PROGRESSIVE TAXES: A PARABLE
Once upon a time in the land of America, there lived triplet brothers named Tom, Dick, and Harry Class. They were 45 years old, had virtually the same aptitude (skill), and were raised in the same home. Each was married and had two children. All three were employed as carpenters making $25 per hour, working 50 weeks a year.
While they were almost identical in most respects, they had somewhat different preferences and values. For example, Tom, who worked 20 hours a week, had a different work ethic from his brothers, Dick and Harry, who each worked 60 hours per week. Neither Tom’s nor Dick’s wives worked, while Harry’s wife worked 40 hours per week as an office manager making $50,000 per year (the same hourly rate as her husband). Tom and Dick spent all of their income, and were relying on Social Security to take care of them when they retired. Harry and his wife, on the other hand, saved most of her after-tax income over many years, gradually accumulating $300,000. They invested this money in bonds and real estate that produced $25,000 a year in interest and rental income. This was the income of each family:
Despite their different priorities, the Class families were close; so much so that when a new housing tract was developed in their community, they each bought an equal-priced home on the same private street. Theirs were the only houses on the street.
One day the brothers decided to pool their funds for the purpose of improving their street. Concerned about crime and safety, and desirous of a more attractive setting for their homes, the three families decided to: install a gate at the street’s entrance to deter burglars; add lighting for safety and additional security; repave the street’s surface to repair damage; and install landscaping to beautify the approach to their homes. The work was done for a total cost of $30,000.
The brothers were quite happy with the outcome and felt the $30,000 was a worthy expenditure given the benefits provided each family. But when it came time to divide up the bill, the problems began.
Harry thought it would be simple to divide the bill. Since the benefits to each family were equal, each brother should pay one-third, or about $10,000. But Tom and Dick objected. “Why should we pay the same as you?” they said. “You make much more money than we do.” Harry was puzzled. “Why is that relevant?” he asked. “My family makes more money than yours does because my wife and I work long hours and we earn extra money on our savings. Why should we be penalized for working and saving?” Harry looked at Tom and said, “I’m no smarter or more talented than you are. If you and your wife worked harder and saved more you would make as much as my family does.” To which Tom replied, “I don’t work more because I value my leisure time more than I value money. And I don’t save because I prefer the gratification of consumption today more than I will when I’m too old to enjoy it.” Tom was adamant. How could Harry, who was clearly “rich,” ask him to pay the same amount, when it was obviously harder for him to do so?
Dick thought for a moment, and then said, “I’ve got an idea. Our aggregate income is $250,000, and $30,000 is 12 percent of that amount. Why don’t we each pay that percentage of our income? Under that formula, Tom would owe $3,000, I would owe $9,000, and Harry would owe $18,000. Since I make three times as much as Tom, I would pay three times as much. Harry, who makes twice as much as me and six times as much as Tom would pay two times as much as me and six times as much as Tom.”
“No,” said Tom. “No?” Dick and Harry responded in unison. “Why not? What do you propose instead?” asked Harry. Tom was ready with his answer. “Paying the same percentage of our income is not fair. Instead, Harry, you pay $23,450; Dick, you pay $6,550; and I will pay nothing. This is the only fair division.” Dick was surprised at how completely arbitrary this proposal was. He was also surprised at how disproportionate it was, but since his suggested share was significantly less than under his own proposal, he didn’t object. Harry, however, was stunned. “You call that fair?! I make only two times as much as Dick, but you want me to pay three-and-a-half times as much as he does. I make six times as much as you but you expect me to pay almost 80 percent of the total cost while you pay nothing. And this is despite the fact that each of us is receiving the exact same benefits. Where did you get such a crazy idea?” he asked. “From no less an authority than the federal government,” said Tom as he pulled out a gray booklet. “It’s all right here in the irs tax tables. Under the current tax code, here is what each of us paid in income taxes last year:”1
“By an amazing coincidence, our total taxes paid were exactly equal to the $30,000 expended on our street improvements. This is the progressive income tax system all U.S. taxpayers live under, and I don’t see why the Class families should be different. In fact, I believe all future pooling of funds should be divided in this way.” “I’m in,” said Dick. So, by a vote of two to one, the cost of the street improvements was divided as follows:
Also by a vote of two to one, all future pooling of funds was to be divided up the same way.
Like all parables, the story of the Class brothers is designed to illustrate a moral principle. In this tale, Harry is required to pay a disproportionate amount of the cost and value of the benefits he derives from his “mini-society,” simply because his family works harder than the families of the society’s other members. The moral question is: Is Harry being treated fairly? If not, how should this affect our thinking about progressive taxation?