It is said that two things are certain: Death and taxes. But this leaves out one more certainty and it is the incessant preoccupation with taxes. Today is no different from any other day in that taxation is on the mind of most people, and the talk about it is everywhere. But because much has been covered already in this field, the only thing left to probe is the notion of progressive taxation. More specifically, the question we need to answer is whether or not progressive taxation should be maintained or should be replaced with a flat tax.
To be clear, a flat tax is the payment of a fixed percentage of one’s income regardless of the bracket in which the earner falls. For example, if the rate is set at 10% it would entail someone earning a hundred thousand dollars to pay ten thousand, and someone earning a hundred million dollars to pay ten million.
By contrast, progressive taxation would entail that the one earning a hundred million dollars pay 10% on the first portion of ten million, then pay 20% on the second portion of ten million and progressively so until the last portion where the rate reaches the 90% level. You add up all this and it comes to forty five million dollars paid in taxes versus the ten million that would be paid under the flat tax regime.
Now, in order to come to grips with the original question let alone answer it, we must clarify the philosophical differences between the two forms of taxation. And to do this, we must define the concept of leverage which is as follows. In the same way that someone may use little money of their own to gain control of a big asset, the social contract creates the condition by which someone may make a small effort and amass huge amounts of capital. This is what is meant by leverage and you find it everywhere in the business world especially in the leveraged buyouts where people put down little money of their own and borrow a whole lot to buy something big like, for example, a multi-national conglomerate.
What this means is that the leverage which is inherent to the social contract under which we live allows someone like Bill Gates to create the business that he did. Certainly, the man did not amass a million times more wealth than the average citizen because he is a million times better but because he lives within the confines of a social contract that allows him to amplify his talent. Put this man in a setting that is governed by a different social contract or put him in a place that is governed by the law of the jungle and Bill Gates may prove to be at best twice as good as the average person or he may not have the necessary wits to gather his daily bread.
Consequently, the conclusion we drawn from this is that wealthy people become wealthy in a given system not only because of their innate talent, which no one wants to take away, but also because of what the system offers them in terms of the support that amplifies their talent and their work. And this support is something that most wealthy people acknowledge receiving when they engage in philanthropic activities, their way of saying thank you to society.
But the wealthy do more than thank society because philanthropy is also their way to give back to society some of what it has given them. And they do so despite all the taxes they are paying which suggests they feel they are not paying enough and wish to pay more.
In fact, when the very wealthy pay taxes, they pay for two things. First, they pay for services rendered by the various levels of government, and these are the services which every citizen receives and pays for. Second, they pay for the maintenance of a system that guarantees to them the leverage by which to amplify their work, and this is a luxury that the average citizen does not use or enjoy.
The amplification of one’s talent and work is not restricted to the world of enterprise. It is everywhere, most notably in sports and in the arts where those who achieve stardom earn thousands of times more than they did before they reached that level and more than their nearest competitor. And this could not have happened without the literal amplification of their talent by the electronic and the print media that turn them into a sensation overnight and in every household.
But the one area that is of interest to this discussion is what happens in the world of politics. This is where some people with seemingly limited abilities may, by the confluence of circumstances, be given the opportunity to amplify their talent and show what a great leader they can be. Many have traveled this road, Winston Churchill being one of them. But what happens to some of these people as time passes is what should happen to some business leaders but does not for one reason or another.
What happens to politicians is that they get tired after being at the helm for a few years, they run out of ideas and their output is reduced. Those who try to linger on are disliked by the public and tossed out of office at the first opportunity. In a similar fashion those who come into business with a great promise tend to wilt with time except that their weaknesses are not readily detected because they do not come under the same scrutiny as the politicians; and no one is in a position to toss them out because no one has elected them in the first place.
These people linger on at the helm but their business continues to prosper because the social contract guarantees it. And the bigger the enterprise, the more the social contract is willing to shore it up because it represents jobs that the public wants, it makes products that the nation needs and it represents a link in a chain that does not tolerate having a weak link along its line. Thus, the social contract which allowed the business to expand and hire more people now becomes the insurance policy that maintains its survival because it sits like an indispensable icon.
You ask: What did these people do to merit all this? You read their biographies and learn that some inherited the money and went on from there but others were lucky enough to be standing in the right place at the right time when it all began to happen to them. And this leads to two more questions.
First, does someone who inherits the money and may not have the talent of the parent merit receiving the benefits of the social contract? Second, does the recipient of fortuitous circumstances deserve to be rewarded still more as we consider how much taxes they should pay on the profit they make?
People like Bill Gates and Warren Buffet do not want their progenies to inherit all the money they have amassed. They say they will give the kids some money to start them off in life but the kids will have to work, to use their own talent and to amass their own fortunes. Thus, it seems that the parents themselves do not believe dynastic rule is good in business anymore than it is in politics, and they want their kids to make it on their own merit.
Which brings us to the original question: Should progressive taxation be maintained or should it be replaced with a flat tax? I cannot escape the conclusion that progressive taxation must be maintained. Not only that, but the case has also been made for maintaining the inheritance tax.