Courtesy of investopedia.com
With the 2020 election on the horizon, many Democratic party candidates have already announced their presidential bid. However, common to the most well-known names—Corey Booker, Kamala Harris, Bernie Sanders and Elizabeth Warren—is their push for more and more extreme versions of the progressive tax system, which taxes the wealthy at a disproportionately higher rate than those in lower income brackets.
The argument, at face value, is persuasive. If an individual is endowed with more wealth, why not expect them to pay a higher tax rate?
However, without any clear justification for how accentuated a progressive tax system may become, the progressive tax system will become the means of engineering power and wealth inequality into the foundations of our political system.
THE NEW YORK PROBLEM: THE FIRST TREMOR
Recently, New York Gov. Andrew Cuomo announced that the state had lost $2 billion dollars in tax revenue—which is “as serious as a heart attack.” This has sent New York into shock and seeking to drastically reduce its spending.
The traditional answer for the state, which relies heavily upon a progressive tax system, is to increase taxes on their own one percent of the highest earners. Despite the accusation that the new federal tax code has impacted the New York budget, Cuomo also realizes that increasing taxes on the most wealthy will not fix the situation. As he said, “I don’t believe raising taxes on the rich. That would be the worst thing to do. You would just expand the shortfall. God forbid if the rich leave.”
Many will read Cuomo’s plight and find a simple solution—just increase the taxes everywhere so the rich have nowhere to run. If one takes a moment to read the tea leaves, the problem is much more dangerous. Cuomo’s stance is interesting because his plea is on behalf of the rich, the ones who constitute 46 percent of his budget.
Let me provide an example.
THE STOCKHOLDER MEETING: THE PROBLEM
Imagine 100 people come together to form a company. The CEO approaches each of them and says, “I will give each member equal control of the company if each member invests equally in the company.” Furthermore, he says, “To honor your investments and control of the company, I will require 51 percent of you to agree on any proposal I make.” The members of the company find these terms fair and agree—one vote for one person, each invests equally, and each controls an equal amount of the company.
Quickly, and rightfully so, many of the members of the company realize that some of the other members are paid vastly more from outside the company. Some members work with other companies, others have inherited vasts amounts of wealth.
And so the question arises, “If we all have different amounts of wealth, must we all invest the same amount of money into the company?” They bring the company together and give the CEO the proposal. They want to retain equal control of the company, but propose different levels of investment—the more wealthy members of the company should invest more in the company.
They all pass the vote, and the alterations are made. During the meeting, they realize that one member takes in so much additional wealth that he should make larger investments into the company. They agree that this member will account for 46 percent of the total investments into the company, and the remaining 99 members will account for 54 percent of the investments. Of course, they agree that all members retain equal control of the company.
But there is now deep suspicion—who actually controls the company? And this question can be put in two different ways.
First, do we trust the CEO to still honor each vote as equally controlling the company? Why not try to convince the one member who makes 46 percent of the investments and 10 other members to obtain the 51 percent of total investments?
And second, what if the member who accounts for the 46 percent of the company’s investments threatens to pull their money out of the company? Will the CEO pitch proposals to the rest of the members as, “Guys, if we do not do it, the company will collapse”?
THE FINAL TREMOR: ENGINEERING OUR PROBLEM
This tension in the company is the exact crisis that is being engineered into our government via the progressive tax system. When those who invest in the government become fewer and fewer, and those who live off the government become greater and greater, power is concentrated into the hands of the rich.
This is the inevitable failure of progressive tax system advocated by the voices of the democratic party. If you want to centralize power to the wealthy and throw politicians into the pockets of the rich, then continue pushing for the progressive tax system. We all know the result. Those who fund the system control the system, and those who put nothing into the system will eventually mean nothing to the system.