In the monthly "Ethical Inquiry" series, we examine ethical questions, highlighting a broad array of opinion from journalism, academia, and advocacy organizations. Our intent is to illuminate and explore the complexity of some of the most vexing ethical questions of our time.

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Ethical Inquiry: April 2011

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Ethical Dimensions of Taxes: Who should pay how much for what?

Why do we pay taxes? What good or harm is done with them? Is it better for individuals or for the collective to decide what how to spend tax dollars? As the historical tax cuts championed by the George W. Bush Administration were renewed along with expansions of various tax credits in a landmark compromise between the Obama Administration and Congressional Republicans in late 2010 these were just a few of the questions being debated by the public.

Additional tax cuts, such as the permanent elimination of the estate tax, are being lined up as early priorities for the now Republican-controlled House of Representatives.

This installment of Ethical Inquiry will explore some of the ethical dimensions of taxes in order to help provide context for the next time you are exposed to the topic – whether it is through a news piece, a glance at your paystub, or as you file your 2010 tax return.

Why Do Taxes Exist?

Taxation at the federal level in the United States of America is authorized by the Constitution and clarified by the Sixteenth Amendment, ratified in 1913. The first federal tax in the US was suggested because of the need for new revenue to support the War of 1812. However, the war ended before the tax was enacted. The Revenue Act of 1861 became the first formal tax, and was used to help pay for the American Civil War.

On a more micro level, local excise taxes and fees generally are created or increased to pay for public structures and services that have lost funding or were not funded from broader tax revenues (See “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States” [PDF] from the Institute on Taxation and Economic Policy. Taxes are used to pay for infrastructure such as roads, and services such as fire departments and schools, as well as national defense, research, and more.

How to Judge a Tax?

As with any evaluation task, one must first identify the criteria by which you are to judge the issue up for analysis. The Massachusetts Budget and Policy Center considers four criteria: adequate, stable, simple/efficient, fair. To what extent does a given tax meets the revenue need? Is it stable in the amount of revenue it generates over time? Is it simple or administratively efficient? Is it fair?

That last criterion, “fair,” is perhaps the most contested, because there are many ways to define fairness. Deborah Stone presents an excellent illustration of this in her 2001 book, Policy Paradox: The Art of Political Decision Making.

Most commonly, fairness with regard to taxation is measured by calculating the percent of personal income paid. If that percentage is higher for people with low-incomes compared to those with high incomes, a tax is considered “regressive.” If the reverse is true, it is considered, “progressive.” If the percentage is the same across income levels, it is considered “proportional.” (See “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.” [PDF])

But which is more fair? Proportional or “flat” tax? Regressive? Progressive?

Complicating the question, even if there were agreement on which system would be most fair, determining which system is actually in place can be challenging.

In the Commonwealth of Massachusetts, for example, the tax system could be considered progressive, regressive, or proportional, depending on how you evaluate it:

Massachusetts has a flat income tax rate. That is, everyone, regardless of income, pays 5.25%. That would make the state income tax officially proportional. However, because of a system of tax credits and personal deductions, those with very low incomes in effect pay a smaller percent of their income in taxes, making the state income tax de facto somewhat progressive (“Facts at a Glance: The Income Tax” Massachusetts Budget and Policy Center.).

If one were to broaden the analysis to all state and local taxes, the conclusion would change again. Specifically, the Institute on Taxation and Economic Policy found that those (non-elderly) in the bottom income quintile in MA pay 10.1% of their income in local and state taxes, whereas those in the top quintile pay as little as 6%. Thus, the overall taxation system in Massachusetts – as in nearly all states – is regressive. (“Who Pays? A Distributional Analysis of the Tax Systems in All 50 States" [PDF])

There is a great deal of false or politically skewed information available. The debate  around the estate tax is a striking example. Opponents of the estate tax have labeled it a “death tax.” After an aggressive campaign led by the Walton family, of Wal-Mart fame, the majority of the US population thought they would be affected by the tax, though it impacts fewer than 2% of the population.

