Tax Policy, Progressivity, and Catholic Social Thought (Part Two): The Need for Empirical Evaluation of Tax Equity

The fundamental principle of Catholic Social Teaching ― that taxes necessary to generate government revenue should be imposed in proportion to capacity to pay ― often is mistranslated into a supposed precept that a tax is properly “progressive” only when it involves an escalating sequence of rates that increase with income or whatever is the subject of the tax. Likewise, some appear to believe that the presence or absence of a graduated scale of rates is the crucial or even solitary measure of tax virtue. Neither presupposition is correct.

First, the magisterial teaching of the Church directs that taxes be imposed by governments in a manner “proportioned to the capacity of the people contributing.” Pope John XXIII, Encyclical Letter Mater et Magistra ¶ 132 (1961). Proportionality, not progressivity as re-defined to be synoymous with higher marginal rates, is the standard of tax equity. As long as taxation falls fairly upon those capable of paying, in proportion to that ability to pay, escalating rate brackets are not an essential feature. The expectations of Catholic Social Teaching are satisfied by a tax that exempts those unable to pay, that requires a reasonable contribution from the average taxpayer (considering the rate, deductions, and exemptions), and that collects a larger amount from those with higher capacity to pay (although not necessarily at an enhanced marginal rate). Graduation of rates may well be appropriate in some circumstances and to some degree and may be consistent with proportional capacity to pay, but progressive tax rates are neither necessary nor even sufficient in evaluating fair proportionality.

Second, and more importantly, the true burden of a particular tax upon demographic groups in society requires nuanced and critical analysis. A simple reference to tax rates set forth in legislative text in the abstract of political debate cannot substitute for careful study of the real consequences on real people in application in the fact-bound contexts of economic, social, and cultural activity. The empirical question is whether the tax oppresses the poor, unduly burdens the middle class, and unfairly advantages the wealthy. Expanding ratios and varying rates may be a factor, but such elements are not always conclusive and do not always unfold as expected. Whether a particular system of tax rates or particular type of tax offends principles of Catholic Social Teaching cannot be decided in the abstract.

For example, any sales or consumption tax would appear on its face to be hopelessly regressive in nature (and many may well be). But if the necessities of daily life are exempt from sales tax (such as food, clothing, and housing), if sales tax is not imposed against basic human services (medical care, etc.), and if other appropriate adjustments are made, a sales tax may become somewhat more progressive in application (as it would attach more directly to the wealthy who spend more both in real dollar terms and as a share of income on non-basic goods and services). For example, the Catholic bishops of Tennessee report that the regressive impact of the sales tax on the poor in that state is driven primarily by its application to food. My point here is not that any particular sales tax regime passes muster, or that alternatives may not be prefereable, but rather that any critique on Catholic Social Thought grounds must move beyond simply identifying the type of tax.

On the other side of the coin, what appears to be a progressive tax in theory may be much less so in reality. An income tax, even one with graduated rates, may be constructed in such a way that the wealthy are able to shield sufficient income through tax shelters that the actual tax burden is shifted down the income ladder. Again, my point here is not to offer a commentary on the progressive or regressive nature of the present federal and state income tax regimes. Nor do I mean to discount the potentially beneficial nature of certain deductions and exemptions that may greatly enhance positive incentives, additional factors beyond mere progressivity that cannot be neglected. Rather, I mean here only to insist that reciting the formula of a tax as set down on paper does not necessarily describe its application in the real world.

As another example, many people across the political spectrum have questioned the wisdom of the corporate income tax and challenged its purported progressivity. After all, only natural people pay taxes, not artificial entities such as corporations. The corporate income tax thus is merely a conduit for collecting revenue from people, specifically owners of corporate stock (many or most of whom today are workers saving for retirement) and consumers who pay higher prices for goods as the corporate tax is tacked on as part of the cost of doing business. Again, my point today is not that the corporate tax does or does not pass the proportionality test for tax equity. Rather, I mean to insist that any evaluation of its supposed progressivity must focus on who actually pays what, not on the assumption that this tax must be progressive because it is calculated by graduated rates and imposed against publicly-held corporations which are regarded as proxies for the wealthy.

In a final posting, tomorrow or the next day, I’ll introduce a further and vital dimension in evaluating tax policy. Moving beyond the equities of the formulation of a tax scheme in collecting revenue, I’ll emphasize the need to consider as well the secondary and frequently unanticipated consequences of taxation. Before we may pronounce any social justice verdict upon any tax system, we must consider as well the dynamic effects of taxation upon the economic and cultural sectors of our society.

Greg Sisk