Because most philosophies that frown on reproduction don't survive.

Tuesday, April 15, 2008

The Tax Man Cometh

Blackadder reminds us that it's tax day (I'll confess, I'd forgotten, having filed back in February) with a quote from the first book of Samuel warning the Israelites that if they choose to have a king they can expect him to confiscate a whole tenth of their income in taxes. As of this year's tax bill, ancient Isrealite tax rates are sounding pretty good to me!

In honor of the day, Blackadder also quotes a range of tax reform proposals.

There I things I like about many of these approaches to reform, simplification and reduction, but for the moment, I'd like to throw out something which might sound odd coming from an avowed conservative: I'm concerned many Americans don't pay enough taxes.

It's not that I want government spending to go up, or that I want to see tax rates raised. I'd much rather see spending down and rates lowered and simplified.

But it does worry me a bit how progressive the tax system has got. That's not progressive as in "liberal", but progressive as in taxing the rich more than the poor and the middle class.

It does seem quite fair for the rich to pay higher tax rates than those with less. After all, someone who makes 1 million dollars a year will experience considerably less diminution in living standards by giving up 30% of his income than someone who makes 25k per year.

However, our current system is so progressive that the top forty percent of tax payers pay 85% of all income taxes, and the bottom forty percent of tax payers pay less than 5%. Now, that's a great help if you're hard up. Three out of the first four years we were married, we actually got more money back from the feds than they'd originally witheld in the first place (due to child tax credits.)

But there are two opposite things that bother me about this situation:

1) Generally, people are much less careful with other people's money than their own. If fifty percent of the American people can vote to fund this, that, or the other thing while knowing that they'll only have to pay ten percent of the cost (and many of them won't pay any) what real sense of responsibility will that foster?

2) Generally, if you pay for something, you own it. If ten percent of the population pays more than half of all income taxes, you can bet that one way or another, that ten percent will end up being the tail that's able to wag the dog. So all populist pretensions aside, I can't help imagining that our "soak the rich" tendencies simply end up putting the rich more firmly in charge than they were before.

It's all very well to worry, but what to do? On that I'm less sure. There are a lot of problems with the current system -- one of them being that unless you spend a fair amount of time staring at your check stub it seems like taxes are all about getting money back every April rather than paying out every time you get paid. (Indeed, most of my coworkers intentionally have extra withheld because "then you get more back".) Witholding makes tax paying comparatively painless.

And there is a certain oddity in collecting taxes from someone so low on the income ladder that you're simply going to have to turn around and give him some sort of payout of equal or greater value in order to keep him off the streets.

But we are a democratic republic, and as such all citizens are expected to share in responsibility for how our government is run. It strikes me as hard to have that if most people do not have much of an experience of what our government costs.


Anonymous said...

I've put a little thought into this and wrote about it here.
My basic thought is:
Step 1: Remove the existing tax system
Step 2: Implement sales taxes to compensate (excluding basic food and hygiene products)
Financially speaking I think this is pretty sound. The snag is that there is a whole industry built around the tax system, so it is all a question of easing away from that without forcing hundreds of thousands of people out of work with no qualifications to do anything else.

Anonymous said...

The Blackadder Says:

Your two worries seem to be at least in tension with one another. If it's true, as they say, that "he who pays the piper calls the tune," then it wouldn't really matter what the majority who don't pay much in taxes think, as to the extent they don't pay much in taxes, they will have less of a voice in setting policy. Of course, if it were true that paying more in taxes meant more control over government policy, one wonders why people who pay a lot in taxes can't get the government to lower their taxes more.

The problem, I think, is that the "pay the piper" principle (say that five times fast) is only true of voluntary payments, where the the person making the donation always has the option not to donate (or to donate less) in the future. That's not true in the case of forced transfers, so there's no reason to assume the piper principle would hold. It's not like bank robbers take their orders from the federal reserve, after all.

Darwin said...


Generally, I like the idea of a sales/consumption tax -- though you've got a good point about the number of people employed by both the IRS and tax prep.


Well, I did say they were opposite...

While you've got a point about involuntary payments, I think there's still an aspect of the piper principle in effect here. Perhaps what most often goes on is a fusion in that top bracket people call shots while mustering large numbers of easily led non payers, who are incented not to think about the issues as much since they don't pay for them.

I pay a few thousand a year in taxes, so if I call up my senator and tell him that I want to meet him over lunch to tell him what I believe policy should be, I probably won't even get to talk to him in person. (Though that couple thousand already puts me in the top 50%.)

However, if I paid a couple million in taxes a year and employed a few thousand people, I would bet that if I called and asked for a lunch I'd get it.

There are other factors involved, obviously. If I paid that much in taxes, I could clearly be a big political donor as well. And I'd be incented to be since I paid more for decisions made.

Generally, I think that the low cost of decisions for the bottom 50% is a much bigger problem in our politics (It seems like you can get all sorts of great things simply by taxing other poeple.) than the piper principle. But I think both are in play to some extent.

Anonymous said...

The Blackadder Says:

The fact that the two worries are in tension doesn't mean it's irrational to worry about them both. If the government wanted to institute price controls on a particular good or service I'd be worried both that they'd set the price too high and that they'd set the price too low. But of course not even the government can manage to do both at the same time!

You're probably right that if you were the head of a largish business, you'd have a better chance of getting politicians to return your calls. But I don't think this is a function of how much you'd be paying in taxes (maybe you'd have found a way to pay very little). Other factors (that you employ a lot of his constituents, that if he helps you he might get a contribution, etc.) are what's really behind the difference.

Darwin said...

And to undercut my piper point: No matter how flat a tax scheme, the rich will always be much more central to the economy than the poor on an individual basis, so there will always be more power concentrated in their hands.

Anonymous said...

darwin, I find it odd that you note the proportion of taxes paid by the top 40% of tax payers, without also noting what percentage of aggregate income they take in. For the record, the top 40% of taxpayers take in 78% of all personal income in the US. The fact that they pay 85% of all income taxes is hardly unreasonable.

My real concern is that the top 1% of earners account for 19% of all personal income in the US, yet they pay only 28% of federal taxes. Yes, I said "only". Someone with an income well into the seven figures (the threshold for the top 1% is $1.5M/yr) can afford to pay a tax rate more than half again higher than ours.


Darwin said...

I guess given that those who make 40k/yr or less pay virtually no income taxes, (and that the top percentages are indeed paying a significantly higher percentage of their income in taxes than those in the middle brackets) it just doesn't worry me that much. Yeah, sure, it wouldn't hurt them if the Feds took 40% of their income instead of 30%, but I'm not convinced that it would really help anyone all that much either. (Aside from the satisfaction of knowing that millionairs were taking home a little less.)

That money (whether spent or invested) heads back out into the economy anyway -- and I guess (given my skepticism of large government programs) I'm not sure it would necessarily be that much better for us as a nation to send it to the the Government rather than simply out into the economy.