There is disagreement among those who are actually affected by this tax, as well. For example, Abigail Disney, heiress to the Disney fortune, supports the estate tax. “My grandfather [Roy Disney] would be the first person to tell you that he’d managed to amass his fortune not in spite of, but because of, the American system,’’ she said. “After all, without reliable and safe roads there would be no such thing as Disneyland; without high-functioning legal systems and a well-regulated business environment there would have been no copyright protection for Mickey Mouse.’’

To Pay or Not to Pay?

While there are groups, such as the Tea Party, that claim that government is “too big” and warn against a “government take over,” with few exceptions (see below) people in the US support some level of taxation. Many uses of funds raised by taxation share broad public support. (See Class War? What Americans really think about economic inequality. Even Libertarians, who advocate for smaller government, support taxation for basic national defense. (See “Speeches and Statements,” Congressman Ron Paul.)

A recent report by the Center for American Progress (“Better Not Smaller: What Americans Want From the Federal Government,” July 2010), found that concurrent with an historical low in confidence in government, Americans are more interested in improving government’s performance than in shrinking the budget. Specifically, they support efforts to “eliminate inefficient government programs, implement performance-based policy decisions, and adopt modern management methods and information technologies.”

This is consistent with the cognitive research findings that despite the negative public opinion of “government,” people also overwhelmingly support specific interventions that require government involvement. (See "Achieving the American Dream: A Meta-Analysis of Public Opinion Concerning Poverty, Upward Mobility and Related Issues" and “Talking About Government.”) Many people want good schools, parks, nice roads/public transportation, safe neighborhoods, plenty of jobs, clean air, etc., all of which and are typically paid for in whole or in part by taxes.

Seven provisions in the 2009 federal “stimulus bill” (the American Recovery and Reeinvestment Act of 2009) are estimated to have saved 6.2 million people from falling into poverty, including 2.4 million children under the age of 18.

The biggest debates, then, are around who pays, how much they pay, and how public funds are used.

Objections

There are those in the United States (e.g. “tax protestors”) who refuse to pay some or all income tax or other specific taxes (such as the “telephone tax”). Their reasons for protest generally come from morals or principles concerning the use of taxes (e.g. spending on weapons of mass destruction or a belief that only national defense is a legitimate public expenditure).

Objections to size or role of government
Another scenario involves those who argue against a specific type of spending in order to decrease revenue for the public sector in general. A leading anti-tax activist, Grover Norquist, who founded Americans for Tax Reform in 1985 “at the request of President Reagan”, Norquist famously said on NPR’s "Morning Edition" in May 2001 "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

Americans for Tax Reform “opposes all tax increases as a matter of principle." They state their view as “We believe in a system in which taxes are simpler, flatter, more visible, and lower than they are today. The government's power to control one's life derives from its power to tax. We believe that power should be minimized.”

Others support the scaling down of public revenue in favor of individual charitable giving. The Boston Globe’s senior opinion editor, Renee Loth, counters that argument by arguing that “Charity is a virtuous human impulse and should be rewarded, but it is an enhancement, not a substitute, for government. Charity won’t build roads or pick up the garbage. It won’t inspect your hamburger meat. It won’t do nearly enough to support unpopular groups such as prisoners or drug addicts. Only effective government will do that.”

Objections to specific uses of funds
Predominantly, people will disagree on specific expenditures or spending patterns. For example, there are individuals and organizations, such as the War Resister’s League, that advocate for not paying taxes that would be used for defense spending, sometimes calculating a percentage of taxes as what would be spent on military expenditures and withholding that percentage. Others calculate the percentage in different ways.

