Why The Wall Street Journal Should Like Progressive Taxes
The Wall Street Journal editorial page is upset that Maryland raised its income tax on millionaires. So after bragging about how all the millionaires had left the state, and then conceding that the recession probably just reduced the number the millionaires, the editorial page decides to make this truly odd argument against progressive taxation:
No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions.
The Wall Street Journal editorial page can't really believe this, can it? I'd say there is widespread consensus that the exact opposite of what the Journal says here is true: Progressive taxes are useful in recessions precisely because of all that vanishing revenue.
That's because a progressive income tax is an automatic stabilizer: It helps offset shocks to GDP that come from large declines in income and wealth. When a family's income falls during a recession, the percentage of income paid to the government falls at a faster rate -- since, under a progressive income tax, you can only fall into a lower bracket. Household demand will thus be higher than it would be under, say, a flat tax ("everyone pays 20%") or a head tax ("everyone pays $2000").
It is also true, as the Journal says, that there will be a decline in revenue. That's the inevitable price of offsetting the shock. But that's really no different from a deficit-financed tax cut, or one of the other policy initiatives that I'm sure the Wall Street Journal editorial page will get back to supporting once it's done making disingenuous arguments against progressive taxation.