Fair share of taxes, what's that?

Charges go back and forth about taxes.  Some say the rich should pay their fair share of taxes; others say that taxes hinder entrepreneurship.  As usual, the extreme positions miss the truth by a couple miles or a hundred.

First, what is a fair share?  Is it the same percentage as everybody else?  Is it a progressive rate without a lot of gimmicks to reduce taxes.  Or is it a share commensurate with the benefits received?

Second, how many rich people are really entrepreneurs?  Few of us really know.  Some have inherited their wealth and are just "clipping coupons", an old phrase for getting the interest payment on bonds.  Some have invested in stocks, but how many were original investors?  Aren't many "investors" really traders trying to take advantage of the variations of stock prices?  About the only social benefit traders provide is liquidity.  Some rich people are executives of companies that they didn't create, but have managed by one means or another to gain control, sometimes with disastrous results for the shareholders, employees, and society.

Let's look at the hypothetical entrepreneur to determine what his "fair share" of taxes should be.

Bugs Bunner has forty acres in which he has planted carrots.  He starts by plowing his fields all day in the early spring.  Then he uses a planter to put in rows and rows of carrot seeds.  He spends many a day cutting the weeds down and keeping the deer and rabbits out.  Come fall he takes his carrots to market and hopes to cover his costs and make a profit.

One year he finds a carrot variety that keeps well and tastes great even after a year of cold storage.  Grocers all over the state seek his carrots out.

Now we get into the first problem of being a self-sufficient entrepreneur.  How do his carrots get into the stores?  On public roads.  How do the roads get paid for?  By taxes.  What is Bugs Bunner's fair share of the cost of the roads?  Is it a share of his  income?  Is it the cost of his use of the roads?  If everything was truly free market, he would pay the owner of the roads a toll for every use of the roads.

Bugs Bunner's carrots are so popular that he buys more land and plants even more carrots.  His plantings get so extensive that he can no longer do all the work himself.  He has to hire farm laborers.  How much will he pay them?  It partly depends on the supply of labor - low supply, high wages; high supply, low wages.  Let's suppose there is a high supply of labor and he pays low wages.

Will he pay enough for decent housing, for health care, adequate food, and so on?  If not, who pays for making sure the needs of his work force are met.  Would that be called welfare?  Welfare is often paid for by taxes.  How much of these taxes should Bugs Bunner pay?

If he requires literacy in his laborers, who pays for them to learn to read?  Their parents?  But if the next generation of his laborers are the children of his current laborers, can the parents afford to pay for their children's schooling?  If the parents can't afford to pay for schools, then the government will have to pay for the schools.  Guess what?  This requires taxes.  What is Bugs Bunner's fair share of these taxes?

On and on it goes.  Until we recognize that "no man is an island unto itself", we will continue to argue what a fair share of taxes is.

Free market is a construct, not reality

Some write that there should be no bail-out of borrowers who are defaulting on their loans. These commentators write that the borrowers willingly entered into a contract and should accept the consequences of their inability to pay. These commentators also say the lenders shouldn't get any help as the lenders also willingly entered into a contract.

Like "there ain't no such thing as a free lunch" there ain't no such thing as a free market. Those who preach about a free market also forget about the detail of externalities. Few transactions are between a willing buyer and a willing seller with no effect on anybody else. If a dealer sells a car to a buyer who knows the brakes are bad, it may be a third party who suffers damage to life, limb, or property when that car doesn't stop. If a factory belching smoke sells its products far away, it is the people who live nearby who suffer the effects of pollution.

Similarly, a large number of defaults can affect more people than the borrowers and the lenders. More conservative lenders are going to take even more care choosing their borrowers. This in turn will drive up interest rates for more solid borrowers. There are already stories about the "credit crunch".

Defaults of home mortgages are going to put more houses on the market. A larger supply of houses is going to depress prices for those who would like to willingly sell their houses. The depressed prices may be good for potential buyers, but the increased mortgage rates and decreased availability of money to lend could offset the low price benefit. This could lead to fewer buyers which would lead to even lower prices.

Low demand for houses also affects realtors and builders. The lower earnings for these two groups could also lead to less spending by them in other areas, like autos and appliances and many other goods and services.

Fewer purchases by more people leads to a slower economy. Couple this with rising fuel costs, is it any wonder the stock market is in turmoil?