On Taxation

The issue of taxation is one that divides everyone.  If we are to have government perform certain functions, we have to provide a mechanism to fund that activity.  For the sake of simplicity, let’s put all the various forms of raising revenue through taxes, duties, fees, tolls, etc. under the same umbrella and simply call that “taxes”.  The argument for duties or fees or other forms of revenue collection are really the same as the arguments for different methods of direct taxation.  Those arguments fall into two main categories: tax everyone for common services and tax those who use a service for that service.  Within those two arguments are additional arguments related to progressive and regressive methods.  On top of all of those are the exemptions (to stimulate growth in an area) or targeting (to reduce a given activity) arguments based primarily on the factual basis that taxation of an activity discourages that activity.  From these six basic principles has arisen the most complicated, convoluted and miserable creation of mankind: the various tax codes.

“The federal income tax system is
a disgrace to the human race.”
– Jimmy Carter

Everyone should be treated equally under the law.  Such a simple statement can be agreed to by all, but result in completely different interpretations.  A simple flat tax on income could be considered to treat everyone equally, but it can be argued to take a greater portion of wealth from the less well off who have to spend the majority of their income just on necessities making a flat tax a proportionally larger part of their wealth.  Attempts to make the rate of taxation proportional to discretionary wealth are championed in the form of progressive income taxes with multiple tax rates.  There was a time in the 1950s when the top marginal tax rate was 91% and it seems impossible to argue that anyone being taxed at that rate while others pay nothing is a case of equal treatment under the law.  By the same token, taxing people for services they do not use and may not be eligible to ever use in order to benefit others who pay the same or less also goes against the principle of equal treatment under the law.  This is an argument often heard by those with no children or who have children in private school against having to pay to support public schools for the children of others.  The converse argument is that everyone benefits for an educated populace and it is equal treatment for everyone to pay.  The list of examples could stretch on for volumes, but it is sufficient to conclude that equality is not a term upon which everyone can agree when it comes to a practical application.

“To compel a man to subsidize with his taxes
the propagation of ideas which he disbelieves
and abhors is sinful and tyrannical.”
– George Washington

An argument often lost is the one related to choice.  Government at the consent of the governed is a basic tenant of the American system.  Taxation to support activities to which the majority or even a single person objects is to enable government without consent.  Of course it is a practical impossibility to have each individual citizen express a preference on every expenditure nor is it a sound idea.  Yet the idea that a person should have some choice in how much they can afford to or wish to provide to fund the government is a valid one.

“It would be a hard government that should
tax its people one-tenth part of their income.”
– Benjamin Franklin

The issue of how much someone can afford to pay is not as simple as the amount of money coming in as income.  Someone can be making a decent income but have the expense of children in college that someone else of the same income does not have.  The cost of living in one area can be vastly different than the cost of living in another such that two equal incomes have a very different standard of living.  Someone can be running their own business as an individual and have a large income but only a small portion of that income is profit and therefore has a very low net income.  Income does not necessarily define ability to pay.  Some could argue that the choice to have children and the expense of college was made and thus the reduction in net wealth shouldn’t mean a lower amount of taxation; someone else shouldn’t have to pay more because another chose to have children in college.  The one with children in college could however argue that others with lower incomes get subsidized college for which he or she is not eligible placing that taxpayer at a disadvantage in that no benefit is received from taxes that are being paid at a rate higher than those who did receive the benefit – essentially a double expense.  These issues are often addressed with exemptions, tax credits, deductions and a whole host of ways to try to undo the unfairness in the principal method of taxation.  Of course, each of those adjustments made to undo the harm to one class of taxpayers comes at the expense of a different class which does not qualify for that adjustment and could claim the same unfairness and unequal treatment as a result.

“The power to tax is the power to destroy.”
– John Marshall

Increasingly governments are looking at consumption based taxation.  These taxation methods are based on how much is spent rather than how much is earned.  If you spend less, you pay less.  The main arguments against consumption based taxation come in two forms: its regressive nature and its impact on economic activity.  Consumption taxes on essential items for living do result in a regressive system for the reason previously mentioned.  This can be circumvented in one of two ways: exempt essential items or provide a rebate for the amount of taxes paid on necessities.  Of those two methods, the first is the most frequently utilized because it is the easiest.  Food, clothing, etc. may be exempted from taxation.  While this method may be simple, it is not logical.  It makes more logical sense to calculate the amount needed to be spent for a individual to subsist and then provide a rebate for the tax upon 150% of that amount.  That treats all people equally while removing the regressive nature of the tax.  The second solves itself.  Consumption taxes hurt economic activity in one area if there is a neighboring area with a lower tax rate, thereby encouraging a shift in economic activity to the lower tax area.  They also hurt when the rate of taxation makes discretionary spending prohibitive.  While that can be seen as a negative to consumption based taxation, it can also be a positive.  The ability to circumvent high rates of taxation by shifting economic activity or abstaining from economic activity is a check on unreasonable levels of taxation.  Consumption based taxes become balanced with economic activity at a certain level, thereby identifying a revenue limit for government to function within.

