The Deal on Taxes and Taxation

ON AUGUST 19th, the publisher of the New York Times’ made a promise to “intensify [his paper’s opposition] to wastefulness and peculation [embezzlement] in the administration of public affairs,” and to advocate harder for “the lowest taxes consistent with good government, and no more government than is absolutely necessary.”  

It was August 19th … 1896 – over a century after the American people had legitimated their government by ratifying its Constitution and, thereby, consenting to the governance it prescribed. Another century has passed since Adolph Ochs made that promise, and we’re still somewhat befuddled by what right-sized, right-acting government looks like ... and how much it costs ... and the best ways to pay for it. Well, here anyway is the Deal on Taxes and Taxation:

Taxation is just Fine if it buys the right Government @ the right Price

We’re constantly told that we hate – and rightfully should hate – paying our taxes. It’s a cynical message that emanates from America’s leadership void. The truth about taxes rarely gets spoken, because in Washington, all Truth must first "run" the “Gauntlet of Cynicism” – Emotional Demagoguery, Fear Mongering, Guilt Tripping, and Race Baiting – before it can be heard. Typically, real leaders get punished for letting the truth “slip out” by opponents of lesser integrity who happily deliver messages they think voters want to hear instead of providing them with information they need to know.

For the most part, today’s elected officials reflexively shield their constituents (and even themselves) from mature examinations of the trade-offs associated with government spending – analyses that would inevitably reveal pros and cons to virtually every government spending proposal. Modern politics shifts our central focus from seeking “Value,” where only the most worthwhile things get done, to seeking “Victory,” where sound public policy gets scuttled in order to reduce one’s opponents to caricatures…labeling them “unpatriotic,” for example, if they challenge national security spending levels, or deeming them “heartless” if they dare consider cutting spending on a social insurance program – even an ineffective one.

We haven’t had a single Tax Cut since 1954

Legitimate taxation stems from legitimate government spending, because legitimate governments pay their bills. But remember:  it’s the spending that necessitates the taxation … and every increase in spending is, by definition, an increase in taxes. The more a government spends, the more taxation – either current or future – it requires. And since the U.S. government hasn’t lowered its inflation-adjusted level of spending since 1954, taxes have, by definition been going up for 60 years straight. Today, we’re running about $17,073 billion short on our tax bill...

The value we derive from government spending is what matters most. If we get a lot of value from government, then it’s perfectly OK to have a lot of government. But the opposite holds true as well….

So, our political discussions should focus on discerning the things we want from government versus the things we need. Deficit spending is OK if it’s for investments that will glean future benefits that exceed our costs of borrowing. Likewise, it’s OK to spread payments for a capital purchase over the life of its usefulness, e.g. pay for a bridge over the time period it’s expected to last. On the other hand, borrowing to finance present day consumption, i.e. “eating our seed corn” or accumulating debt that will be insidiously passed along to our children, is just plain wrong.

Our Flat Taxes on Income and Consumption

Every election cycle, we hear calls to institute a “Flat Tax.”  Well, guess what:  we already have two of them! Our Payroll Tax is a 15.3% flat tax on income, which is purportedly collected to pay for future social insurance needs. But the truth is, all collected revenue goes directly into the General Fund, and it gets spent on current retirees' benefits. The payroll tax is America’s only true “income” tax because workers pay it no matter what they earn (although currently, the Social Security tax only applies to incomes below $113,701).

State and local governments have a flat tax too – the Sales Tax – which taxes consumption. The more people consume the more tax they pay…that is as long as they’re not “consuming” education, or healthcare, or legal services, or religion, or charitable giving, etc...

Our Progressive Tax on Surplus

What’s commonly known as the “Income” Tax is actually America’s “Surplus” Tax, because it’s designed to only tax a person’s year-end surplus. And because of our shared longstanding desire for fairness and justice, our (Surplus) Tax Code is pretty darned complicated…

We attempt to account for each exception and extraordinary circumstance that impacts how much income a particular person needs for reasonable “sustenance,” which then indirectly determines that person’s surplus. The factors that the I.R.S. incorporates into this calculus fall under four main categories: exemptions, exclusions, deductions, and credits. Once they’re applied, “Total Income” gets whittled down to “Adjusted Gross” Income, or “Surplus” Income, which then gets “progressively” taxed – higher rates for larger surpluses.

Taxing surplus “progressively” makes good sense because it provides the resources society needs to insure against devastating loss. The principle that winners should reach back and give their less fortunate brethren a hand up comes from one of our culture’s most widely accepted norms: “To whom much is given, much is expected.” We use contributions from exceptionally lucky folks to lift up our unlucky brethren. And sometimes, thanks to disease, injury, or a natural disaster, etc., today’s lucky winner sometimes becomes tomorrow’s needy recipient. And that’s the thing about managing luck:  one never really knows what tomorrow will bring.

Our Commission on Investment & Corporate Profits

Investment taxes (dividends, corporate, capital gains, etc.) are really just commissions that the “House” – the U.S. government – justifiably charges for providing the Rule of Law and regulatory oversight that investors and corporations need in order to trust their marketplaces. 

Maintaining fair markets costs money. So, charging a 10-15% commission on market profits makes good sense. But commission rates above that range – say 15-25% – only make sense if native markets and business conditions are comparatively stronger than competing foreign markets and economies. In other words, U.S. capital gains and corporate tax rates should be periodically re-examined and reset based upon America’s relative global competitiveness.