Higher taxes and morality plays revisited

In this column, last week, about the wisdom of tax rises on the highest income earners, I belatedly realized that I wouldn’t have enough time to fully express all the ideas I had lined up, and I knew my editors wouldn’t take too kindly to me writing a column version of war and peace.

In this column, last week, about the wisdom of tax rises on the highest income earners, I belatedly realized that I wouldn’t have enough time to fully express all the ideas I had lined up, and I knew my editors wouldn’t take too kindly to me writing a column version of war and peace.

Even though by this point I sound like the guy at the bar who won’t shut up, I want to revisit the topic mainly to discuss two issues: the problem of moral judgments on the rich and the somewhat related problem of the differences in access of various class groups to legislators and policy makers.

One interesting issue that arises from the demand for increased taxes on the highest income earners is that sometimes there is an implication of moral judgment. Of course taxes generally don’t have any sort of moral message.

However in times of economic strife, this can change and a modification in tax rates can be a signal from society expressing moral disapproval of the taxed segment of society (The government would simply be reflecting public opinion when they change the tax rates).

This is mainly relevant for industrialized nations where there is a big enough middle class and politically engaged lower class to reinforce the resentment.

I’m a bit uncomfortable with the idea of taxation as moral condemnation in and of itself. In some cases, it has some concrete basis-higher taxes on American investment bank CEO’s for example would be the kind of moral condemnation that arises out of damage they have caused to the world economy.

The greed and reckless risk that caused the financial crisis deserves all the moral condemnation it received, and if this causes a shift in the tax burden for those who caused it, then I for one won’t be shedding any tears.

However moral condemnation merely for being rich is a dangerous situation I feel.

There is nothing inherently immoral about being rich, and punishing the rich solely for their monetary wealth (with their wealth serving as a stand-in for their moral inadequacies) is a bad idea.

However raising taxes on the rich, when applicable, should be done based on sound economic policy. And even if moral condemnation of some of their members can be occasionally justified as I noted above, taxation should still be based primarily on sound policy.

And I should note that higher taxation for a targeted group of society can trigger the required behavioral changes if it is explicitly tied to that group’s misbehavior.

For example, higher taxes on industries that repeatedly cause pollution or can be the driver behind changing such practices. In such cases, moral judgments via taxation can be useful and legitimate.

But moral judgments in this context are also connected to another idea I didn’t fully explore in my previous article.

The very rich have easier access to politicians and thus have much greater lobbying power (again this is mainly applicable to more developed nations). This creates some obvious asymmetry in influence when it comes to policy-making and legislation.

Because the top-earners have greater access in this context, you could argue that higher taxation attempts to balances this out.

This is important where there is insufficient feedback from those in the lower income brackets. However even those with sufficient feedback from all sections of society are much more likely to see higher influence and access by those at the very top echelon of the wealth brackets.

Tax becomes a sort of umpire, providing some level ground to the situation.

Ends

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