Two standards of tax fairness: “Ability to pay” and “equal treatment”
Our research shows that voters are instead motivated by different standards of tax fairness. Some people believe in the principle of “ability to pay” — wealthier people should pay higher tax rates because they can better afford it. Others think in terms of “equal treatment” — if democracy is about treating people the same, then all should pay the same tax rate. Progressive tax changes tend to be adopted when both fairness criteria point in that policy direction.
Inequality isn’t what motivates progressive tax reform
If inequality alone drove tax policy, then a look at history should show that governments tend to raise taxes on the wealthy in response to rising inequality. In our book “Taxing the Rich,” we compiled two centuries of tax statistics for 20 countries to find out whether this is true. In short: no. We saw no evidence that governments, on average, raise top rates of income taxation when the top 1 percent hold a larger share of total income. The same is true for inheritance taxation and wealth inequality. The United States is following a broad historical tendency: not adjusting tax rates to respond to inequality.
Why? It could be that those with the largest proportion of wealth use their expanding resources to protect their share from taxes. Or it could also be that some people don’t think raising top tax rates is the fair way to deal with inequality. To find out what people believe, we conducted for our book a representative survey of American adults. We found that on average, Americans thought the ideal top statutory income tax rate was 33 percent. That’s lower than the GOP bill’s top rate of 37 percent. In a follow-up survey of American adults conducted in 2016, we found that many U.S. respondents who think inequality is too high nonetheless oppose raising top tax rates as a solution to the problem.
Opponents of the GOP plan have focused not just on existing inequality, but also on showing that the lion’s share of its benefits will accrue to the wealthy. But some Americans in the “equal treatment” camp don’t think that’s unfair. As one Ohio resident told the New York Times, “I don’t think someone who makes more money should have to pay more in taxes. My meal shouldn’t cost more just because I make more. That’s not fair.”
What proportion of Americans believe in “equal treatment” taxation?
We have conducted several surveys of U.S. adults over the past two years, asking respondents to specify the marginal income tax rates they think individuals at different income levels should pay. In each case, roughly a third of respondents say they prefer having individuals at different income levels pay the same tax rate. Note that we didn’t call the option of a single rate in every bracket a “flat tax,” because this term is most commonly associated with Republicans, and we did not want to trigger party allegiances.
When the wealthy avoid taxes, it offends both approaches to tax fairness.
Currently, those with the highest incomes in the United States sometimes actually pay lower effective rates than do those earning substantially less. One of the many reasons for this involves the “carried interest” provision in the U.S. tax code, which President Trump highlighted on the 2016 campaign trail. It allows some individuals, particularly working for hedge funds and private-equity firms, to classify earnings as capital gains and to pay a lower tax rate than if the earnings were ordinary income. This outcome respects neither approach to tax fairness — “ability to pay” nor “equal treatment.”
Several features of the Republican tax bill will increase the ability of the wealthy to avoid taxes. For instance, the law will enable more individuals to pay lower tax rates by using “pass-through” companies through which business owners pay a lower rate on earnings. A recent paper by top law professors summarizes all the ways the GOP plan will allow high earners to avoid paying the ordinary tax rate.
Ultimately, those who want to change the tax debate will have a much better chance of success if they focus less on inequality and more on special privileges in our tax system that violate both progressive and conservative standards of fairness.
Kenneth Scheve is professor of political science at Stanford. Find him on Twitter @kfscheve.
David Stasavage is professor of politics at New York University. Find him on Twitter @stasavage.
Together they are the authors of “Taxing the Rich: A History of Fiscal Fairness in the United States and Europe” (Princeton, 2016).