Memo to Joe the Plumber: Work on Pipes, Not Policy

After being mentioned 23 times in last night’s debate, Joe the Plumber had his 15 minutes of fame extended when Dianne Sawyer interviewed him. His beef with Barack Obama’s proposed tax policy was that if he were lucky enough to make $250,000 a year, he didn’t want to have the government tax it more. (The difference would be from a 36% tax rate to a 39% tax rate.)

Joe said, “Just because you work a little bit harder to have a little bit more money taken from you, that’s scary. I work hard for it, why should I be taxed more than other people?”

Sawyer: “What about people who make a million dollars, or five million dollars?”

Joe: “Why should they be penalized for being successful? … It’s a basic right. And Obama wants to take that basic right and penalize it. It’s a very socialist view and it’s incredibly wrong.”

Actually, it’s not socialist. Obama’s not advocating state ownership, merely an adjustment in what we already have: a progressive tax, which has a rate that increases as the amount subject to taxation increases. And it’s common in most advanced economies.

Joe’s opposition seems to come from working a little bit harder to having a little bit more money taken from him. In strictly personal terms, that makes sense. But even in the situation he’s describing, it doesn’t. Here’s why.

First, according to the US census, only 1.5% of all US households (not individuals, households) earn more than $250,000 a year. (As an aside, if you’re making even half of that, you’re doing pretty damned well, since 80% of people on earth live on less than $10 a day — that’s $3,650 a year.)

Second, if Joe is concerned that he’s going to get penalized on “working a little harder,” we have to question what his motivation is. If he’s lucky enough to make $100 an hour as a plumber, and he works 2,000 hours in a year, he’d make $200,000. Why isn’t that enough? What is the compelling reason to work another hour a week (or another week a year) to go from $200,000 to $250,000? It can’t be meeting basic needs. It has to be something else — like greed. Greed isn’t a basic right, it’s one of the seven deadly sins.

Third, if he’s complaining that he shouldn’t be taxed “more than other people,” what he’s actually advocating for is a proportional tax (i.e., a fixed tax rate for everyone), but it’s not very common, because the ability to pay that tax is disproportionately harder for people with lower incomes, so much so that such tax proposals usually exempt household income below a certain minimum threshold — in which case Joe’s same selfish argument would apply slightly differently: “Why should I work just to get taxed?”

Fourth, one of the way a progressive tax operates is to exempt some basic necessities from taxation (such as food), and taxing luxury items (such as yachts) instead. Many people, people like Joe, actually favor that.

As personal income grows, people tend to spend less and less of it (as a percentage) to meet their basic needs (food, clothing, shelter). In economics, there’s also a concept called the marginal utility of money, which is the “change in the total satisfaction derived from money that results from one unit of change in the quantity of money.” Put another way, one dollar is worth a whole lot more to someone living on a dollar a day than it is to Warren Buffett. So for high-income earners, they pay more taxes, but parting with it causes proportionately less pain (because they can still easily meet their needs).

Also, as income grows, some people derive income from their investments (property, stock, etc.),  so they’re not actually working harder for more income at all.

No one likes taxes, but if you’re lucky enough to be making more than 98.5 percent of everyone in the US (and 99.9% of everyone on earth), and you spend proportionally more income on things like luxury goods, you’d have to be awfully selfish indeed to believe you’re somehow entitled to keep every last penny when other people can’t afford to eat. Or build a school.

That’s why thinkers from Karl Marx to Adam Smith supported such progressive taxation, and 81 percent of economists support it now. Here’s Smith’s rationale: “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

Smith is talking about something Joe is omitting to mention. In a society, you ought to have rights, including the right to be successful. But you also have obligations. And one of your obligations ought to be to contribute to everyone else’s benefit. Justice Oliver Wendell Holmes had a really good quote about this. “I like paying taxes. With them I buy civilization.”

Last point: if a 3% increase for the highest incomes seems unfair, it’s worth noting that Bush tax cuts were hugely regressive: According to one set of data, “the top one percent of households (whose incomes average nearly $1.2 million) will receive an average tax cut of approximately $40,990 in 2004. This is more than 40 times the average tax break for those in the middle fifth of the income distribution.”

So why not turn Joe’s question on its head: why does someone in the middle income get a tax break that’s 40 times less?