03 September 2011

Imagine I am Running for Congress - 5

Taxes!

Is there anything that inspires more emotion these days, even more than terrorism. The whole tea party phenomenon is about taxes, as the name Tea Party says. Of course the original Tea Party was not about excessive taxes but unjust taxes, the whole 'no taxation without representation' thing. Which does not mean people like paying taxes, as evasion is as old as taxation itself. I am only saying that the current 'Tea Party' is anti-tax because taxes are the fuel of government, and government is their true adversary.

Fervent anti-taxers like Chief Justice John Marshall's famous observation in 1819 that "the power to tax is the power to destroy," is a touchstone. Those who like the libertarian implications of this notion ought to review the context in which it was said, as it was directed against a state (Maryland) that sought to tax the US Government and thus impede its work. In short, the decision (McCulloch v. Maryland) in which that famous phrase was written actually defends the supremacy of the federal government over the states. Ironic, isn't it?

But in my imaginary campaign the issue of taxes is very real. Who can get elected on a platform of higher taxes and stronger government? Fortunately, this is an imaginary campaign so I can be truly honest. Yes, we need higher taxes and we also need stronger government. Let me tell you why and how.

The debt crisis involved two things - expenditures and revenues. The provisional solution only employed one of them. To pay off the entire debt only by reducing expenditures would require all but closing the government, which in some quarters would prompt thunderous applause, but would in other quarters prompt riots and insurrections. I guarantee that at best it would last only as long as one congress, two years, four years at the most. That's because the costs in human terms would be unbearable to so many that they would choose those who would reverse course. Then the anger would be on the other side, and so it would go.

Sound familiar? We are already there in some ways. So the only path available (aside from suspending democracy entirely in a federal Emergency Financial Manager act that would be essentially a dictatorship) is the 'half a loaf' option. Some expenses get cut. Some taxes get raised. Higher revenues are inevitable. The only question is how much for whom for how long.

I have an answer. And it comes from Adam Smith, the father of free market thinkers. (Surprise!) He wrote:

(Book V. chapter 2) The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expence of government to the individuals of a great nation is like the expence of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate.

Proportionality is a ratio, not a number. the tax we pay should be based on where we stand in relation to others in terms of income and wealth, not merely on how much we have.

But we already do that, you say. To an extent. Progressivity is way we do this, asking from those who have more. BUT IS THE CURRENT PROGRESSIVITY PROPORTIONAL TO WEALTH AND INCOME?

No. At the very highest and lowest levels taxes are way out of proportion, and ironically in the same fashion. Those who have very little pay nothing at all in income taxes, which is unwise, but those who have a very great deal pay far too little in income taxes which is also unwise.

I say, let's create a tax code in which we tax people based on how much they have of the national income they have. According to Wikipedia, which is not authoritative but neither is it ideological,

The aggregate income measures the combined income earned by all persons in a particular income group. In 2007, all households in the United States earned roughly $7.723 trillion. One half, 49.98%, of all income in the US was earned by households with an income over $100,000, the top twenty percent. Over one quarter, 28.5%, of all income was earned by the top 8%, those households earning more than $150,000 a year. The top 3.65%, with incomes over $200,000, earned 17.5%. Households with annual incomes from $50,000 to $75,000, 18.2% of households, earned 16.5% of all income. Households with annual incomes from $50,000 to $95,000, 28.1% of households, earned 28.8% of all income. The bottom 10.3% earned 1.06% of all income.
In other words, we should ask for 50 % of taxes from those who had 50% of the income, meaning those with incomes above $100,000, which is 20% of households. So we should ask 20% to pay 50%, $3.86 trillion, that would be proportional. But the top 20% are more spread out in come than the bottom eighty percent so to be really fair in Smith's sense, we have to further divide that 20%.

The top 8% of earners, those who earned more the $150,000, actually got 28.5% of all income, meaning they earned significantly more than the 12% just below them. Their share should reflect their income which would be $2.20 trillion, well more than half of the $3.85, which would be fair. Within THAT group, those earning $200,000 or more earned 17.5% of the national income, which would make their share (in 2007 dollars) 1.31 trillion.

This sound complicated, but the principal is not. You share of federal taxes is exactly your share of the national income. The more you make the more you pay, not based on marginal tax rates or other arbitrary lines, but on your share of the wealth.

Think about how simple this would be, and how objective. You would pay what you make. I know the devil is in the details, and politicians can make a camel from a mouse with their hands tied behind their backs. But this principle has the appeal of the flat tax in simplicity and the fairness a flat tax lacks.

I have some libertarian readers who doubtless will chime in. Please do. But join me in thinking outside the tax box as it now exists, with its awful choice between fairness and simplicity. And yes, I have not considered Social Security or Medicare, or state levies. This I know. Focus on this for now and tell me what you think. But please think. That, it seems to me is most missing in our politics at the moment.

1 comment:

Joel Monka said...

I've been thinking farther outside the box than you. The problem with income tax is that it only taxes income. Why is that a problem? Say you inherit $1 Billion after taxes. Let's also say you've no interest in playing the market- you put the whole billion in your checking account just to see jaws drop when they do a credit check. What's your tax obligation next year?

0. Zero. You owe nothing. Doesn't matter if the tax rates are 10%, 50%, or 100%- you have no income, therefore you owe no income tax!

This is not an imaginary scenario- Sam Walton's heirs are worth billions, and pay taxes only on investment returns. Senator Kerry is worth nearly a billion, but has only investments and Senate salary as income. How about if we start taxing net worth, rather than income?

Income, after all, is earned; you've done something people are willing to pay for- you're a net plus to society. But net worth is the past, often something done by your forebears, not yourself, often unearned. Why do we tax only the fruits of useful labor, and give a free pass to the idle rich?

Taxing net worth is more fair, AND sends a better message. Someone who is earning their wealth can easily replace that portion of their net worth lost to taxes; those living off legacy wealth would be encouraged to do something with the money, so that it won't get taxed away.