Thursday, March 04, 2004

A Quick Blurb on Taxes
Why Should People Be Penalized For Being Successful?

I have a confession.  I have spent hours reading other people's blogs.  Some of them go off on rants.  I have been blogging for a couple of months, and have not ranted once.  I am getting jealous.  So even though jealousy is a deadly sin, I am going off on a rant of my own:

A common complaint by wealthy persons is that a progressive tax system levies a higher tax rate against persons who make a lot of money.  They refer to it as being penalized for being successful.  The article in this blog that immediately precedes this one contains the statement:

"Fiscally conservative" Kerry wants to raise taxes on the rich, never mind that the top 5 percent of income-earners pay over 53 percent of income taxes, while the bottom 50 percent pay just 3.9 percent.

I have some comments on this.  First of all, Mr. Elder is confining his remark to income taxes.  This is an artificial limitation.  Income taxes occur in an economic environment alongside many other kinds of taxes.  Some taxes are progressive, such as income taxes.  Others are regressive, such as sales taxes.  Furthermore, governments have many ways of generating income; most are not called taxes, but they have the same effect:  they direct the way in which a citizen's money is spent, regardless of the direct wishes of the individual.  An automobile registration fee is a tax; at least the IRS allows a deduction for it, in the same manner that one can deduct for state income tax payments.  But an entry fee for a state park is not called a tax, even though in both cases the individual is paying money to the state for the use of a state resource. 

If one wants to decide if a given tax is fair, it is necessary to consider that tax as one element in a complex system.  Say, if one state raises the income tax, but lowers the auto registration fees by a commensurate amount, such that the net income to the state is unchanged, people without cars will pay more, and people with cars will pay less.  Regardless of whether that particular arrangement is fair, the point is that you cannot evaluate the fairness of the income tax change without simultaneously considering the effect of the change in auto registration fees. 

Mr. Elder points out that the wealthiest 5% of Americans pay 53% of the Federal income taxes, while those below the 51st percentile pay "just" 3.9%.  He makes this statement as though it means something.  I submit that it means nothing at all, because it is a statement that ignores all the other ways that the government has to collect money from people.  In addition, the government directs personal spending though means other than taxes.  For example, construction codes require that people spend money to keep their dwellings within certain standards.  This is not a tax; the government never gets their hands on the money.  But is is money that goes out of the individual's pocket at the direction of the government, so the net effect to the individual is the same as if the government took the money and provided a service. 

All over the Blogosphere, there are discussions about taxes: what the tax rate should be, what should be taxed more, what less, whether there should be a flat tax, etc.  My stance on all of this is: I don't care.  I repeat: I don't care.  I don't care if the tax rate is 1% or 100%.  Really.  I. don't. care.  What I care about it how much of the income I generate is directed by the government, and what do I get for what I give up.  (Well, I do care if it is fair on not.  I acknowledge that we never will have a system that everyone thinks is fair, but certainly the concept of fairness should enter into whatever equation ultimately is used.)  If the tax rate is 100%, but all of my material desires are satisfied, fine.  if the tax rate is -100% (I get paid double whatever I earn) but civilization is falling apart, there will be nowhere for me to spend all that money.  Without a civilization, money is meaningless.  So a low tax rate is not an advantage if the government is not functioning. 

Another quibble about the tax discussions.  (This is a rant tangent) People keep referring to money collected as taxes as "taxpayer money."  Get this everyone: ALL MONEY IS TAXPAYER MONEY.  The Department of Treasury prints money.  Where does the "moneyness" of the paper or coin come from?  It comes from the collective agreement to pay taxes.  No taxpayers, no money.  The Treasury derives all wealth from taxpayers.  So all money is taxpayer money. 

Anyway, back to the main rant.  So what is this business about being penalized for being successful?  If you make a lot, some of your tax rates are higher.  Is this the same as being penalized?  No, it is not.  Somehow I don't think Bill Gates really feels  as though he is being penalized, living in one of the world's most expansive mansions.  The notion of being penalized carries with it an implication of unfairness.  Is it not fair to tax people at higher rates if they earn more?  In order to answer that, one must first consider why any  tax is fair.  Remember, people actually do get something for their money when they pay taxes.   If you get something in return, and what you get is in some way proportional to what you give, it might possibly be fair. 

Let's look at an example, and to keep it simple, use an example of a direct financial transaction that does not involve a government.  I go to work, and I put it, let's say, an hour of work, and get $20.  On the way home, I stop at JC Penny and buy a jacket for $20.  What have I done?  I have converted one hour of my labor into a jacket.  I make the transaction because I need a jacket, and I believe that the price is fair.  Presumably, the person who sold me the jacket also thinks it is fair, or he wouldn't have sold it at that price.  Simple.  Now, what would I have had to do if I had made the jacket myself? I would need to clear a field, till the soil, plant cotton, wait for it to grow, pick it, spin it, weave it, cut it, sew it, and so forth.  It would take a lot more than an hour.  So in effect, I have actually gotten a lot more for my money than an hour's labor.  The difference between what I put in, and what I get out of the transaction, is rather large.  That extra value is made possible by cooperative effort.  If I take the difference between the labor I personally put forth, and the labor I would have had to have expended to make the jacket myself, I get a lot of added value.  Where does that value come from?  It comes out of cooperation within a society.  That added value is something that economists have a name for, I suspect, but I don't happen to know the formal name.  I am going to come up with a name of my own: the dividend of cooperative society, or DCS. 

Money, after all, is just a symbolic representation of cooperation.  By pulling a twenty out of my wallet, I am demonstrating that I have cooperated with society, and that I expect cooperation in return.  No cooperation, and the money is meaningless.  If we all cooperate, we all get more back than what we put in.  That cooperation is made possible by taxes.  So one of the things I get in return for paying taxes is a lot of DCS.  By paying 36% of my income in taxes, I am able to take one hour of labor and get perhaps a hundred hours back.  That is a pretty good deal.  If we had a flat tax of 18%, it would be an even better deal for me.  But, either way, it is a good deal.  The higher tax rate is NOT a penalty.  It is not as good of a deal as a lower tax rate, but it still is exceptional.  Most bank accounts do not routinely give you back one hundred times what you invest in a single hour.

Of course, this does not resolve the question of what constitutes a fair tax.  But it does demonstrate that a progressive tax is not  a penalty.