Higher taxes for high-wage earners not the full answer
This is the third in a series exploring how a tax system might be created or revised. Last week we looked at the basics of the flat tax. This week we turn our attention to the sliding scale, often called a progressive tax system, and to the top-down system.
When you are taxed on a sliding scale, the more you earn the more you pay. How the sliding works depends on numerous fine details, as does how quickly the scale rises and how far up it goes. Our current tax system has similar qualities, but isn’t purely this way. Ours is more like a stair-step than a slide. Simply put, the sliding scale means you pay a higher percentage in taxes as you earn more money.
Like the other systems, this one is fair, just in a different way. Here, the more “excess” money you have, that is, what you have above and beyond what is needed for survival, the more you pay.
The pros of this system: those who can afford to pay the most in taxes are the ones who are asked to pay a higher percentage in taxes. Cons: the lowest income families still pay taxes when they can barely afford a basic standard of living. Also, since you are taxed at a higher percentage as you make more money, this system can act as a disincentive to continue to increase your earnings.
At this point I’d like to reiterate: this is not the tax system that we have now. First, in our current system we have made adjustments so that close to half of the families out there pay no taxes. Next, we have all the special phase-outs, deductions, credits, and surcharges that attempt to make the system more “fair”. So, no, ours is not a true sliding scale, it just looks a bit like it.
The last tax system we’ll explore is called top-down. In this system, only the highest wage earners pay taxes. You tax 100% of all income above a certain level. Let’s pretend that it is determined we can pay our Federal bills by taxing away any income above $150,000 a year. So anyone earning less than that pays nothing. Anyone earning more pays Uncle Sam every penny they make above that amount.
Other than some small socialist circles, no one seems to like the top-down system. But it is certainly fair. It only burdens those who can most easily afford to pay the taxes. That’s the end to its benefits. With this system, lower income earners have no reason to control governmental taxes and spending and higher income earners have no financial incentive to work as much as they do. Risk-taking, working more hours, or spending years earning a higher education to get a higher paying job only to relinquish any “extra” earnings wouldn’t seem worth the effort. Surely, fewer would make the attempt and society and the economy might suffer accordingly.
Now that we’ve explored my three chosen systems, we’ll look at how your economic philosophy will probably determine your favorite. See you next week.
This article was published under the title "Several systems of taxation" in the Wichita Falls Times Record News on February 22, 2014.