The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.
- Jean-Baptiste Colbert
There was a tempest in a teapot last week at the Volokh Conspiracy over taxation based upon "ability to pay" and, in particular, a quotation from Illinois Governor Pat Quinn that:
There will be some that will have a higher tax burden — but it’ll be based on the principle that all of us in a democracy can believe in: ability to pay.
This is presumably in comparison to the principle that the tax burden should be carried by those who lack an ability to pay. But, governments based upon that principle of taxation swiftly collapse for lack of funds, unless they are independently wealthy (see Saudi Arabia and Alaska). In the bad old days reflected, not necessarily with perfect accuracy but with some reflection of the times, by Biblical writings, the efforts of rulers in ancient times to tax people who couldn't pay was reflected in the pariah status of the tax collector, and the cruelty of methods used to try to collect taxes (yes, tax collection can get much, much worse than tax liens and tax debts that aren't dischargeable in bankruptcy).
A focus on actual ability to pay may seem like a trivial distinction that merely distracts from the more specific and partially implied matter of progressive taxation. But, it isn't. A lot of important tax policy flows from the fundamental ability to pay criterion, and much of the disparity in the amount of taxes actually paid comes from the former and not the latter.
One of the fundamental reasons that the income tax is imposed on what amounts to discretionary income, rather than total income, is that people who can't pay rent or buy food make poor tax collection targets. Ability to pay is an important reason that we have withholding taxes, since it insures that people who lack the foresight to save will have the ability to pay their taxes. And, ability to pay is also one of the reasons that the property tax has survived so long. The property tax due at any given time is almost always lower than the value of the property, assuring an ability to pay.
Similarly, major increases in the nation's tax revenues through increased taxes on those in the bottom 50% of the income distribution aren't just unwise, they are impossible. The bottom 50% has a fairly modest portion of the nation's income and an even more modest portion of the nation's wealth. Even major increases in the tax rates for these taxpayers would not generate much revenue. Democracies are particularly sensitive to this reality.
One can choose between a "flat tax" and a "progressive" income tax, as a matter of policy, but either way, one has to make some allowance at the bottom for those who can't meet basic needs and also pay taxes (either through an government income assistance program or a tax break), and high income earners end up paying a disporportionate share of taxes. Indeed, taken as a whole, combined federal, state and local taxation burdens leave us with a system that is surprisingly close to flat. Many state and local taxes are regressive. The federal income tax is quite progressive, and FICA taxation is quite regressive when separated from the social security benefits that it finances. Many poor people receive government subsidies, but a significant number of high income people directly or through their businesses, receive really big government subsidies.
Funding through ability to pay also explains many non-profits seemingly not inherently charitable in operation. Why do operas, which are overwhelmingly enjoyed and consumed by the educated non-poor organize themselves as non-profits? Because some can pay more than others, and opera companies could not raise enough money to operate is they raised money only from tickets whose prices are set by what a typical opera goer is willing and able to pay. Economically, the revenue maximizing mix of non-means tested ticket prices for an opera is considerably less than the cost of putting one on. But, there are wealthy people who like opera and they are willing to pay a premium to have quality opera as an option at all. So, they pay far more than any non-means tested ticket pricing system would ever charge them, in order sustain the institution. Non-profit operas are a way of engaging in price discrimination similar in effect to a progressive income tax, with the additional factor of discriminating based upon intensity of love for opera. While some people go to the opera only because their girlfriends drag them there, others buy premium best in the house seats and would still do so if the price was $1,000 a seat per performance greater, and if it didn't tap into that extra wilingness and ability to pay, the opera would go under.
Similarly, it is routine in civil litigation to refrain from suing people who are culpable but judgment-proof. The cynical aphorism about tort law goes something along the lines of, you sue the person closest to the accident who is able to pay. Criminal laws punish wrongdoing typically committed by judgment-proof people, while tort laws demand compensation in situations where people are typically capable of paying for their wrong doing.