Monday, February 06, 2006

Paradox of Tax Cuts

The flatter a tax system, the easier it is to cut taxes. Why? Because if the rich are paying less in tax, an across the board tax cut no longer benefits the rich as much.

Unfortunately, the opposite is true. The more progressive a tax system is, the harder it is to cut taxes, because it's very likely it'll "only benefit the rich". Nevermind the fact the rich were paying most of the taxes in those scenarios anyway. What this means is that any tax cut or rebate, to be "fair", cannot merely keep the same level of progressivity (which would end up "helping the rich" too much) by being equally sized. Any "fair" tax cut must cause progressivity to *increase* by this logic. In order for the top 10% to only get 10% of the tax cut when they're paying 30% of the taxes for example, it's the only way to do it.

This can cause somewhat of a vicious cycle. When a tax system has the rich paying substantially more in taxes, any tax cuts that preserve this progressivity will inevitably help the rich more, so you must increase progressivity by cutting taxes on the bottom far more, which means the rich pay even more in taxes, which makes it even harder to cut taxes, and so on.

However, it can thankfully apply the way I first mentioned. If taxes are already low and proportional, cutting them more would give the rich less in both a dollar value and percentagewise, making them easier to sell to the public. Once people have gotten over sulking about the tax cuts, they'll then adjust to the new value and defend it how it is, not how it used to be. So, if we can flatten the tax/benefit system initially, it becomes easier down the road.

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