During the GST debate in Malaysia, there was a strong push to cut personal and corporate income taxes. Indeed, the government of the day did cut income tax across multiple income band and lowered the rate for those in the top income tax bracket. There were at least four supporting reasons behind the proposal.
One was that it would soften the GST blows faced by households and companies. Second, related to the first, it would the GST more politically palatable. Third, there was a sense that it was fairer (and easier) to tax consumption instead of income. And finally, there was an idea that it was fairer to have flatter tax rates.
It is the fourth point that came across my mind as I read Equality: What It Means and Why It Matters recently. The book records a conversation on economic, political and social equalities between economist Thomas Piketty and philosopher Michael Sandel.
Within the context of flatter taxes, both parties highlight the importance of the middle class in forming any social compact. The middle class is important because in most settings if not all, it is the middle class who would fund the arrangements the most. Such compacts involve the financing of public institutions and infrastructure that in theory would introduce positive externalities that no private endeavor could bring.
But the middle class needs to be to convinced to come on board and pay up. It is not enough for them to become the beneficiaries of any institution generating positive externalities. This is especially so when they know the poor would not be paying as much as they do, if at all. Jealousy and a perverse kind of envy when it comes to taxation (or lack of) are something that need to be kept in mind.
This could be addressed by having a progressive taxation regime, where members of the upper class are required to pay more through steeper tax rates.
As Piketty states it in the book:
It’s also what contributed to building a new social contract where the middle class would accept contributing to the social state. They knew that they would benefit from it, but also that people at the very top were going to pay a lot more than they would. Whereas today, of course, there’s a big suspicion by the middle class—more than suspicion—that people at the top are not paying their fair share. It makes them say, “Okay, then I’m not going to pay for people who are poorer than me.” [Page 17. Equality: What It Means and Why It Matters. Thomas Piketty. Michael Sandel]
Of course, the tax monies received by the authorities have to be put to good use and that means for the betterment of society. That betterment at the very least is the various effective functioning public institutions, which are central to the creation of sense of community and belonging, but also long-term public investment in a myriad of fields.
That sense of community and belonging achieved through some social compact financed by progressive taxation is a profound point at a time when far right extremists are championing identity politics and driving a plural society, like the one in Malaysia, apart.
From here, Piketty (and Sandel) are presenting progressive taxation is a tool to fight off the far right. It is a tool to create institutions that inculcate that sense of civic community and belonging to rival whatever the far right is offering.
Piketty and Sandel had the conversation (which has been edited into a book format) from the standpoint of the political left. I would not classify myself as a leftist. Yet, the ideas are useful for a person like me, who believes in civic nationalism with a dose of liberalism.