Tuesday, July 22, 2008

Government for Free

How do you cut taxes for people that pay no taxes? Never fear, I’m sure that the politicians will find a way to do that. There is more than one way to buy votes.

Never mind what the actual tax rates are. Let’s focus on what people actually pay in taxes. Half of this nation’s ‘taxpayers’ pay almost nothing in federal income taxes. In 2006 the bottom 50% of American taxpayers contributed only 2.9% of federal income tax revenues.

As noted by the WSJ Editors, Washington is getting set to raise taxes on “the rich” big time next year while “cut[ting] taxes for those at the bottom.” But when those at the bottom already pay almost nothing, what’s left to cut? It’s difficult to see how the top 50% can afford to pay much more than they are already paying. Apparently politicians think that there is no limit to how much can be extracted from these people. They are assumed to be like the rich uncle that has bottomless pockets.

The common refrain is that “the rich can afford to pay more.” It turns out that, thanks to the 2003 Bush “tax cuts,” they already do. In 2006 the top 1% of American earners earned 22% of total income but paid 40% of federal income taxes. The next 4% of earners paid 20%. The next 20% paid 26%. The next25% paid 11%. As stated above, the sum of those that earned less than the median paid less than 3%. For nearly half of Americans government is seemingly free of cost to them.

While the Bush tax cuts spurred economic growth, they also shifted a greater burden of taxes to top earners than at any other time in American history. In fact, the rich paid a much smaller share back in the days when the tax rates were far more progressive. WSJ Editors say that this is “[b]ecause they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.”

It’s no longer a theory. The way to effectively extract more taxes from the rich is with lower tax rates.

Another common refrain is that “the rich” should pay a greater portion of their income in taxes because they consume a greater portion of government services. It’s difficult to see how this can be said with a straight face. Even if this could be proven, the benefit differential would not be 11-to-0 or 40-to-0.

We have become a country where half of the people “pay to support the other half.” But this creates a problem. Those that pay little or nothing for government services have little incentive to seek to hold the line on the growth of the same. Indeed, they have an incentive to seek ever increasing levels of such services.

Somehow this is rarely seen by the beneficiaries and their promoters as voting themselves benefits from others’ pocketbooks. Even when this is recognized, the assumption is that “the rich” should pay for these services because they are undeserving of their wealth. The line is that they earned it immorally on the backs of the poor.

Those that actually pay federal income taxes may be more disposed to oppose government expansion. But their ability to do so decreases as their number decreases. While slightly more than 50% of American earners pay taxes today, what will happen when only 40% pay — when 60% rely on the minority to fund the government benefits they enjoy?

What makes us think that our wealthier neighbors are going to continue to be disposed to pay for continually increasing benefits for the rest of us? Would they acquiesce simply because they are outnumbered? How is this different from mob rule?

Oliver Wendell Holmes is said to have stated, “Taxes are the price we pay for a civilized society.” A commenter on this post countered that taxes “are the price we pay to otherwise go about the business of civilization, our ability to do so being directly proportionate to how much is stolen from us.” In this view, the rich that increasingly bear the cost of federal programs would do so only because it would be less costly than what would happen to them should they refuse this burden. But that does not make it morally proper.

Few people gleefully pay taxes. Most people try their best to minimize their tax burden when preparing their tax forms. Some do so legally. Some, not so much. But if we ultimately pay no federal taxes, why should we have any say in how great the tax burden should be or how tax revenues collected should be spent?

I appreciate the fact that the Bush tax cuts spurred economic growth, even if other policies eventually ruined that run. But I believe that the resulting ultra progressive income tax payment system is unhealthy. Everyone should help bear the burden of the government that is of, by, and for them. They would then have more incentive to be vigilant in preventing government sprawl, overspending, and corruption.

In reality, those that directly pay no federal taxes indirectly pay them through increased prices and stifled innovation. We all pay for the cost of government. But when we pay indirectly the costs are disguised and hidden. Some sage once said, “There ain’t no free lunch.” Full transparency in government funding would be painful, but worthwhile.