“It might be demonstrated that the most productive system
of finance will always be the least burdensome.”
– Alexander Hamilton

Even with consumption based taxation, one maxim remains a constant: only people pay taxes.  Taxes on businesses are passed along to the consumer.  This a consumption tax must be only on consumer retail purchases or else it just compounds and raises the effective tax rate on the people.  Such a process requires that all businesses be registered with the government and their tax exempt identifier be used for each purchase to properly record exempt purchases and avoid fraud.  Advances in technology have made such a registry easily developed, used and maintained.  As this would apply to all non-persons, the exemptions for traditionally tax exempt entities would still apply.  It is only a matter of appearance that businesses would no longer pay taxes as the reality is that they already do not.  Treating the tax system in this matter would essentially eliminate the complications in the tax code, eliminate the need to file anything more than an individual rebate claim and treat all people equally without being regressive.

“Collecting more taxes than is absolutely
necessary is legalized robbery.”
– Calvin Coolidge

A side issue to this matter are so-called “sin taxes”.  These targeted taxes on certain products and services are put in place to not only raise revenue but also to reduce the targeted activity.  They are a type of self-destructive tax in that they seek to raise revenue through the destruction of that which the revenue is raised.  Whether they are placed on cigarettes, junk food, alcohol, gambling or whatever, the rationale is the same: to reduce the consumption of these items and to raise revenue to combat the negative effects on society as a whole by the use of these items.  If the rationale were put into practice, this would be a sensible method to deal with the societal costs of destructive activities.  Government should not strip people of the right to engage in an activity that is not infringing on the life, liberty or property of others.  Some activities however are more likely to result in unintentional infringement on the rights of others.  Thus the taxation of these things to provide revenue specifically to provide revenue to address the unintended damage of these activities makes sense.  Governments however do not restrict the revenue raised to this purpose.  They utilize it to fund other things, thereby creating a situation where the need for the revenue exceeds the intent to end or at least balance the consequences of a certain activity.  If gambling taxes are used to fund schools, then the government becomes interested in maintaining and even increasing the amount of gambling in order to fund the schools.  If gambling taxes are restricted to fund gambling addiction recovery programs and a proportional amount of law enforcement costs associated with gambling related crime, then the government has no interest in maintaining nor expanding the amount of gambling.

“The government’s view of the economy could be summed up
in a few short phrases: if it moves, tax it. If it keep moving,
regulate it. And if it stops moving, subsidize it.”
– Ronald Reagan

Given the arguments presented, the model taxation strategy is a consumption based system placed solely on individuals with a calculated rebate and potentially additional targeted taxes on specific items that have significant unintentional societal costs, such taxes to be restricted in amount to covering the actual costs associated with the items and treatment for those addicted to them.  Under such a proposed method of taxation, individuals would be encouraged to repair rather than replace, garden, save and otherwise reduce consumption in order to reduce taxation.  This would be most likely with those on fixed incomes and others with tight budgets.  One could even receive more in rebate than one actually spent and thus have a net negative tax rate.  Government would have a restricted source of funding that would remain linked with economic health.  Attempting to raise the rate would only reduce the economic activity and result in no change in revenue.  While lowering the rate would increase economic activity and thus result in no change in revenue.  Government would be forced to keep its expenditures in direct relation to the economic health of the society.  As the economy grew, so would government revenue, but if the government implemented policies that hurt the economy, it would see its revenue decrease in equal proportion.  Tying the government to the health of the economy is a valuable check on the power and actions of government.

“Whether taxation should extend only to property,
or only to income, are points on which opinions
have not been uniform. I am inclined to think
that both should not be taxed.”
– John Jay

What should not be done is to tax in multiple methods at one and the same time.  Taxes on income and then on consumption is just double taxation on the same money.  Taxes on businesses are passed on to consumers and then the consumer transaction is also taxed resulting again in cumulative taxation.  These types of hidden and duplicative taxes are little more than a way for government to increase revenue without the citizen knowing the true rate of taxation.  Government should either tax income, or consumption, or property, but not more than one so that the rate of taxation is obvious to the citizen and the citizen can thereby vote for and lobby representatives from an informed position.  No targeted taxes should be levied on one thing in order to fund unrelated government activities or subsidize another.  Government should not “pick winners and losers” through tax exemptions, but rather implement a tax structure that treats all people equally without being unduly regressive.

Published in: on March 7, 2017 at 4:31 PM  Leave a Comment  
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