Thoughts about American taxes from the perspective of Rawlsian principles of justice

Today the taxes richest Americans pay are less than the taxes middle class Americans pay. Let us for now put aside economic implications. I ask is this just? And to answer this question I propose to use the two famous Rawlsian principles of justice:

First principle: Each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all.

Second principle: Social and economic inequalities are to be arranged so that they are both:

a) To the greatest benefit to the least advantaged and

b) Attached to offices and positions open to all under conditions of fair equality of opportunity.

Rawls (1971: 302)

My intuitions tells me that it follow from justice that: 1. everyone should pay the same taxes. 2 those who are the least advantaged should pay less or no taxes. And I think that the least advantaged really don"t pay a lot of (or any) taxes.

But so don"t pay the most advantaged according to the Bush law, which Obama kept in place. So the burden of taxation is disproportionately leaned towards the middle class. In the following analysis I shall use three categories: the super rich, the middle class and the least advantaged.

My intuitions tell me that if you want to follow the second principle – greatest benefit to the least advantaged you should engage into some sort of redistributive taxation. You take from the rich and the middle class and give to the poor. However the principle is so subtle that it doesn"t say that. What matters is that the least advantaged have the greatest benefit. If you can bring the greatest benefit to them by not taxing the rich as heavily – so be it.

The idea is to give incentives to the rich to become richer by investing more (since the state will leave them with more money to invest). They are good at investing and creating jobs, so let them work their capitalistic magic on the whole society. Meanwhile the middle class would have to pay disproportionately the bill for government expenditures which includes helping the least advantaged.

There is economic rationale in that: you don"t tax the super rich that much → they create jobs (unemployment is a problem in America. It usually isn"t a problem but now it is. Why shouldn"t the middle class be encouraged to create jobs too is also a legitimate question here. After all aren"t they the backbone of the economy?) More people are hired, work and produce (I suspect more middle class people than the least advantaged). They create more wealth that in the end should reach the least advantaged (either as higher employment or from the taxes the middle class Americans pay. The revenue from these taxes will be higher, since more middle class people will be employed by the rich, will create more wealth, which the state can redistribute). It seems that there is some ground for thinking that this system would be economically justified. Everyone will benefit. Is it just, though? Something seems strange to me. It should be. After all it is ultimately after a lot of loops, twists and turns in the interest of the least advantaged.

No. we forget the first principle of justice. Everyone should be treated equally. You are treating the super rich better at the expense of the middle class, which should also presumably be in the interest of the least advantaged. Oh well, but if the least advantaged are better off, then so be it.

This whole scheme rests on one assumption. It is the super rich who should take America out of the crisis. It should be they that will create the new jobs. Not so much the middle class but the strong capital. It is the middle class that have to endure disproportionate hardships. Middle class ultimately has make the sacrifices. It was also the first to make sacrifices when the government declared that it will save some of the super rich banks using taxpayer"s money (mainly middle class money). Why should government save the super rich banks? The liberal in me asks. If you make bad investments, you have to face the consequences. The answer is that financial institutions are too important for the economy. They are extortingly important. Big banks are pointing a gun towards the head of society and are saying. If you don"t bail us out the whole economy is going belly up. Without the flow of money no economic activity could take place. The financial is the blood system of global capitalism. The banks are simply too big to fail. Jefferson was right when he said that: “Banking establishments are more dangerous than standing armies.”

What is to be done?

The libertarian answer will be: “Oh well, let them fail. Not all of them will fail. Some will survive. The sound ones. It is good to have crises from time to time which show the good and the bad companies and the bad ones fail. Failure is a main component of capitalism and you should let it work its incentive power. This power hurts and this power teaches at least as far as we don"t forget about it, and we fail again. Oh, well...”

Socialist might say regulate or even better nationalise all banks. This option will soon lead to ruin.

The liberal might say save some, but not as far as to create moral hazard in dangerous quantities. Regulate but leave the market streams flowing. The biggest problem to solve out of this financial crisis is how to deal with moral hazard – how to avoid rewarding reckless behaviour. Fannie Mae and Freddie Mac were an epitome of moral hazard: privatisation of gains and nationalisation of losses. This is why letting Lehman brothers fail was an important decision. It showed that the government is prepared to let someone fail. It had the courage to do so. This letting to fail creates insecurity in the banks. Now they are not so sure that the government will save them no matter what.

I think Hank Paulson"s – the then secretary of treasury - decision to let Lehman fail was the single most important decision of the management of the whole crisis. It was not the 700 billion dollars of rescue money from the governmental TARP fund.

It was a decision of principles. The important principle is that sometimes you can fail even if you are too big.

Dobrin Stanev