TCS Daily


The Underlying Principle in Taxation

By Jon N. Hall - August 7, 2009 12:00 AM

"One more thing, none of them wanna pay taxes again...ever."

 --
Bruce Willis, negotiating his terms to save the world in the movie Armageddon (which made a ton of money, all of which was taxable).

If not flat out unfair, almost all our taxes contain at least an element of unfairness.

However, not all taxes are levied to raise revenue. For instance, sin taxes are levied, in part, to change behavior. And poll taxes were levied to disenfranchise folks. One leftist principle of taxation is 'wealth redistribution' (leftists seem to think wealth was unfairly divvied up long ago, rather than being created anew everyday).

But is there any underlying principle of fairness involved in the taxes levied strictly to raise revenue? In other words, why do we tax what we tax?

To answer that, we must first know what we tax. The two main categories of what we tax are what we'll call 'assets' and 'transfers'.

Asset taxes include property and real estate taxes, and they pose a special problem for the issue of fairness. Consider two houses sitting side by side. The owners of theses two houses both use the same roads, sewers, police, and other public amenities and services. But one of the houses is taxed considerably more than the other. Why? It's because the government assessed it as being worth more, even though both houses may cost the government the same. Indeed, the less-valued house may cost the government more. (If the government wanted to stir up another revolution, it would levy an asset tax on bank accounts. Of course, such a tax would destroy the commercial banking industry.)

Whereas local governments rely on asset taxes, the federal government gets most of its revenue from transfer taxes. Transfers are wealth passing between parties. These include wages, sales, interest, estates, gifts, etc. The big transfer taxes for the feds are income and payroll taxes, which usually account for well over 80% of all federal revenue. The problem with transfer taxes is that government taxes on both the front end and the back end; when wealth is received, and when it's passed on to someone else. So with every transfer the government skims a little (or a lot). And the faster money circulates, the more money transfer taxes rake in. If money circulated fast enough, transfer taxes would confiscate all of it.

In short, you get taxed when you receive money, when you spend it, and then when you leave it to your heirs or give it away. On top of this, you'll get taxed every year on your assets for as long as you own them, even if they sit unused. (A Value-Added Tax is a fusion of transfer and asset taxes. Congress is considering levying a VAT.)

Some of the more unfair taxes involve double taxation, such as the taxes on estates, gifts and dividends. (The tax on dividends is especially irksome because if dividends weren't doubly taxed, corporations might be more inclined to issue them.) But what are we taxing here? Estates, gifts and dividends don't involve the creation of wealth nor do they incur any cost to the government. They merely concern the transfer of ownership from one party to another; a re-titling, if you will. How can the government justify getting a cut?

How fair is it that a man can leave his estate tax-free to certain government-approved entities (e.g. charities and colleges), but cannot leave his estate tax-free to his family or loved ones? If a man can't hand off his fortune to his kids, haven't we taken away one of the main motivators for taking risks and starting a business? In 2011, the estate tax rate goes back up to 55% and the exclusionary amount goes down to $1 million. Unless Congress acts, the feds will resume taxing the estates of the middle class exorbitantly.

Because of this looming tax rate hike on estates, a large estate could be quickly whittled down by 75% if left to an heir who promptly dies. Such depredations have spawned an entire industry devoted to sheltering estates from the estate tax. But this can't be healthy; investment choices should be made on their own merits, not based on their tax ramifications. We would do well to remember that as recently as 2001 the exclusionary amount on estates was a mere $675,000.

Surely, the fairest tax is one where everyone pays the same. It's called "capitation" (the head tax), and is provided for by Article I, Section 9 (4) of the Constitution. But if capitation were the only source of revenue to the federal government, it would amount to $13,333 plus change per annum for every man, woman and child in these United States. (That's our projected $4 Trillion federal budget divided by 300 million Americans.) So as a major source of revenue, capitation is a non-starter; few could pay it.

But capitation is fair. And capitation illustrates a salient point when contrasted with our other taxes: Only the government can charge folks based on what they can afford to pay. The government certainly doesn't allow private enterprises to charge folks differently; a billionaire pays the same for a gallon of milk as does a pauper. But if you were getting your milk from the government, they'd need to know your income before knowing how much to charge you.

The biggest source of revenue to the federal government is the Individual Income Tax. For Fiscal Year 2007, this tax accounted for 43% of all federal revenue, 3.3 times the share of the corporate income tax. How fair is it that, for 2007, the top 5% paid 60% of this tax, while the bottom 50% paid less than 3%?