Most people I talk with about taxes almost immediately agree with the concept of a flat tax. But when I start throwing out some of the issues involved, their views quickly become more nuanced. In reality, almost all of them favor some kind of progressive rate, even if it’s only a mildly progressive rate. Regardless of the rate methodology, we would all be better served if everyone paid something to help fund government.


Cameron said...

Great post Reach. It's a topic I've been thinking about a lot lately, spurred in no small part from various discussions we've had in other places.

I wonder if we'll ever be able to reverse the current tax trend.

Anonymous said...

I guess we just have different perspectives. The very reason the rich are paying the burden of taxation is that they monopolize the wealth. They are so desperate to keep it they have created a huge divide between rich & the poor that is growing bigger under our friend Mr. Bush. Every job in America should have dignity. As we see the rich cling to more and more opulence they become more and more protective. The middle class now has little access to the power broking in this country. Education is the key as established by our founding fathers. This is what made America great. Opportunity!!! ,,,that is now fleeting. The daily "roll up your sleeve" ( middle class worker) is the real strength of America. They produce while our rich collect from the sweat of these workers. Chaos will eventually reign, Your killing the goose. Our nation should shame in how we distribute our resources and wealth. Health care is a prime example. Other lesser countries take care of their people. Look at American CEO pay compared to other countries. It is pathetic. Who do think won World War II? It was the basic courage and innovation of the soldiers in thousands of small acts of greatness. It was the patriotic worker back home. Oh hell according to you this was evil when our nation unitedly worked for a socialistic goal, Those evil women workers making parachutes. Without FDR's vision of shared responsibilty and shared benefit of resources (GI Bill for example) we would not won the war. This was America at its greatest and the result was we defeated the non -democratic societies. The American soldier came home were able to get an Education that led to an economic boom. We shared and cooperated. This was the key. Its sad we have moved so far from that model. We have lost our voice as the rich gamble away our sweat (sub prime crisis ). We bail out the brokers but not the worker. How can you support this version of capitalism? Because you must think your part of the elite. What other possibility is there?

Charles D said...

First, let's get some perspective. The top 10% hold over 70% of the nation's wealth. The same group gets 38.8% of income as well. If they pay a higher percentage of the nation's taxes, it is simply because they have a higher proportion of the nation's income and wealth.

Second, we have a kind of hyper-individualism in this country that maintains the illusion that we are not a community of people or a society, just random individuals seeking to maximize our wealth. To the extent that is true, it probably accounts for much of the unhappiness and loneliness in our society.

When we succumb to this hyper-individualism, we participate in the redistribution of wealth to those who already have more. We buy into notions like deregulation and privatization that destroy the government's ability to help us and turn it into a massive scheme to transfer even more wealth into the same hands.

We need to regain a sense of ourselves as a community, to recognize that our community suffers if any of its members are suffering needlessly. We need to rethink our economy so it works to the benefit of all citizens, not just the wealthy. Instead of allowing the unbridled market to continually redistribute income further and further upward, we should use our government to insure that no American is hungry, homeless, or without quality health care. While this may cut into the sales of yachts and private jets, it will truly grow the economy - the economy for the bottom 90% as well as the top 10%.

We need not worry about moral hazard here and the few freeloaders who will take a bit more than their fair share of benefits. We are avoiding the far greater moral hazard of turning our economy into a kind of socialism for the rich where shareholders and executives are always bailed out while the ordinary American is blamed for believing their experts.

Scott Hinrichs said...

"...the government's ability to help us..." –DL

""The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" –Ronald Reagan

"...the rich...monopolize the wealth. ...they have created a huge divide between rich & the poor..." –Yeti

Hmmm.... Let's see. So, the rich monopolize the wealth, so that that means that THEY are the ones that have decided to tax themselves to the benefit of the vast numbers of Americans that pay little or no federal income tax. That sounds pretty generous. But doesn't this pose a logical conflict with other claims in the rant?

