A Taxing Problem

Ari Fleischer writes in an op-ed in Monday's The Wall Street Journal about the latest Congressional Budget Office (CBO) report on U.S. taxation.  Mr. Fleischer discusses this in connection with the presidential campaign rhetoric about the income tax system.  He produces a graph, similar to a table produced recently by Harvard's Greg Mankiw, that helpfully illustrates the actual distribution of taxes paid by income level.

Mr. Fleischer's main point is this:  "If fairness in paying taxes means the amount you pay is based on the amount you make, then the only group in America paying at least a 'fair share' is the top 20% — people who make more than $74,000. For everyone else, the tax code is a bargain."  He substantiates his position based on a comparison of data that is summarized in the following graphic.

Based on the CBO report, Mr. Fleischer examines "the top 20% of income earners (over $74,000).  They make 50% of the nation's income but pay nearly 70% of all federal taxes.  The remaining 30% of the tax burden is borne by 80% of the taxpayers, those who make less than $74,000. In short, this group's share of taxes paid, 30%, is lower than the share of income they earn, 50%."

He compares not just income level to percentage of federal taxes paid in the period under review (through 2009).  He also tries to put this into historical perspective:

the share of taxes paid by the top 20% has gone up over the last 30 years, while the share of taxes paid by everyone else has gone down. … The top 20% in 1979 made 44.9% of the nation's income and paid 55.3% of all federal taxes. Thirty years later, the top 20% made 50.8% of the nation's income and their share of federal taxes paid had jumped to 67.9%. … Meanwhile, the federal tax burden on middle- and lower-income earners is lighter. In 1979, the bottom 20% paid barely any taxes at all, just 2.1%. Now their share of taxes is a minuscule 0.3%.

I doubt that the data that Mr. Fleischer presents will be disputed.  What will be disputed is his interpretation of the data.  It is important to remind ourselves of this distinction (data and interpretation of it), even generally, because it will help to clarify the moral issues that are debated and thereby to promote improved public discourse.

Although I sympathize with the perspective that Mr. Fleischer advances, I also think that he misses something critical to the ongoing national conversation about monetary and tax "fairness."  This is a complicated topic, but let me offer one observation.

When the president and others object to the current tax system on the grounds that many citizens do not pay "their fair share," they are objecting, among other things, not just to the rate at which certain citizens pay taxes (that the rate is too low) but also to the level of income on which taxes are paid (that the level is too high).  It is both the tax rate and income level, taken together and with a view to a certain social end, that is viewed as unfair.

To say the same thing slightly differently, the issue in question is both the progressivity of the tax system and the spread between income levels.  The wide spread between income levels now versus thirty years ago -- that is, the difference in earned income between the top and bottom quintiles -- may in fact be what prompts the outcry for greater progressivity in taxation than prevails at present.  (This income discrepancy, by the way, is not a uniquely American phenomenon.)  

I suspect that if the spread were narrower, then demands for greater tax fairness might be more muted.  If some people did not make so much more money than others, then the issue might not seem in certain quarters to be so problematic.

This is important to note.  It is a sense of unfairness about the spread between income levels that is effectively prior to -- and therefore it is this that motivates -- the sense of unfairness about the spread between average tax rates and share of income taxes paid.  The widening income gap seems to some to be wrong (unfair); so current taxes paid on the high levels of income also seem to be wrong (unfair).  At issue, in other words, is the understanding of fairness itself.

Mr. Fleischer himself seems to recognize this, which is why he begins the op-ed in the way that he does, namely, by proposing one understanding of fairness:  that "the amount you pay is based on the amount you make."  This is fairness as equity.

His construction helps him to make his case, since he presents his data in light of that construction.  He spotlights disparities in taxation relative to earnings.  He, too, identifies unfairness; however, it seems to him to be "unfair" to those who have higher incomes.  It is not unfair because they have higher incomes.

When viewed thusly, Mr. Fleischer's objection may not be to progressivity itself but to the degree of progressivity:  that discrepancy in taxation is out of proportion to the discrepancy in income earned; it is too progressive; this spread is too wide.  It is not equitable.  The increase in the amount of taxes paid is greater than the increase in the amount of the nation's income earned.  (See the nearby table.)
 