Well, it's not fair. But it's inescapable: the rich pay more taxes because they're the ones with the money. There is no higher principle invoked in setting tax policy and tax rates; the government "needs" your money and has the power to grab it. The only "principle" involved is this: The beast must be fed.

We are facing a fiscal Armageddon not even Bruce Willis can save us from. Congress is on a trajectory to hit a $1.84 Trillion deficit for fiscal 2009. This would be more than 11 times the deficit the Democrats inherited just 2 years ago. And trillion-dollar deficits (that's trillion, with a 't') are forecast "for years to come".

Top-bracket taxpayers shouldn't obsess about the unfairness in our tax codes. (Fairness is not for this world, anyway.) High-taxpayers should just be thankful their rate isn't 91%, as it was as recently as 1963.

What all taxpayers should be concerned about more than taxes is spending, because the less the government spends, the less it "needs" our money. Out-of-control government spending is why so many things are taxed; it's why we have so many types of taxes; it's why tax rates are going up.

Get government spending under control, and taxes will follow.


Jon N. Hall is a programmer/analyst from Kansas City.
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207 Comments

The deficit
Will undoubtedly be bigger than $1.84T (I got it right this time.) A recent report said that tax revenues were running 18% below projections, and unemployment continues to increase.

(Don't be fooled by today's drop in the unemployment rate. We lost a 1/4 million jobs last month, the only reason the rate dropped was because 3/4 of a million people gave up looking. The U6 (which is the way unemployment was calculated during the Depression) has unemployment up to 19.6%.)

Ability to pay
Prostitutes are also know to price their services based on the customer's perceived ability to pay.

Breaking News: Obama Union Thugs Beat Up Town Hall Protesters
Now the guy has Brown Shirts:

http://www.youtube.com/watch?v=_kxaGfClPws
http://www.youtube.com/watch?v=qLpHbD5cy0s

Oh, and if any of you are thinking of forwarding what I have posted, posting now and will post in the future to flag@whitehouse.gov -- be my guest.

Just be sure include a bogus claim that I am organizing a militia to storm the White House, ok?

Who knows. Perhaps it might turn out to be true as we slip more and more into tyranny.

Also: I am also looking for investors in a little side business that could have explosive growth potential. See, I figure that sooner or later about half the country will be required to wear either elephant armbands or have elephant patches sewn in clothing worn in public. You know, so people can easily find the 'fishy' people. So, why not have a product line to meet that sudden and huge demand ready and waiting? We can make a lot of money...before the firing squad makes profit a moot point.

From each according to his ability....
to each according to his need.

Limited government, limited taxes.
That WAS the idea.

...and when the mob sets protection racket 'fees'
.

...then they gave non-taxpayers the franchise and it all went to hell
Originally, you had to own land or a defined-size business in order to vote. That was because it was those two groups who paid direct taxes.

...
I watched you first video, the people protesting looked to have been kicked out for being too disruptive to allow any sort of actual discussion to take place...

Also, comparing Obama to a Nazi, is a bit of a stretch.

If you're going to post, why not post something a little less, oh, I don't know, blatantly wrong?
Also, your comparison of the Republicans to Jews is inappropriate at the minimum. Jews were victims to one of the most grave tragedies that the 20th century produced. Your comparison of Republicans to Jews completely diminishes the fact that Jews faced actual horrors and oppression, while the Republicans are merely no longer free to have absolutely everything in the political realm their way. Grow up.

Obama is a socialist...
like the N A Z I s.

Obama and is staff are obsessed with getting their way, the Chicago way, doing whatever it takes. So far, only political threats are being used against Congress. What will they do it that won't succeed?

What is your opinion of Pelosi accusing all those who are protesting of being N A Z I s (carrying swastikas)? Isn't she Jewish? Shouldn't she be ashamed of herself for trivializing the N A Z I s in that fashion?

Yeah, and those blacks too!
Man, this country used to be so great. Oh, slavery, you shall be missed. Why do have to keep allowing people representation!



Not really...
Yes, Nazi comparisons are inappropriate all around. Actually, I find Nancy Pelosi terribly irritating. And she's from my district, so yes, quite embarrassing.

Obama is not much of a socialist though. When he abolishes private property, or more moderately, creates a single payer health plan, that would be socialist. But I admit, if anything short of a 19th centuryesque laissez-faire market is a socialist market, then Obama is definitely a socialist.

*****, however were not Socialists, really. While some of their economic philosophies may be considered extremely interventionist, or as fascists would term it, corporativist, which is often associated with socialistic thought, the ***** totally dismissed the main trait of Marxist thought, that the problems of society can be remedied by creating class equality. The ***** felt class to be an integral part of german culture, and never attempted to create wealth equality. THAT would be socialist.

