Wednesday, May 14, 2014

Economics 101, Part 2

Yesterday I shared with you some of my thoughts on basic economics. Thank you for stifling your yawns. Today, I'd like to take the discussion a little farther.

Republicans always describe Democrats as "tax and spend liberals." To a certain degree, this may be true. But I think Republicans could be equally described as "wish and spend conservatives." In part, this is because of their firm belief that if we could just get rid of all those pesky taxes, business would boom, unemployment would disappear, and birds would sing in every tree. In part also, it reflects the conservative view (which I share, in part) that government at all levels, but especially the federal one, spends far too much money and spends it on the wrong things. Here's part 2 of my economic diatribe, in which I look at the subject of taxes and spending. We'll carry the spending discussion further in future posts ...

Economics 101
Part 2: Taxes and Spending

We spoke in yesterday's post about taxes as a cost of doing business, and the fact that businesses invest significant money (in terms of political contributions) in ensuring that their tax burden is minimized.  But what’s the real story on taxes?

In one regard, I agree 100% with the Republicans (incredible as that may seem): government spending – in relation to revenue – is out of control.  Both parties are at fault, as much as Republicans like to accuse Democrats of being big spenders.  They’re both guilty, just in different ways:

-  Democrats believe in spending on social programs without concern for where the money comes from.
-  Republicans believe in outright spending only on defense programs, but much of what they actually “spend” is hidden by manipulating the tax code to reduce the burden on favored sections of the economy (business and the wealthy).

The real issue is, as the Republicans rightly point out, spending.  Simply raising taxes to generate a larger amount of money to spend only makes the problem worse.  But blaming taxes for the problem and refusing to consider revenue as a contributing factor to a solution is irresponsible.

So, we have to cut spending.  The issue is what to cut, and by how much.

Article 1, Section 8 of the Constitution tasks Congress to “pay the debts and provide for the common defense and general welfare of the United States,” and gives it the power to impose taxes to do it:

“The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States…”

The devil is, of course, in the details.  What are the common defense and general welfare functions of government that tax revenue should pay for?  The Constitution doesn’t specify them, and this has led directly to the angry debate on government spending that is paralyzing Congress today. These are easier to identify at the state and local level of government – things like police and fire protection, schools, and sanitation are clearly reasonable responsibilities of the civil government.  The higher one goes in the government, though, the less obvious are the things we can all agree should be paid for by tax revenue – we can probably agree on the need for an army, a court system, and the general legislative and executive mechanisms of government, but how about educational standards?  Regulation of commerce?  Social Security?  Food safety and purity?  Air traffic control?  Workplace safety?  Protection from discrimination?

Over the years, and particularly since President Roosevelt expanded the power and authority of the government in an attempt to drag the nation out of the Great Depression, the size and cost of our government has continued to rise.  Every new agency, every new law, every new regulation was conceived and instituted with the very best intentions of making the government more helpful and responsive to the needs of its citizens.  But nothing ever goes away, and agencies take on lives of their own and grow constituencies that howl with rage if they are threatened.

Virtually every government program you can name has its ardent defenders who can marshal great throngs of supporters, petitions with thousands of signatures, and reinforced platoons of expensive lobbyists to argue that it is vital to the life of the Republic and can’t possibly be terminated or reduced in any way.  There are also lots of government programs that have opponents fueled with visceral hatred of the heavy hand of government regulation, who can marshal the same forces in a no-holds-barred fight to eliminate or neuter them (ATF, for instance).

Governments, whatever their size and scope of authority, need money to operate.  They can raise that money in one of three ways:

-  Collect taxes;
-  Charge fees for government services (such as the money you pay to get a passport issued, or the stamps you buy to get your mail delivered*); or,
-  Borrow against the credit of the nation (which, of course, has its own problems).
-  There's a fourth way, which is simply printing money, but economists tell us that’s a bad thing, and we won't discuss it here.

What should the characteristics of a taxation system be?

-  It should bring in sufficient revenue (when combined with borrowing and fees for services) to operate the government and provide a cushion for unforeseen emergencies;
-  It should be fair (that is, no one segment of the taxpaying population should bear a larger burden than any other).  This, of course, leads to much debate over what constitutes fairness, but we’ll get to that later;
-  It should be transparent and understandable to the average taxpayer (that is, a person should be able to calculate the taxes he or she owes based on a set of simple instructions; and,
-  It should not be used for any purpose other than the raising of revenue to operate the government … not as a tool for social engineering, a source of political patronage or reward, or anything else.

Let’s talk about fairness as it applies to taxes.  What makes a system of taxation fair?  I suggest these as yardsticks of fairness:

-  The tax rate should be as low as possible consistent with the needs of the government;
-  The tax should apply to everyone, regardless of income level above a minimum subsistence level;
-  Taxes should not be negative; that is, no taxpayer should receive refunds or payouts in excess of taxes actually paid;
-  The tax rate should be progressive; that is, variable (within limits) and not based on a flat percentage of income.  I believe this is reasonable, because 10% of a taxable income of $1000 will take a bigger bite from the budget and living standard of an individual than 10% of a taxable income of $1,000,000 (you can live a lot better on $900,000 than you can on $900).

I contend that - regardless of what fiscal conservatives loudly believe - taxes are essential. The great jurist Oliver Wendell Holmes once reminded us that "taxes are what we pay for civilized society," and he was right: paying taxes gives each of us a stake in the nation and the government we're paying for. There are legitimate arguments to be made about how high taxes should be**, what the revenue should be spent on, and how the tax system should be structured to maximize fairness (if that's even possible), but the need for the government to levy and citizens and businesses to pay taxes is beyond question.

Tomorrow, we'll take the argument forward with a discussion of what taxes should pay for, and how that relates to the structure of the tax program. Come back tomorrow and weigh in with your opinions.

Have a good day. More thoughts coming.


* Not really a valid example, as the Postal Service is a quasi-independent business that is not directly taxpayer-funded, but I think the point is still valid.

** As the French economist Jean-Baptiste Colbert once said, "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”


eViL pOp TaRt said...

Using Colbert's simile, we already have a lot of hissing geese. Some of the problems are due to the absence of any consensus on what the Federal government should be involved in. Then there's the Tax Code itself. It requires specialized lawyers to get the most benefit out of the various laws and loopholes. The result is that the average person feels that he is shouldering more than his burden.

Grand Crapaud said...

I wonder if certain types of programs and expenses should have a time limit written in, so that they could be open to review. Hopefully, this would terminate unsuccessful programs and the expenses that go with them. As it is, some go on to perpetuity because of a lack of a review mechanism.

We can't even agree on what constitutes "the general welfare" on the local level. It's hard to get voters to approve of new taxes even if schools benefit from them.

Elvis Wearing a Bra on His Head said...

A form of taxation that gets widespread support is the so-called "sin tax"; especially from the people who do not enjoy that government-defined vice. Thus, there are high taxes on alcohol, tobacco, and gambling. Maybe the legalization of marijuana might be rendered more politically palatable if it provided stiff tax revenues?

Mike said...

"taxes are what we pay for civilized society,"


Insane Penguin said...

Very definitely taxes should be progressive.