Occasionally, in the political discourse, you hear calls for the rich to “pay their fair share”. This discussion quickly gets confused by different interpretations of the word “fair”. It could be that it is “fair” for the rich should pay more, both in absolute terms and as a proportion of their income, because “they can afford to”. Conversely, a flat tax (where everyone pays the same percentage of their income in tax) can also be described as “fair”. In most OECD countries, the tax system is progressive: the more you earn, the more you pay in taxes as a proportion of your income. I believe that this is “fair”, for four interrelated reasons.
1) Some of the wealthy inherited their wealth, and so did not earn it through their own hard work and resourcefulness.
2) Some of the wealthy did not earn their wealth in morally or economically justifiable ways. Even leaving aside those who acted illegally, plenty of money has been made by those operating cartels, or monopolies, or monopsonys, through government favors, or in regulated industries. That is not economically efficient behaviour that we are obliged to encourage or reward.
3) Plenty of the wealthy earned their money through hard work, attitude, intelligence, entrepreneurialism and lots of other positive adjectives. However, we must not exclude the role of luck: there are plenty of people with those attributes who did not get rich, and there are some who got rich despite not having them. Simply assuming that the wealthy must have those attributes because they are wealthy is circular and simplistic.
4) Even if we assume that all the wealthy got that way because they worked hard, played by the rules and created products and services of value, rewarding them proportionally ignores the fact that no-one does it by themselves. Every billionaire climbs on the shoulders of those around them, using the benefits provided by society.
To claim that the wealthiest should pay the same tax rate as the poorest, and that all their excess rewards morally belong to them is both illogical and naïve.
When I say the wealthy should pay more, I do not mean 100%. Clearly, some of their excess wealth is justified by their input and the benefits their behaviour brings to society. Even if they do not deserve all of their excess wealth, it makes sense to allow them to keep a large portion of their gains, to incentivize them to use their skills to benefit society. But to claim that their wealth is solely justified by their own merit and that society has no claim on it is naïve. Personally, I feel that paying about 40% of my six-figure paycheck is reasonable, given the benefits that society has provided me, and 60% provides me plenty of incentive to get up and go to work. Those who are lucky enough to rise to the top of our social tree have a moral obligation to help those less fortunate.
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