RALEIGH – As it seems likely that “tax fairness” will be a matter of great dispute in Raleigh and Washington next year, now is a good time to offer a useful definition of the term.
Useful is not the adjective I’d use to describe how most politicians and political activists define tax fairness. To some on the Left, taxes are “fair” to the extent that they redistribute income from those who earned it to those who didn’t. To others, tax fairness is about inflicting pain in proportion to income, regardless of whether the proceeds go to transfer programs or are spent on public programs such as education and infrastructure. Essentially, either sentiment can be summarized as “Stick ’em up!”
Virtually everyone agrees that regressive taxes – in which the tax burden varies inversely with income, wealth, or standard of living – are unfair. Fewer people agree that progressive taxes – in which the tax burden rises in proportion to income, wealth, or standard of living – are also unfair. Indeed, when left-wing activists employ the term tax fairness, they specifically mean progressivity.
But both regressivity and progressivity are unfair, for the same reason. They violate the principle of proportionality, which is the only sensible principle for determining how citizens of a republic should share the cost of core governmental services.
As I’ve argued before, you can only evaluate the fairness of a tax code by first dividing the programs it funds into two categories: entitlements and enterprises. Simply put, the first category includes services to which citizens have a natural or civil right, such as national defense, law enforcement, or basic education. The second category, enterprises, includes services that citizens purchase according to use, such as municipal water service, highway travel, or college education.
Most of the time, arguments about tax fairness center on entitlements. They make up the vast majority of federal, state, and local spending (notice that I’m using the term more broadly than federal budget analysts do). Regarding the question of how to apportion the cost of these basic governmental services, James Madison explained the answer quite well: “The moment you abandon the cardinal principle of exacting from all individuals the same proportion of their income or of their profits, you are at sea without a rudder or compass and there is no amount of injustice and folly you may not commit.”
The problem with progressive taxation is that, in the end, setting the relative rates boils down to an exercise of raw political power. Because of the twin temptations of envy (resenting the success of others) and greed (seeking to steal the possessions of others), there will always be a political constituency for demagogues who promise to use the tax code to inflict pain or redistribute income. Proportionality is a rule that guards against predation, be it of the poor by the rich (think regressive “sin” taxes on alcohol, tobacco, or soft drinks) or of the rich by the poor (punitive tax rates on high-earning professionals, entrepreneurs, and investors). It makes a virtue of simplicity. Roughly speaking, a proportional tax means that if you earn twice as much as I do, you pay twice as much in taxes – not three times more, or 50 percent more.
Here’s a quick-and-handy guide to assessing future claims of tax fairness. If a proposal would move North Carolina or the nation closer to a proportional tax system, it’s fair. If a proposal would move North Carolina or the nation further away from proportionality, either towards the progressive or regressive ends of the spectrum, it’s unfair.
Politicians say they care about making taxes fairer, but most of the time they just want to make taxes higher and choose the path of least resistance. I don’t know about you, but I think that’s grossly unfair.
Hood is president of the John Locke Foundation.