Monday, March 20, 2006

On tax

It's close to tax reporting due date. God knows how I hate tax. That silly "progressive" income tax. In addition to being the cruelest income cutter, progressive tax is also the meanest disincentive to work hard(er). Think about it. From kindergarten to high school to college to wherever, we are told: work is good. But Tax thinks otherwise. According to Tax, working is sinful. And a sin should be punished. That's why once you have a job and get paid, you are punished. You have to pay tax. Worse yet, the more you work, the more severe your punishment is. (They give this system a cute name: "progressive").

I always think this idea of "progressive" system is dull (not only in taxation, but in anything). Same fraction (in percentage) of different levels of income should already take care of the differences. It should be "fair" therefore to take (for some legitimate purpose; development for example) 5% from a person with Rp 2 million monthly income and 5% from a person with Rp 20 million. It's not fair to, say, charge the former 5% and the latter 10%. Because at 5% for each, the absolute amounts should already take care of the difference: the richer one pays a lot higher (Rp 1 million) than the poorer one (Rp 0.1 million). "Progressive" tax, on the other hand, orders the richer to pay Rp 2 million. You call this "fair"?

Of course there's all legitimation for tax. Development (esp. welfare state) needs money from taxing the people. Fine. I'm not saying there shouldn't be any tax whatsoever. But income tax has to be in a flat rate. Not like that "progressive" tax. (The system of zakat is more fair, for that matter). Of course flat rate system only addresses the issue of "fairness". As for being a disincentive to work, any kind of income tax is.

13 comments:

  1. i think blogging is also a disincentive to work. but then again...

    ReplyDelete
  2. Man, you're either an anti- rawlsian or supply-sider,--or both :-)

    ReplyDelete
  3. Treespotter, blogging is a ... work. It's good that the return is not money. Otherwise, Big Brother will tax it.

    Rizal, I'm an anti-Rawls. As for supply-side, read on...

    ReplyDelete
  4. Aco--I'm not sure I agree with what you're saying. In regards to taxation as a disincentive to work, what do you expect? Are you saying we should do away with taxes? As you rightly point out, the solution you are advocating for--a flat tax--would also be a disincentive. Hence, what is your point?

    Regarding your point that a progressive tax system is "unfair", I think it is not necessarily so. If one of the purposes of taxation is wealth redistribution (helping the unfortunate who for some reason fall through the cracks of our system), it is very fair that those who make more money are taxed relatively more than those that make less. In reality, those that make more money are also those who happen to be more 'blessed'--they might have been more forunate to receive a better education, been born into a wealthier family, or been gifted by being naturally smarter. I think it is fair that the more fortunate you are, the more you take part in helping society. It is true that using a flat tax, a person making Rp. 2 million and Rp. 20 million would have already contributed a different amount. But, I think paying 5% means differently to a person who makes 2 million and one that makes 20 million. A tax that would impose the same "cost"/"burden" to a person making 20 million as to a person making 2 million would require the person making 20 million to be taxed more than 5%, thus the progressive tax.

    ReplyDelete
  5. JR, thanks for your comment. My point is I hate tax. But as I said, I can't do much about it. And any kind of tax is a disincentive to work -- be it progressive, flat, or even the "negative income tax" proposed by Friedman.

    As for different rates for different levels of income I still think it's unfair. You're very right that the marginal utility of income of the rich is in general lower than that of the poor. But it's not an enough justification for charging the former higher. We can see this at the margin. Basing a progressive tax policy on this rationale would certainly problematic especially to those near the cutting lines. That is, if the policy says 5% should be imposed to those earning up to 2m and 10% for those with 2m+, we can see more clearly how a 1.99m earning person is "fortunate" compared to a 2.01m person.

    FYI, I'm a good taxpayer :-)

    ReplyDelete
  6. Aco-That's a good point you raise. But I actually was defending the progressive tax as a concept/idea. The problem you are raising is, I think, a problem of implementation. In theory, you could easily think of a continuously-progressive (for lack of a better term) tax where the income brackets are broken down so much that it is not so much discrete anymore.

    Although there are some very convincing arguments for a flat tax--like ones put forth by Steve Forbes, I still think a progressive tax is justified on the grounds of equality and fairness. I believe in the equality of inequality. I believe that it is fair and equal to treat inequally people who are richer and poorer such that those who are more blessed should take a larger role. Those who are given more should be expected more of.

    I realize that my argument is not a wholy economic one--but that's my take nonetheless.

    ReplyDelete
  7. Thanks again, JR. I understand your concern: for the sake of fairness and equality, the haves should take "the larger role" than the have-nots. I think a flat rate does just that, as my example has shown.

    I once talked with a friend. He's a moderate as far as income is concerned. But his income is close to the top of his bracket. Once he got a promotion. But he was sad. Why? He told me, the promotion added Rp 200,000 to his monthly income. But because of that, he moved to an upper bracket so he had to pay an extra income tax of Rp 250,000 per month. On net, he was worse off thanks to the promotion.

    ReplyDelete
  8. And I am a rawlsian, for a sentimental reason :-). let's elaborate this liberal justice debate later on, if we have time, co :-)

    ReplyDelete
  9. Aco-the case of your friend exemplifies the problem associated with the implementation of a progressive tax. It could have been that the tax bracket increased in such small increments that the problem like that of your friend's is avoided. For example, if you earn 2 mil you are taxed 5%; if you earn 2,001,000 you are taxed 5.01%; if you earn 2,002,000 you are taxed 5.02%. If the bracket increments are tiny enough, an increase in the before-tax wage will always yield a higher after-tax income. A progressive tax need not punish making more money.

    ReplyDelete
  10. Aco-the case of your friend exemplifies the problem associated with the implementation of a progressive tax. It could have been that the tax bracket increased in such small increments that the problem like that of your friend's is avoided. For example, if you earn 2 mil you are taxed 5%; if you earn 2,001,000 you are taxed 5.01%; if you earn 2,002,000 you are taxed 5.02%. If the bracket increments are tiny enough, an increase in the before-tax wage will always yield a higher after-tax income. A progressive tax need not punish making more money.

    ReplyDelete
  11. That's a nice way of implementation, JR. Let's hope that it's really doable, considering the enforcement and monitoring costs. Not to mention the need of actually ending up having a different rate for virtually every level of income. The bad taxmen (and probably some tax consultants) will love this, though. My hunch, however, is, it gives more room for corruption and manipulation.

    It's a good discussion, JR. Thanks.

    ReplyDelete
  12. just my two cents, progressive tax makes sense as in JR view.

    various tax holiday as investment incentive's an example in relative/progressive tax model, too. equal don't always mean flat bottom for everyone.

    as for blogging, this is just proving the point.
    i better go back to work.

    PS: i'm not kidding, but the word verification thing says "lsbian"

    ReplyDelete
  13. Am I missing something here? Person with 2.01m will always get more net money than person with 1.99m. He only need to pay tax 2m x 5% + 0.01 x 10% isn't he, Minus that to 2.01. Compare that to the guy with 1.99m - 1.99m x 5%. For sure the first guy still bring home more money.

    Progresive tax is fair enough to me. Just like marginal utility concept, your first 2m maybe very important to you to cover your basic need. The additional more money you get will have a less sensitivivity for tax cut.

    ReplyDelete