Friday, August 29, 2014

Who’s to blame for high taxes? Try looking in the mirror

Originally published in the
Northland Reader
now the
Reader Weekly
January 20, 2000

"Cut taxes!"  "Reduce spending!" Hardly a week goes by that we don't hear a politician or a fellow citizen utter these two paired slogans. But do we know anyone who is willing to make the hard decisions that will bring about these two much desired goals?  Though both parties use these slogans, little of substance is done because we demand so much of our government -- from sweeping streets to catching criminals to projecting power around the world.

Next time we complain about taxes, let's make a short list of government services we expect.  If we compare our list with somebody else's, it probably won't match.  Let's say we have libraries on our list and the other person doesn't.  That person might have snowplowing on their list but we don't.

Now, should one person be taxed for libraries but not for snowplowing and the other person for snowplowing but not for libraries?  What would that other person say when we drive on the newly plowed streets?  Would they call us a free-loader?  What would we say if that other person decided to borrow a book from the library?  Would we call them a free-loader?  In order to get some of the services on our list we have to compromise and agree to pay for some of the things on the other person's list. 

Now things really become sticky.  How do we pay for all the things on both our lists?  We could pay the library part of the cost of the books that we borrow.  But what about some child who can't pay for the books?  Should we deny that child a marvelous learning opportunity?

For many of the services we would like from government, it would be a very
complex and costly accounting problem to bill citizens individually according to the benefits they receive.  Therefore, a broad-based tax is more efficient.

So, we have decided we will have our government perform a long list of services and that we will all pay for these services through taxes.  How do we apportion these taxes?

If we assume that we all have access to all benefits, then each of us could pay a fixed sum, say $2,500 per year.  A family of four with an income of $20,000 would pay $10,000 in taxes, leaving them with $10,000 per year to spend on other things.  On the other hand, a family of four with an income of $100,000 would also pay $10,000 in taxes, leaving them with $90,000 per year for other things. Just considering the two families, the paying of the tax has caused the ratio of their incomes to go from 5 to 1 before taxes to 9 to 1 after taxes!  Is this fair just for the privilege of having access to government services?

If a lump sum tax is not fair, would a percentage tax be fair?  Let's suppose that we would pay 10 percent of our income in taxes.  So those earning $20,000 would pay $2,000 and those earning $100,000 would pay $10,000!  This would leave each income group with 90 percent of its income. All but the family of four with the $20,000 income would complain that a proportional tax was unfair to them.  Adam Smith, the "father" of "free markets", supported this scheme when he wrote in The Wealth of Nations:  "The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state."

Modern governments have taken "respective abilities" one step farther with progressive taxation, under which people making more money pay a higher proportion of taxes.  For example, a family making $20,000 might be taxed at eight percent while a family making $100,000 might be taxed at twelve percent.  If the less well-off family earned $1,000 more per year, how much would the utility of that $1,000 be? That is, could they eat a bit better or rent a less cramped apartment?  If the family with a $100,000 annual income earned $1,000 more per year, how much would the utility of that $1,000 be to them?  Would they eat out more often or rent a more luxurious apartment?  Or would it be like a blip in their investments?

If we assume the less well-off family used its extra $1,000 to buy more necessities and the more well-off family used its extra $1,000 to buy more luxuries, then a proportional tax would create a heavier burden on the less well-off family. We might say that each family's burden is more equal under a progressive tax.

No matter which tax system we choose, somebody is going to be unhappy. Since we have chosen a mix of proportional and progressive, just about everybody is unhappy.  We have local property taxes which are proportional using property as a proxy for income.  We have state and federal income taxes which are progressive.  And we have a number of other taxes levied by every level of government from the city to the federal; most of them are proportional.

Recently Duke Skorich wrote that the city of Duluth wanted the state of Minnesota to pay part of the cost of a recreational area.  The Duluth News-Tribune recently noted that the federal government was paying part of the cost of the renovation of the Old Downtown.  Congress included in its final budget bill some of the costs for new buses in the Twin Cities.

Why does this "bumping up" of costs happen?  Mostly because of us.  The more local our elected representatives are, the more we complain about any tax they may impose to fund the benefits we ask for.  Because we think somebody else will be paying, we ask the next higher level of elected officials to fund our favorite projects.  As the levels increase, it becomes easier for our representative to get projects for us and in turn blame other people's representatives for the high taxes!

So, "Cut taxes!" and "Reduce spending!"  really means "Cut our taxes!" and "Reduce your spending!"  But it will never happen until we change it to "Let's reduce our spending, and then we can cut our taxes."