On Taxes, Part III

This three-part series on tax policy concludes with a discussion of stability, purpose and balance. (Read Part I and Part II.)

Progressive taxes tend to be the most volatile, that is they tend to go up and down with the economy.  When rich people are doing well, they really rake in the cash but the drop off in bad times is precipitous. This outcome is unsurprising as the income of wealthy taxpayers is more sensitive to the performance of volatile assets.

For this reason, the least progressive taxes tend to be the most stable during recessions. While this is an argument against solely relying on taxes on the wealthiest taxpayers, it is not one against progressive taxation. As one senior legislator explained to me, a good way to look at taxes is that they are a portfolio. You have to have a mix of progressive and stable non-progressive tax revenue sources. Spending below the State’s means in good times (i.e. a rainy day fund) is also good insulation against inevitable downturns.

The central purpose of taxes is to raise revenue to pay for government services. More broadly, they should be designed to encourage economic prosperity. On occasion, they can also help to encourage or to discourage an activity (e.g. smoking, energy use). Their purpose is not to punish people for doing well—something sometimes forgotten in the new focus on economic inequality.

At the same time, this does not prevent tax policy designed to protect people with lower incomes (i.e. low taxes) or make it easier through spending to make it possible for people who work hard to live decent lives (e.g. health care, earned income tax credits, educational spending).

Relatedly, part of the danger of increased polarization can be a lack of proportion in approach. Funding government services costs money. Few enjoy paying taxes but they are the price we pay to have police, fire, schools, roads, etc. While the conservative desire to shrink government is perfectly legitimate that desire goes far overboard with those who attack all taxation and view any taxation as virtually illegitimate.

On the other side, some progressives seem to talk about corporations and profits as if both are inherently illegitimate rather than as employers or engines of economic activity. Moreover, the goal of progressive tax policy should not be endlessly higher taxation or to kill economic growth. As former President Bill Clinton loved to remind Democrats, low unemployment was the best anti-poverty program.