Yeah..
What's your point?

Recall there was a war and the 14th amendment.
Recall also that most states in the north opposed slavery.

It was the first Republican president that ended slavery and the Civil Rights Act would not have passed without Republican support.

I do support the idea that one must have skin in the game. If you pay taxes and are a citizen, you can vote.

I really like Heinlein's idea that citizenship must be earned.

National socialists....
Socialism, state control of private property. The N A Z Is were socialists.

I don't have a problem with Lincoln
He was a great man, I don't really know what your point is. I think that that party has really lost its progressive edge since then, but it was once a great party.

So, the working poor have not earned their citizenship?

OK
If you want to define socialism that way then you're right. But if you're trying to say that because ***** were socialists, that socialists are *****, then thats totally absurd. But I think you're kind of missing the point of socialism here. By your standards, the US is also socialist. The ***** never abolished private property, they were just heavily involved in directing economic activity, indirectly controlling industrial, but not personal property.

Why we tax different people differently.
To try to create a more equal society. I don't see why this is unfair.

State control of private property
"they were just heavily involved in directing economic activity, indirectly controlling industrial, but not personal property."

What is 'personal' property? If I own a business and the state controls what I can and cannot do, then what do I own? The N A Z I state also took the lives of their 'citizens'. Owning one's self is the most basic of private property.

I think it is you that is missing the point of socialism. Yes, the USA is socialist and is becoming more so being led by Obama and a socialist Congress.

The Constitution
As originally written, the Constitution was designed so that only property owners could vote. Which makes sense as they would be the ones that were taxed to pay for the government.
If the Constitution was being followed as designed, with limited federal powers, we would not have a majority of forcing the minority to pay for a welfare state.

Should anyone have the right to force a fellow citizen to pay for their room and board?

Equal outcomes or equal opportunity?
How do you guarantee equal outcomes without creating a socialist state with all sharing the misery?

So, what's your point?
You keep saying how the US is becoming socialist and ***** were socialist. But what is your point? What's wrong with socialistic policy? It works well for western Europe.

Pay for room and board?
Come now, you are being too generous to our federal social programs. The feds do not pay for peoples room and board indeffinately, unless its a family situation. And the people it does cover temporarily or for a long period of time do not present a sizable enough group to really sway the election in any way. In reality, people voted democrat not to "force a fellow citizen to pay for their room and board" but because they are humanistic and want to reduce poverty. It isnt as if the democratic party is a group of freeloading bums out to steal the "real America's" hard earned money. Why should the poor not have a safety net?

Not entirely equal
As we have seen historically, a complete implementation of Marxist thought leads to tyranny. I'm not suggesting this. I'm advocating a compromise between laissez-faire smithian economics and marxism. The free market provides the engine but the federal government intervenes to prevent the rich from becoming too rich and the poor from becoming too poor. I don't see why this is so objectionable.

why it's objectionable
It is objectionable because it is based on the use of force, which is normally considered immoral.

they "need" it?
That's supposed to be one of the 'underlying principles'?
Governments only 'need' such revenues in the same manner that Tony Soprano, Stalin, and the Triads need it. And don't bother to try to rationalize theft with the insult that we have voted for this.

Here is a good article about taxes: http://www.freecanadian.net/articles/UndergroundEconomy.html

wanting to reduce poverty....
That is only an abstract goal. Poverty had been regularly being reduced, all on its own, but this was a threat to big government. Thus they had to implement socialistic policies in order to keep people dependant on them, increase the scope and power.

Define "works well"
I have heard how young Scandinavians who get a job in the USA buy a car and a house. Something that is too expensive back home.

When I visited Scandinavia a few years ago, I noted that Scandinavians drink, a lot. In Norway, my cousin made his own alcohol because of state taxes. Some attribute the drinking to the weather. I attribute it to depression brought on by lack of opportunity.

How are the employment rates in Europe?

I know a few Europeans who work overseas to avoid high taxes and have an opportunity to afford a house and a car.

What is 'working well'?

How do you like subsidizing bums in SF?
Maybe you don't live in SF, but how do like the subsidization of bums by taxpayers in SF?

Has that reduced their 'poverty' or attracted more bums?

Charities
Charities, funded by voluntary contributions, not coerced, do a much better job of ending poverty because the charities really do care about the people. Conversely, those receiving charity may have a sense of gratitude instead of entitlement and may make an extra effort to support themselves.
A government tossing about coerced money inspires little gratitude.

