Reply #62: OK, but the inference he then makes doesn't follow.

[Iriemon]

I agree that, by definition, if you have a progressive tax structure, a person who makes more will still have more disposable income than a guy who makes less, assuming that the marginally increased tax rate is applied only to marginally greater income. That is obvious.

Where the author errs in is the next paragraph (you did not cite) where he contends that you can increase the progressive structure and tax rate without affecting everyone's "relative bidding position."

"With the Progressive Income Tax, taxpayers do not need to be concerned about the shrinking of their disposable incomes. They can know with certainty that prices will drop to levels they can afford if all consumers have their disposable incomes reduced in a way that preserves everyone's relative 'bidding positions.'"

djohson pointed out that that phrase is a little ambiguous, it could be read to mean that what the author is talking about is their rank position as opposed to relative purchasing power. In other words, Gates makes more than Allen, and under a more progressive tax structure, after tax Gates will still have more than Allen. But what is not true is that Gates' relative purchasing power will be the same. Under the exagerated progressive tax example I gave in my first post, Gates makes 25% more than Allen, but after the tax, is disposable income is only 0.25% more than Allen. He has made a bunch more more for only a very small relative gain. The progressive tax has changed Gate's bidding position compared to Allen's, not in absolute terms (Gates still has more) but certainly in relative terms. Before the progressive tax, Gates was 25% richer than Allen. After the progressive tax, Gates is only .025% richer than Allen.

I think the author is suggesting the latter (everyone's relative position remains the same) and not the former (everyone's positions in terms of rank remains the same) when he makes statements like this:

What is important is not the dollar wealth you are able to accumulate; it's the dollar wealth you are able to accumulate compared to everyone else. The purchasing power of your income is determined solely by its relative position amongst all accumulations of disposable income/wealth

The author makes the proposition that if everyone is taxed more, then everyone's DI remains relatively the same. If, in tax system A, your disposable income is 1000 and Fred's is 500, and in tax system B, your DI is 500 and Fred's is 495, the "purchasing power of your income" is not in the same relative position.

This faulty reasoning undermines the premise of the author's theory. He suggests that this extreme progressive tax could be implemented without negative effect because it wouldn't affect anyone's relative "bidding" position. But that is a false premise, as I demonstrated.

I also think the author is wrong on the proposition that you can increase taxes "accross the board" (which is inconsistent as a matter of definition with a more progressive tax structure; with a more progressive tax structure the taxes on the wealthier will be increased more) without affecting the purchasing power of remaining DI. His proposition that market prices would drop equivalently is suspect, because it assumes that post tax DI is the only thing that affects prices. That is not true, *lots* of other things affect prices besides just post tax income levels, not the least of which is the money supply and foreign competition. Empirically, taxes were slashed in Reagan's term from 72% to 28%; under the author's theory prices should have risen dramatically. Fact is, we had pretty bad inflation, before Reagan took office, inflation fell sharply after he took office an after taxes were slashed; exactly the opposite of what the author theorizes.

I also disagree with the author's premise that increasing taxes accross the board has a positive effect on the economy, with its presumption that government invests money more efficiently than the market. That has been proven to generally not be the case.