Taxes considered

THIS WAS WRITTEN A LONG TIME AGO, IN OCTOBER OF 2003.

I've been thinking about tax policy for a while, so [an email to the church listserv] nudged me to first reply specifically, then share some more general thoughts on taxes

[A long list of taxes..., followed by commentary]: "Not one of these taxes existed 100 years ago and our nation was the most prosperous in the world, had absolutely no national debt, had the largest middle class in the world and Mom could stay home to raise the kids. What the hell happened?"

So, things were great 100 years ago and things have gone to hell since. It's probably not meant to be taken completely seriously, a bit of an exaggeration most would agree (?), but the basic assumptions are still there. Taxes are too high, they're ridiculous, and government can't do anything right. So, playing the straight man:

Life for an average urban dweller was incomparably more miserable a hundred years ago than today. If mom stayed home with the kids, she never stopped working all day, her husband was out at the factory 12 hours a day six days a week -- and half of their kids died from disease. Whatever policies you don't like today, arguing that day-to-day life was better for ordinary working people 100 years ago won't get you anywhere. (Farm life is a complex case, but people didn't leave farms because of tax policies). The actual assertion here is that there are too many different kinds of taxes. That's true. It would be fairer and simpler to get rid of many of these taxes. But many are based on the politically popular idea that people who use a service should pay for it; I think it's the people and not the inept politicians who have led us there. Gasoline taxes pay for roads, for instance. Others exist not primarily to raise revenue but to encourage certain behaviors. There is a heavy tax on liquor and cigarettes because society wants to discourage people from using them. (Maybe bridge tolls discourage people from cruising back and forth over the George Washington bridge all day looking at the view? :-)) Others simply enforce rules. You may hate that ticket you got for the expired meter, but if you think one little step ahead, does anyone want to place odds on finding parking in a retail district if commuters or residents hog the spots all day? As for court fines, they enforce laws (I am sure there were court fines 100 years ago). If you don't like the concept, it seems you must prefer anarchy -- or whippings or amputations. Even imprisonment for parking violations or, say, failure to carry implements to remove dog feces would be unpopular.

But what about the more common complaint that taxes are too high? I think taxes are great. They're wonderful. We need taxes. Nowadays, we need more tax revenue, not less. Everybody with me so far? :-) Of course everybody hates taxes. Why not keep the money for yourself?Thinking one tiny step ahead, taxes pay for things. They pay for government services. Sure, there's corruption and inefficiency in government, but compared to other places and other times in history, it is very low. It is certainly comparable to corruption and inefficiency levels in large corporations. This is not rocket science, but somehow it doesn't make the evening news much. If you want the latest health care available to everyone in society, someone has to pay for it. If you want a huge military whose best use is to allow us to get into quagmires like Iraq (I certainly don't), someone has to pay for it. But government can work pretty well.

Taxes need to be progressive -- much more progressive than they are today. I don't understand how anyone can swallow Bush's offhand "argument" that we don't want class warfare, implying that taxing the rich (more heavily) is somehow class warfare.

I found this article on the web. It certainly explores tax issues in depth and appears to be taking a balanced view. http://www.tcf.org/Publications/Basics/Tax/History.html

What I really like in this article is Figure 6. I knew there had to be a Figure 6 in the world somewhere, and I'm glad to have found it. What Figure 6 tells you is that there is a big difference between how income taxes were divided up in the period from 1944 through 1980 on the one hand, and the period since 1986 on the other. In the 1944-80 period -- a period which was generally marked by great prosperity in this country -- taxes were very progressive. The more you earned, the greater percentage of what you earned was owed in taxes. Today, as then, if you earn $25,000 and get a $1000 bonus, you pay something like 33% of that in tax. Today, if you earn $1,000,000 and get a $1000 bonus, you pay the same 33%, but back then youpaid at least 70%. Whether that's fair or not (I will argue its fairness below), our society was prosperous. The idea that raising taxes on the rich will somehow ruin the economy is just a self-serving lie by the rich. Returning to the tax structure of 1980 would raise a great deal of revenue which could be used for various good purposes: reducing taxes on low-income earners, providing that prescription drug benefit for the elderly, and reducing the deficit, to restrict myself to current mainstream ideas. (There are countless complications and details, but I think that change in the 1980s is the really big news.)

