Tuesday, January 27, 2009


Twice yesterday I received an email that is being forwarded around that lists all of the taxes that we pay now, claims (erroneously) that 100 years ago none of these existed, etc. and basically makes the point that taxes are simply too high.

I think that this claim is meaningless at best and whining at worst. It's like making the claim that "boxes are too big." Ummm...ok, boxes are too big...for what? Which boxes? A matchbox is too big too hold a crumb, too small to hold a dishwasher.

The claim "taxes are too high" only has meaning in relation to what we get for those taxes. If the government's budget is $1, then our tax rate is clearly too high; if the government's budget is $10 Trillion, our tax rate is clearly too low.

So I think that any productive claim about tax levels can only be had in relation to:
  • How much is government spending, and whether it is too much or too little (and, of course, whether it can be done more efficiently)
  • How much financing we are willing to bear to support that level of spend (some national debt is a good thing, too much is a drag on the economy in the same way that too-high taxes are also a drag)
  • How the tax burden that remains is distributed among taxpayers.
Only in this context can any statement about whether taxes are too high or low have any meaning whatsoever. Thus I tend to be quite dismissive about claims that our taxes are too high (never mind that for much of the past hundred years they've been a lot higher) when they come without corresponding suggestions of significant spending to cut.
There are additional arguments for lower taxes. One is the trickle-down argument, whereby lower taxes lead to greater economic activity, which leads to higher overall receipts. I'm not an economist so I can't evaluate the merits of this although it does seem like a reasonable theory. But it doesn't change the fact that it is still arguing for alignment of tax revenue with spending. The other argument is "starve the beast" whereby reducing revenues will lead to lower spending. Again, this still tries to reconcile spending and receipts, so it is a rational discussion to have. (Of course, even with my earlier disclaimer, I believe that we have ample evidence that the beast keeps spending even when starved, leading to huge deficits. Exhibit A here is the Reagan years.)

I am particularly amused by the anti-tax missives that whine about how the tax system punishing entrepreneurs and other successful people. They, after all, do pay the highest incremental tax rates. This is, of course, a direct result of having a progressive taxation system. There is only one way to avoid this consequence: eliminate the progressive rate structure and go to a flat (or a declining-rate) tax. I've actually pointed this fact out to some of the anti-tax people, who have surprisingly disagreed with this conclusion. (If anybody can tell me how I am wrong, though, I'd love to hear it, but I think the mathematics is pretty clear).

I'm not opposed to a flat tax or declining-rate tax per-se, but here's another fact about them: for a given level of government spend, switching from a progressive to a non-progressive tax scheme must necessarily shift more of the burden to the poorer segments of society. At some level, this is a good thing: I'm a huge believer that we want broad participation, that we want as many people as possible to be a paying customers of government services, even if it's paying just a little. Of course, the downside is that the poorest segments of the population are by definition not a great source of revenue, so if you went flat you'd have to give them a fairly substantial rate hike to generate enough revenue to compensate for the substantial cut that going flat would give to the wealthiest. And a rate hike on the poorest segment would be a far greater hardship for a far greater number of people than the current progressive system imposes on the wealthiest. I'm going to go out on a limb and suggest that this is perhaps the reason we decided to adopt progressive taxes.

There's another thing about the tax "debate" (I use that word generously) that irks me, and that is all of the class-warfare terminology that gets thrown around. Particularly, the Democrats love to complain about "tax cuts for the rich." Of course tax cuts benefit the wealthy more than the poor - the wealthy pay vastly more in taxes! (And our progressive tax system amplifies this. If you don't believe me, just do the math.) So if you cut taxes, the people that pay the most will get the most benefit. There's really only one way to avoid this artifact: only cut the taxes for the lowest end of the spectrum, the people that are barely paying taxes at all., and keep the taxes the same for everyone above that level. While such a policy would be good for those poor people, it's a bad idea for several reasons: (a) we're simply not talking about much money, so why bother; and (b) you would inevitably end up making many people pay essentially no taxes, which is a very bad idea from both a fairness point of view, but also from the participation point of view mentioned above; and (c) it's not a fair way to distribute a tax cut if most people - particularly those who pay the most - get none of the benefit of the cut.

Cut taxes or don't cut taxes, I don't really care beyond how the resulting revenues compare to the level of spending and debt (both of which I do care a lot about). But if taxes are cut, don't complain about the fact that it affects different groups differently.

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