But others will object that "fairness" is not really or ultimately to be conceived in terms of the amount of tax that one pays compared to the amount that one earns.  If it is, Mr. Fleischer will probably win the argument on that assumption along the lines of his op-ed.  According to his detractors, however, fairness is not a matter of proportionality in Mr. Fleischer's sense, whether proportionality of contributions or proportionality according to merit.  The driving sense of fairness on their view is not one of fairness as equity, but fairness as equality.

On this view, fairness is that system which leads to more equal social outcomes regardless of contributions or merit.  (In some versions it may perhaps be fairness precisely in contradistinction to them.)  It is fair to tax people differently, often very differently, if it is done with the goal of making more equal the primary goods of income and wealth (often through federal programs) across society but especially among those defined as the least advantaged.

This view, as I have articulated it, echoes that advanced by John Rawls, justice as fairness, a theory in which what he calls the "difference principle" operates:  "the difference principle requires that however great the inequalities in wealth and income may be, and however willing people are to work to earn their greater shares of output, existing inequalities must contribute effectively to the benefit of the least advantaged.  Otherwise, the inequalities are not permissible" (John Rawls:  Justice as Fairness:  A Restatement, 64; see also 122-24).

According to Prof. Rawls, the operative principle is not equity but his own special brand of reciprocity.  (I say that it is special because reciprocity is usually, is ordinarily, an in-kind exchange between two parties, whereas that in view in Prof. Rawls's theory involves unlike transfers among multiple parties.)  A controlling idea, then, in Prof. Rawls's view of justice, which has been in the air that many government officials have breathed for the last forty years since he first proposed it in 1971, has to do with acceptable differences across society as judged by a notion of reciprocity.  And it is this notion of reciprocity that sheds light on one current group's sense of fairness:

To sum up:  the difference principle expresses the idea that, starting from equal division, the more advantaged are not to be better off at any point to the detriment of the less well off.  But since the difference principle applies to the basic structure, a deeper idea of reciprocity implicit in it is that social institutions are not to take advantage of contingencies of native endowment, or of initial social position, or of good or bad luck over the course of life, except in ways that benefit everyone, including the least favored.  This represents a fair undertaking between the citizens seen as free and equal with respect to those inevitable contingencies. (124)

Professor Rawls advances this notion of justice as reciprocity, or fairness, by way of a thought experiment:  what sort of society would representatives behind a veil of ignorance choose to create in a hypothetical original position?  Policymakers advance something akin to this notion of justice as fairness not in an original position but at a different stage; they regulate society that is in its current position with constitutional essentials already settled.  The goal of many current policymakers is, with reciprocity as a guiding light, to make progress toward the ideal through social and economic legislation and through the administration of related rules (see 47-49).

When politicians say that they only want the group with greater monetary wealth to pay its fair share of taxes, they do not refer to the statistics that Mr. Fleischer adduces.  They appeal, instead, to a moral idea that is not dissimilar to that of Prof. Rawls's, even if it is not directly dependent on his teaching.  The moral idea is that such a wide discrepancy in income as exists now between the top 20% of earners and the bottom 20% of earners -- which has widened over the last thirty years -- is permissible if and only if the wealth amassed by the top 20% works to the greatest benefit of those in the bottom 20%.

These politicians believe that such a benefit has not been realized.  Because the more advantaged seem to be better off to the detriment of the least advantaged, it follows for them that unfairness exists and that greater taxation is a justified means of producing fairness.  And fairness is what would be to the greatest benefit of the least well-off.  Increased taxation -- which is a form of coercive state power -- on one group of society is a justified means of producing "fair undertakings," or just plain fairness, for the rest or whole of society.  Hence, "fair share" on this view is the share that secures a fair distribution of monetary goods across society.

The debate about taxation, precisely because it is tethered to the ongoing debate about the best American political scheme for the future, is not going away soon.  It is therefore critically important to make explicit the assumptions about what is fair that are often unarticulated but that are nevertheless powerfully at work in people's thinking and speaking.  Taxation is a material manifestation of a more formal matter:  competing conceptions of fairness.

Until and unless we engage each other candidly at the formal level, inquiring sincerely about a person's view of fairness and pressing respectfully why that person believes in this sense of fairness and not another, we will be fruitlessly volleying material arguments back and forth.