Moving back from the current political picture, I argue that progressive taxation is a good idea.

Pure free-market capitalism, if left completely unfettered, is all about dollars being the basic unit of power. Through investment, dollars make more dollars, and if you own those dollars, you can become fabulously wealthy and wield enormous power. If you can do useful work, and trade your work for dollars, you can live. If you have no dollars and cannot earn any, you have no place in the system, which is perfectly content to let you die. (The Irish potato famine of 1847 was close to this, since throughout the period of mass starvation, the landowners of Ireland were exporting grain for a profit). Moving away from pure capitalism, there is always a need for order, as in an army and a court system. The army serves to keep starving poor people from upsetting the system. Family loyalty and charities can also help avoid starvation. Moving another step away, taxes may be used to provide services people want, but also including for example poorhouses. At the other extreme is the idea that all wealth and income should be divided equally among everyone, regardless of how much they work. Most of us think this is not fair, since hard work deserves to be rewarded. It has most certainly proven to be a disaster in practical terms, since societies that come anywhere near this system fail because there is not enough incentive to work (the USSR comes to mind).

What seems evident to me is that each person is a mixture of things they can control, such as their willingness to work hard; and traits they cannot control, such as genetic endowment, family structure and early experiences, education, prejudice, accidents and illness, which can dramatically influence one's ability to work in a way that society values. Since we cannot tell for each individual how to separate these controllable and uncontrollable factors, the best society can do is to let people have things/money/care partly based on how much they contribute effectively to our economy to make money -- what they earn. But it also must be based partly on their status as human beings -- which is roughly that part of tax revenue that goes to support those who cannot (or do not) earn. This includes not only the dreaded "welfare" but social security, medicaid and medicare, food stamps, and unemployment insurance.

The rule in life in general is that people pay for the services they receive. The same carries over to government programs like social security and unemployment insurance, at least in terms of how people think about it. But when we are dealing with those struggling to get by, they can't afford to pay for what they receive. As people go up the scale in income, they need less and less of it to get by. This is the idea behind the progressive income tax. The rich are always allowed to keep a significant proportion of their excess income ("excess" in the sense of being more than other people earn). I don't think fair-minded people feel rich people have done something wrong and deserve high taxes --it's just that the money has to come from somewhere, and the richer you are, the more you can afford to part with.

A basic argument of the anti-tax position is "I earned the money, therefore I deserve it and it's mine." The assumption is that whatever you were able to trade your labor for in the marketplace is in some fundamental God-given sense what you deserve. Aside from ignoring the significant factors in earning potential that people have no control over, and ignoring luck (did you pick the right stock?), and ignoring unethical practices (did your grandfather swindle someone?), it assumes the present system is the only way things could be (or should be). You may be successful because you were born with the skills tha tare valued in today's economy. Intellectual gifts and the power of persuasion are good examples. In other times and places, an ability to do strenuous manual agricultural labor in cold conditions may have been what brought you success. (In most times, no skill is required at all for great success if you are born into a powerful family with connections.) Is intellectual prowess inherently worth more than physical endurance? I say it's not; it's a function of the society and economy of which you are a part. Rich people are not islands unto themselves; they benefit from and are part of an entire system. So it is fair if they pay more to keep that system running.

There is a natural tendency for people to take a position which benefits them. Rich people are likely to find rationalizations for why they should pay as little as possible in taxes. What I find more perplexing and sad is how many poorer people and working people also accept that their income reflects a divine decree on what they deserve. Of course, in balance to this side of the argument, it is just as important that people who through whatever means (work, skill, luck) can make money should be richly rewarded for it and allowed to keep large portions of it -- just not all of it.