January 19, 2025

by Stephen Stofka

This is tenth in a series of debates on various issues. The debates are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

Unlike past weeks, Cain began the conversation. “Last week, we left off talking about taxes and the effect of taxes. First of all, I’d like to challenge your group’s support for the progressive income tax system.”

Abel interrupted, “Let me stop you there. If you want to talk about the progressive feature of the current tax system, fine. Neither you or I like the hodge-podge of policy goals and tax shelters that current tax law has become.”

Cain nodded. “That’s fair. Let’s keep our discussion confined to the progressive aspect where the more that a person earns, the higher the percentage of income tax the government takes.”

Abel sighed. “In principle, should every person pay the same percentage of federal income tax? Maybe. Fourteen states have a flat income tax rate. But practice and principle often conflict. Let’s use World War 2 is an example. Winning the war and defending the country was a benefit to every American. Who should pay the most? As a practical matter, the government needs to tap the pockets of the rich in greater proportion than the poor. That’s what the U.S. did for two decades after the end of that war.”

Cain tilted his head. “War is about the nation’s survival. That is the overriding principle that justifies some practical measures. Your group has used war funding as a justification for a progressive income tax since the 16^th Amendment was ratified in 1913.”

Abel argued, “A nation’s sovereignty is even more important to rich people because they have more to protect, more to lose should the country be taken over by another nation. During peacetime, government institutions are devoted more to the haves than the have nots. The haves should pay proportionately more.”

Cain shook his head. “I don’t understand your reasoning. The majority of government agencies are dedicated to programs for the poor. In 2022, the federal government spent $592 billion on Medicaid. The states spent another $242 billion. That combined expense was 3% of our country’s entire output and almost as much as we spent on defense, the #1 priority of any country.”

Abel asked in an insistent voice, “Who benefits from all that spending? Investors in the stocks of the companies that supply products and services to the federal government. According to one analysis, investors in the stocks of defense contractors enjoy one of the highest risk adjusted returns of any industry. The government recycles tax dollars into the pockets of the better off. It’s only right that they should pay proportionately more taxes.”

Cain smiled. “The economist Paul Krugman recently posted a CBO graph showing that the effective tax rate on the top 1% is often more than 30%. An analysis of 2021 income tax data by the Tax Foundation showed that the top 1% paid almost half of all income taxes while the bottom half paid just 2.3%. That is nothing more than the government taking money from the most productive members of our country and giving it to the less productive.”

Abel scoffed. “During the Reagan revolution forty years ago, the top tax bracket was lowered from 70% to 28%. Since then, productivity growth has fallen by almost 20%. The data contradicts your favorite beliefs. Lower taxes on the rich does not promote increased investment. What are the rich doing with that extra tax money? Are they investing more in productivity enhancements? No. They are buying big mansions and more toys, spending that will promote stagnating economic growth and a more unequal society, a sick society.”

Cain shook his head. “You talk about ‘extra tax money’ as though the money belonged to the government. Income belongs to the people who earn it, not the government. If someone wants to buy a bigger yacht, that’s their business. Some politicians want to spend other people’s money on their favorite theory of social justice. In 1969, the poverty rate was 12.1%. In 2023, after trillions of dollars spent on means-tested social welfare programs, the poverty rate was 11.1%. The programs have benefitted bureaucrats more than the poor people they were meant to serve.”

Abel argued, “The percent of seniors in poverty is a third of what it was in 1969. The Medicare, Medicaid and other social welfare programs of the 1960s have dramatically improved the lives of the oldest generation.”

Cain replied, “Social Security has been the main contributor to the reduction in poverty among seniors. President Johnson’s Great Society programs to reduce poverty did have an effect in the first five to ten years. After that, the benefits have been negligible. Look, poverty has many causes. Cultural, economic, geographical, political, historical. Politicians can’t just throw money at a complex problem like poverty and expect sustained results.”

Abel nodded. “Understanding a complex problem requires a complex analysis. When economists consider the effect of tax, educational and social programs, they estimate a reduction in poverty of 33% .”

Cain sighed. “Let’s stay focused here on the progressivity of the income tax system. Before these programs were enacted into law in the mid 1960s, tax rates were extremely progressive. They were still strongly progressive for another twenty years. Minor changes in tax law had little effect on poverty during those years. The dramatic reductions in poverty during the 1960s can be attributed to those social programs and a change in the political and social culture. Those short-term benefits have been overwhelmed by the long-term ill effects on our families and our society.”

Abel asked, “Since that tax revolution in 1986, the government has had less revenue to pay for programs. Except for the Clinton years when taxes were raised on the rich, the deficits only get more persistent. Those with higher incomes have the money to support the programs and agencies that form a crucial financial support for many families.”

Cain interrupted, “Whatever those programs do, they don’t alleviate poverty. That’s what the Census Bureau data shows. A progressive income tax system mainly supports the huge political infrastructure in Washington. Congressional subcommittees and a plethora of executive agencies. The government takes more taxes from the rich and the rich fund think tanks and hire lobbyists to get some of that money back or construct the policies they favor.”

Abel shrugged. “So, what’s the answer? A flat percentage for rich and poor alike? That will have a much greater effect on consumption for families in the bottom half of incomes. Is that fair? What should be the measure? The percentage of the tax or the percentage of misery that the tax has on a family?”

Cain smiled. “What’s the alternative? That’s a discussion for another week, I think.”

Abel returned the smile and waved goodbye. “See you next week.”

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Image generated by ChatGPT

The Peter G. Peterson Foundation has an analysis of the federal government’s budget here. https://www.pgpf.org/article/budget-explainer-medicaid/ . Combined state and federal expense was $834 billion, 3% of the $26,006 billion in GDP https://fred.stlouisfed.org/series/GDP Defense spending and investment was $930 billion https://fred.stlouisfed.org/series/FDEFX

FRED Chart on productivity https://fred.stlouisfed.org/series/OPHNFB In the period 1948 – 1984, productivity growth averaged 2.35% per year. Since 1985, it has averaged 1.93%, a reduction of 18%.

Census Bureau tables on poverty from 1959-2023. https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-poverty-people.html Table 3 contains data on people by age. From 1969 to 2023, the poverty rate for seniors fell from 25% to less than 10%. For those aged 18 to 64, the poverty rate has actually risen from 8.7% to 10%.

This 2011 NBER article summarizes a paper by economists Gary Englehardt and Jonathan Gruber analyzing the reduction in poverty among seniors in the 20^th century. https://www.nber.org/bah/2004number2/social-security-and-elderly-poverty

This Washington Post article examines the long-term effects of the Great Society programs. This section is the war on poverty. https://www.washingtonpost.com/wp-srv/special/national/great-society-at-50/#war-on-poverty A more conservative outlook on the social and moral effects of those programs can be found at https://hc.edu/news-and-events/2017/02/28/great-society-wrought-fifty-years-later-marriage-family-poverty/