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CenterPoints

November 2009

The Case for Progressive Taxation

by Juan Carlos Ordóñez

Adam Smith, the father of capitalism, walked with Jesus in at least one respect: his support for progressive taxation. That’s the principle that taxes should be based on ability to pay.

Echoing Luke Chapter 21’s message that a few pennies from a poor woman's purse costs her more than many pieces of gold from a rich man's horde, Smith wrote in The Wealth of Nations, “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

But these days unreasonableness stirs in the minds of some, who complain that the rich pay the lion’s share of all taxes. The proper response to such a complaint is, “that’s how it should be.”

Progressive taxation corresponds with our values. We understand that a dollar in taxes costs a poor person much more than a dollar from a rich person. For a poor family, more money paid in taxes means foregoing food, heating, a car repair or other basic necessities. But for the wealthy, paying more in taxes does not diminish their comfort. They have the ability to pay more.

And yet today you’ll hear some argue that Oregon’s tax system is unfair to Oregon’s wealthiest. They usually cite a statistic that the wealthy pay an outsized share of tax collections.

That’s not surprising, considering how skewed Oregon’s income distribution has become. In 2007, the wealthiest 1 percent of Oregon households took in nearly 19 percent of all income in the state.

But more importantly, that the wealthy pay an outsized share of total income taxes tells us nothing about the fairness of the tax system.

Consider the following hypothetical scenario, a state with three taxpayers: Household A earns $20,000 a year and pays $4,000 in taxes. Household B earns $40,000 and pays $6,000 in taxes. And Household C earns $250,000 and pays $25,000 in taxes.

The unreasonable crowd would complain that the wealthiest third is paying more than two-thirds of all taxes. But when you consider what percentage of their own income each pays, you find that A pays 20%, B pays 15%, and C pays 10% of his income. So when you measure the relative burden on each household, it’s clear that the lowest income earner has the biggest burden. It’s a tax system not based on ability to pay. It’s a tax system that asks more of the poor than of the rich. It violates the principles set forth in Luke and The Wealth of Nations, asking more of the poor and, unreasonably, letting the rich off the hook.

Sadly, while it is hard to deny that a progressive tax system is the only fair tax system, Oregon fails to live up to that standard. True, our state income tax is mildly — “meekly” might be more accurate — progressive. But when all state and local taxes are factored in, the regressive nature of our tax system becomes evident.

Today the poorest fifth of Oregon households — with an average yearly income of about $10,000 — pay about 8.7 percent of their income in state and local taxes combined (income taxes plus excise taxes such as gas and cigarette taxes and property taxes and fees, less the federal offset for itemizers). By contrast, Oregon’s wealthiest 1 percent of families — with average income of over $1 million — pay about 6.2 percent in state and local taxes.

Measures 66 and 67 on the January ballot would nudge Oregon’s overall tax system toward progressivity. If Oregonians vote “yes” to approve these targeted tax increases on corporations and high-income Oregonians, the wealthiest 1 percent would be pushed up slightly, paying 6.6 percent of their income in state and local taxes combined, still less than what the poorest families pay.

Thus, Measures 66 and 67 are a step toward Adam Smith’s more reasonable tax system. They would get us closer to a system that acknowledges the difference between a poor person’s purse and a rich person’s horde, asking the latter to contribute more.


Juan Carlos Ordóñez is the communications director of the Oregon Center for Public Policy.

Posted in Income, State tax.
 

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