Researchers have also found a consistent desire among the public for government to take on long-term planning, a function only possible through taxes. Unfortunately, results are not immediately visible, the political environment is extremely polarized and campaign costs are at an all-time high; all of which incentivize the short-term over the long-term for many policy makers, which in turn may contribute to contradictory instructions to government agency heads and under-funding of basic public structures. (See Bureaucracy: What Government Agencies Do And Why They Do It
and Agency Under Stress: The Social Security Administration in American Government.)

Objection to management of funds
Sometimes a goal can be shared across the political spectrum, but there is wide disagreement on what spending policy will achieve that goal. The recently passed Patient Protection and Affordable Care Act of 2010 [PDF] and the controversy in its wake, is an example. There were disagreements about both large-ticket items (e.g. what percentage of the population to cover via Medicaid) and small-ticket items (e.g. whether public plans should cover abortion services). (See for example, “Health Care Reform – A Republican View” in the New England Journal of Medicine (2009) by Senator Chuck Grassley and “Implementing Health Care Reform – Why Medicare Matters” in the New England Journal of Medicine (2010) by Dr. Robert A. Berenson, as well as the individual mandate, requiring most people to buy health insurance.

How to stimulate the economy post-great recession, results in another example of contested means. Groups like Americans for Tax Reform and the US Chamber of Commerce emphasize decreasing those taxes that immediately benefit the wealthiest 5% of Americans (e.g. corporate taxes and capital gains tax).

Reducing the deficit (i.e. the amount the government spends each year beyond what it takes in via all revenue streams) is an example that illustrates the complexity. One perspective is that deficit reduction should be prioritized over providing services, such as when Congressional Republicans argued against a $34 billion expansion of unemployment benefits. However, those same legislators unanimously supported an expansion of the Bush-era tax cuts that will result in over $500 billion added to the deficit.

Another perspective opposes deficit spending because of the burden it places on future generations (i.e. we get the benefit and the future generations have to pay for it). Still others argue that deficit spending is justified because future generations can be expected to have a higher standard of living than we do.

Yet another perspective highlights the idea that deficit spending was necessary to save us from a severe depression (See “Testimony of LaDonna Pavetti, Director, Welfare Reform and Income Support Division, Center on Budget and Policy Priorities, Before the House Budget Committee,” December 9, 2009), but that unlimited deficit spending is not a good idea. Many agree that beyond a certain point, increasing the deficit is not worth it.

Objection to the structure of taxation
Others cite research that payroll tax reductions and tax credits for people in the lower income quintiles generate far more economic benefits, particularly for local economies as they tend to – by necessity – spend 100% of those benefits, resulting in a “multiplier effect.” (See again “Testimony of LaDonna Pavetti, Director, Welfare Reform and Income Support Division, Center on Budget and Policy Priorities, Before the House Budget Committee,” December 9, 2009.)

The non-partisan Congressional Budget Office concluded that extension of all the Bush-era tax cuts would produce the least amount of stimulus for the economy out of 11 options considered because consumption at those income levels is already at a maximum. Therefore, top income earners do not generate much additional demand with additional money in their accounts. (See Urban-Brookings Institute Tax Policy Center, “Five Myths about the Bush Tax Cuts” and Congressional Budget Office, “Policies for Increasing Economic Growth and Employment,” January 2010, pgs 24-25 [PDF].)

There is also a line of thinking that relying on revenue from income taxes on the wealthiest citizens can lead to reliance on an unstable funding source. (See “Price of Taxing the Rich,” The Wall Street Journal and “The Battle Over the Millionaire’s Tax," The Wall Street Journal.)

Final Thoughts

Individual taxpayers and governments make decisions about taxes. Who should pay? How much should they pay? And to what use(s) should those funds be put? In this Inquiry we have begun exploring an area with many more ethical dimensions.

We invite you to continue exploring the ethical issues that arise in this context, and to share your thoughts with us on our Facebook page.

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This installment of "Ethical Inquiry" was researched and written by Cynthia A. Tschampl, Ph.D. candidate in Health Policy at the Heller School for Social Policy and Management, Brandeis University.

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