"If [the top 10%] pay a higher percentage of the nation's taxes, it is simply because they have a higher proportion of the nation's income and wealth. –DL

"The same group gets 38.8% of income as well. –DL

"The top 10% in income, those earning more than $108,904, paid 71%." –WSJ Editors

I think the whole gist of this post is that these people pay almost ALL of the nation's taxes. 38.8% of income, but 71% of income taxes. This is justified as moral by claiming that the rich are evil, greedy, etc. Similar logic can be used to take any property from anyone. In the common vernacular, that's calls stealing.

"...we have a kind of hyper-individualism in this country that maintains the illusion that we are not a community of people or a society..." –DL

"Freedom requires that the individual be allowed to pursue his own ends: one who is free is in peacetime no longer bound by the common concrete ends of his community. –F.A. Hayek

While it is true that our actions impact those around us, we either value liberty or we do not. We cannot force people to act according to some kind of collectivist vision and simultaneously claim that we value liberty. We should be very careful to avoid the hubris of suggesting that we can politically define the purpose of life for everyone, which is what we effectively do when we bandy about claims of our vision of a national purpose.

Government's purposes should therefore be limited to those points where very broad voluntary agreement exists. We do not have the right to trample on others' ability to choose simply because 51% of us want them to do something our way.

Charles D said...

If you don't see the difference between insuring that no one is homeless, hungry, or without health care and "forcing people to act according to some kind of collectivist vision", I really feel sorry for you.

Liberty does not demand that we neglect our neighbor. It does not demand that we prevent our government from helping those less fortunate or providing security to the middle class. National health care and a guaranteed retirement would give most Americans a great deal more liberty than they have today.

We need to rethink the purpose of the economy and the purpose of government in relation to it. People do not exist to serve the market, the market exists to serve people. The government does not exist to allow the market to run rampant and only step in when the wealthy are about to lose money. We need a market and an economy that serves our needs, that makes our lives better, happier and more secure and a government that is active in insuring that the market works to our benefit.

Scott Hinrichs said...

Free people acting of their own free will, often in their own interests, have done more to help 'the poor' than all government programs combined. Many of the Left deride the idea of a rising tide lifting all boats, but the analogy is true.

America's 'poor' live on average far more opulently than the upper middle class in most of this world's nations. Two-thirds of America's 'poor' have air conditioned homes. Most of America's 'poor' are recent immigrants that will move out of the ranks of the poor within a generation.

No one in America today is forced to be homeless. Most of our homeless suffer from mental health issues, but we are prevented by law from forcing them to get the help they need. It's not that the help is unavailable. The only way the government can guarantee that no one is homeless is to lock up the homeless population. That was done for years until it was rejected. Do we really want to go back there?

No one should neglect their neighbor. But no one has a right to force someone to pay for their neighbor's wants. It also stretches the boundaries of reality to suggest that government programs are the only (or even the best) way to help one's neighbor. These programs often do as much to harm people as to help some.

"The government does not exist to allow the market to run rampant and only step in when the wealthy are about to lose money." –DL

I agree, sort of. But the way to do this is for government to foster open competition and protection of property rights. Many of today's CEOs get big bucks because of their ability to schmooze government officials to provide them special benefits and to create competitive advantages. These things ought not to be.

Charles D said...

I cannot imagine any individuals doing more to help the poor than Social Security, or Medicaid, or Head Start. Can you?

I also don't want America's poor to be on a level with Haiti or Jamaica, but I see no reason except greed why they have to live in slums in the richest nation in the world. A nation in which we have had 2 decades of economic growth in which virtually nothing has trickled down. The statistics on income and wealth disparities and their rise since 1980 are staggering.

Open competition and protection of property rights are vital, but when you are billions richer than your competitor and have a great deal more property, all these concepts do is make the rich richer. Couple that with the corruption of our political system and you have our current situation: the very rich have become incredibly richer and the vast majority of Americans are no better off than they were in the 1970's although they are working harder and producing more. Something is wrong with this picture.

Scott Hinrichs said...

It seems that you view wealth as a limited pie. If someone gains more wealth it necessarily means that someone else has less. However, the story of the past several centuries is that the size of the wealth pie is continually expanding.

You also seem to think that the wealthy lock their money away into massive vaults like Scrooge McDuck. In fact, the wealthy expand their wealth by putting it to work. That necessarily means employing goods and services. That necessarily means employing people. That means that people get opportunities to expand their own wealth. Even cartoonists used to understand this.