Can't stop the tyranny
The end result will always be tyranny and corruption as we see in NJ, Chicago, CA and all other states and cities with one party democrat rule.
Why not recognize the evil of socialism and work to reduce the evil?

"What you do with it is up to you."
" I realize there are those Americans workers who labor long and hard and still don't earn much money. There is nothing wrong with giving them a tax cut -- assuming they pay taxes in the first place, and not all low-income people do. But there is something wrong with extending that benefit to those Americans who -- for one reason or another -- haven't invested what they should or made bad choices, took the easy road, passed up the chance to get more education or additional skills, refused to relocate for better jobs and so on.

There isn't a parent of grown children anywhere in the country who doesn't understand this concept. They may love their children equally, but that doesn't stop them from acknowledging that their offspring -- like all human beings -- perform at different levels and reap benefits accordingly. The goal shouldn't be equal outcome but equal opportunity. What you do with it is up to you."

http://www.realclearpolitics.com/articles/2008/11/achievement_argument_was_mccai.html

In nature, species that cannot adapt, die. One reason Panda's are endangered is they only eat bamboo shoots.
Omnivores have a much better chance of thriving if they adapt.
The motto of the Boy Scouts is 'be prepared'. How many people do and why should government welfare reward those who are too lazy not to be prepared?

Working well
Look at the HDI, or other various indexes which measure standard of living, which is the closest indicator of happiness. Happiness is the goal of all good government, and a good standard of living is vital for being happy. All 4 scandinavian countries have higher hdi's than the US. Also, I think its difficult to attribute the traditional scandinavian affection for alcohol with the social safety net in place there. A bit of a stretch if you ask me.

Charity
But, the workers have already been exploited by the industrialists, thats why they are poor. Charity is a little messed up precisely because it makes the poor feel as if the are NOT entitled to what they really should be entitled to.

SF
yeah, unfortunately the entire federal government doesnt do what sf does, that way we would not be such a magnet for bums. Historically actually, police and town authorities have actually bought homeless people from around the state grayhound tickets to SF, which is another reason why we are so flocked with them. But I'd rather they have food to eat and shelter than see them starve.

Why not help them NOT be bums?
How is that program working?

"workers have already been exploited by the industrialists"
How is that?

Why should anyone think they are entitled to your money?

I'm BLACK, you idiot
So throwing out the racist canard doesn't work. Don't you know that black people CAN'T BE RACIST according to liberal dogma?

Then it is not equal enough
I demand sexual rights to my neighbor's daughters. After all, it is 'unfair' that others can have access to them but I can't.

And I'll take his dog and his house, too.

All I have to do is convince 50.00001% of voters to back me up. That is the sole and only definition of an 'equal society' -- it is what people can take from others, nothing more.

Then it is not equal enough
I demand sexual rights to my neighbor's daughters. After all, it is 'unfair' that others can have access to them but I can't.

And I'll take his dog and his house, too.

All I have to do is convince 50.00001% of voters to back me up. That is the sole and only definition of an 'equal society' -- it is what people can take from others, nothing more.

Then it is not equal enough
I demand sexual rights to my neighbor's daughters. After all, it is 'unfair' that others can have access to them but I can't.

And I'll take his dog and his house, too.

All I have to do is convince 50.00001% of voters to back me up. That is the sole and only definition of an 'equal society' -- it is what people can take from others, nothing more.

No, we tax people differently because...
..one large block of voters figured out that they can use the power of the State to engage in legalized grand larceny on their behalf. That is all.

Fairness has nothing to do with it. It is pure 'might makes right'.

nothing wrong with capitalism
I think its the root of all progress, and of course i enjoy a free market society. I just it needs moderation, like all good things. Is it so crazy to find faults with laissez faire economics?

Pretty well



What faults?
?

Power
According to the libs, racism can only be practiced by those in power.
In a similar vein then, those conservatives are being oppressed at town meetings by those liberals in power.
Where is the outrage?

socialism by stealth
1) Obama hasn't abolished private property, but he has restricted it tremendously.
2) He is in the process of creating a single payer health plan. Read the entire bill, it's in there.

It only works well, if you ignore all the ways that it doesn't work at all
Poor people in the US have a higher standard of living then even the upper middle class in Europe.

How the heck is that, "working well"?

a most dishonest measurement.
Nobody can measure happiness.
The measures that they do use have little if anything to do with true happiness.

blacks could vote if they owned land
and many did.

The issue of slavery was entirely a different subject, one you obviously are not intelligent enough to differentiate.

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