a "minimum standard of living" or "basic level" below which people shouldn't fall, he doesn't agree that money should be redistributed merely because someone is rich.
Ethical Stance: Ethically, beyond reasonable social goals, people should be "allowed to keep what they make."
Ideal Tax Structure (Economic Efficiency):
1. Tax "Bad" Things: Ideally, a tax system should target things that are inherently bad or that society wants to discourage, such as "rents of various types" (e.g., from monopoly activities).
2. Consumption Tax: Consumption is a "pretty good thing to tax," especially if a "progressive consumption tax" could be designed.
3. Income Tax: Income is "a little bit below that" because it funds both investment and consumption, making it a less precise target.
4. Investment and Wealth Tax (Worst): The "worst thing to tax" is investment and wealth (as a proceed of investment) because it discourages investment, which is crucial for economic growth and productivity.
Critique of Focusing on Rich Incomes: Mike argues that "focusing too much on the incomes of really really rich people" filters the tax system into a less effective category. He views it as "just a grab on a group of people that people think are sort of deep pocketed," rather than an effective way to run a tax system.

Conclusion

The video highlights a significant, often overlooked, trend of increasing progressive taxation and redistribution across the rich world in recent decades, successfully mitigating rising inequality in many areas. Despite this, public opinion largely favors even higher taxes on the wealthy. The discussion then delves into the complex ethical and economic arguments surrounding the "right" level of taxation for high earners, with Henry emphasizing the multifaceted nature of fairness beyond mere equality and the lack of a clear limiting principle in public demand, while Mike argues that current taxes are sufficient and that focusing on taxing high incomes and wealth is economically inefficient and ethically questionable, preferring taxes on consumption or "bad" economic activities.