Yes, the wealthy get wealthier, but so do the poor. Our wealth classes in the USA are extremely fluid. Few people remain static in a particular wealth class throughout their lives. This is less true in more socialized countries where people live in de facto caste systems.

The only way we can keep people in the 'poor' class is to constantly redefine poverty to a higher standard of living. Thus, our poor live in slums -- or at least neighborhoods where I wouldn't want to live -- but have cell phones with personalized ringtones.

Moreover, the wealth differentiation that causes you so much concern is a one-sided calculation that is devoid of adequate dimension. While income differs substantially, as much as 75-to-1 from highest to lowest by some measures, consumption differs far less, by about 2.5-to-1 from the highest consumers to the lowest. Yes, there are those that live very opulently. But even the fabulously wealthy can only consume so much. When all consumption is counted, our nation's highest consumers expend only about 2.5 times as much as our nation's lowest consumers. And even as we consume -- regardless of wealth status -- we provide jobs for others.

No amount of welfare successfully moves 'the poor' out of the slums. In fact, increasing amounts of welfare tends to contribute to slum expansion. What moves people out of slums is work. Those wealthy you deride have done more -- orders of magnitude more -- to provide meaningful work for the masses than all government programs combined.

Can I think of anything better than Social Security, or Medicaid, or Head Start to help the poor? I don't deny that some programs can be useful. But the sad fact is that studies have shown the ineffectiveness of both Head Start and Medicaid except as bureaucracy expanders. As for Social Security, allowing people to actually own their retirement savings as personal property that can be used as needed and even passed on to heirs would go a lot farther in helping the poor than a program that relies on a diminishing ratio of current workers to provide for former workers and the vast numbers of pre-retirees that garner benefits from the system.

Charles D said...

The question here is really distribution of wealth. What happens in an unrestrained, unregulated economy is that those who have wealth tend to get more, either through market forces, or feeding at the government trough. The history in the US has been that good jobs - well paying jobs with good benefits - are eliminated or moved to cheap labor countries so that the owners can become richer.

The result here has been that relative to living costs, the very wealthy have become far more wealthy while the ordinary working person has become much less wealthy. We have few Americans now with any job security, many millions are one health crisis away from bankruptcy, far too many families have both parents working long hours to provide for their children. That's unacceptable.

When you cite statistics (I doubt them however) that indicate that the wealthy spend only about 2.5 times as much as the poor, you undermine your own argument. Unless the wealthy spend at a rate similar to their wealth disparity, how are they going to create jobs and opportunities so the wealth can "trickle down"? They don't, they aren't, and they won't. The meager effects of domestic spending by the top 10% is far outweighed by the fall in buying power for the lower 50%.

Poor people are not going to get good paying jobs unless they get a high quality education, stay in good health and are motivated by the real possibility that good jobs are out there for them. We have none of that any more, and "conservative" policies are determined to see we continue that way.

Your ideas about Social Security are really bizarre. Millions of people have no other retirement available other than Social Security. They never had enough disposable income to invest and their parents didn't leave them a pile either. If they were not mandated to contribute, they would not have anything. If they had to manage their own assets, they are about as likely to lose them in poor investments, or time their retirement during a down market, and end up with far less than they need.

The "free market" ideas work OK if you are relatively well off, but if you aren't then it's tough luck for you. You can't assume that everyone is educated, healthy, has a decent job and home, and a nest egg put away for retirement. That's simply not the case, and the conservative arguments are specious if that assumption is not made.

Scott Hinrichs said...

What is really bizarre is your view of an America that continually eliminates well-paying jobs in favor of poor-paying jobs. This is simply not reflected in reality. We do not have a nation of serfs and nobility like the picture you paint.

Again, the wealth held by the wealthy is not always expended, but is rather invested. That investment doesn't just sit in a vault somewhere. It goes toward generating income. It goes toward creating jobs. This investment is not counted as consumption. Thus, the 2.5-to-1 consumption rate does not support your conclusion.