Indispensable Economics What's Up with Taxes?

Oct 4, 2010

I don’t know about you, but I find most of the recent debate about renewing the “Bush” tax cuts disturbing. There is a certain class of liberals out there who frame their discussion on two themes, and when someone challenges one theme, they switch to the other.  Neither themes are well thought out. But the conservative opponents of these tax-a-holics miss the point as well.

Let us look at the two arguments of those who want the tax cuts to expire. They start out by saying that the rise in taxes is needed to try to close the budget deficit. They appeal to people’s correct instinct that the massive budget gap and the accumulated debt are severe problems, which will adversely affect generations if the amount of the debt is not drastically lowered. When their conservative opponents ask, “Why not cut spending?”  the liberals switch to the other argument. This one appeals to the greed of the ordinary person. They say these tax cuts were for the wealthiest two percent of the population, and just continuing them allows them to enjoy life even more than before.

The conservatives then give their argument: you shouldn’t increase taxes in a recession. What has happened is that the liberals have fallen into the socialist envy trap with their top two percent argument. Who owns businesses? Who starts businesses? Who employs people? Not me. The wealthy do. The wealthy are not to be the victims of envy and hatred, they are to be thanked. They are not like the lords of old, sitting around on old money, and getting more as the peasants work for subsistence food. Today’s entrepreneurs work very hard for their income, not quitting at 5 p.m. They take giant risks to start and run a business; the ordinary person just takes home his salary because he did what he was expected to do. Taxing those people takes the food out of the mouths of the workers because it discourages the wealthy person from doing more of the same.

But the conservatives fall into the Keynesian trap by repeating exactly what Keynes believed: that government should deficit spend in recessions and tax in prosperity. Now the conservatives do not buy the spending line but the whole argument is based on the presumption that government should be doing fiscal policy. 

For the sake of the conservatives, let us return to principle. The original Constitution explicitly prohibited “capitation” taxes, that is, taxes on people (caput is Latin for head). There were not supposed to be any income taxes, and all government revenue would come from the states apportioned by population. The states had to raise the money, which means that they had to hear the complaints about high taxes. Since the senators were appointed by the state legislators, the states had a direct line into Congress. If the tax bill given to the state was too high, the senators would vote against it. Note how this would strictly limit the spending of the government. It could not reach into your pocket and just take the money it wanted for whatever project it wanted, or to “regulate the economy.”

Along came the progressive movement and with it the income tax. I remember my grandmother, who was born in 1880, telling me that “they” promised that the income tax would only be something like 0.25 of one percent, and would apply only to the rich. Well, she said that that changed very soon as the rate went up and the threshold of minimum income came down. She felt that the income tax was “sold” to the people on false pretenses. Look what we have today! The average American spends half of his working life working to give the government money, which means he works half-time for the government.

The principle that liberals and conservatives miss is not the pragmatic one about whether we should raise taxes during a recession, or how to close the budget gap, or should we punish the rich for their success. The principle is, “Does government have the right to tell you what to do with your income?” The founders would say, “No.” Things like sales taxes or tariffs, aside from their economic inadvisability, are voluntary, because you can decide not to buy the product or service. Income tax is not voluntary. To test this theory, just don’t pay your taxes and see what happens.

In one of my own undergraduate classes in the 1960s I was arguing the same point in class, and after class a fellow student said to me, “What’s the matter, don’t you want to pay your taxes?” I responded “No!” Even as an undergrad I knew it was wrong to just take people’s money.

Lastly, look at the mischief that has come from it: gigantic increases in the size of government, in Federal enforcement agencies, military, and national debt.

Ideas have consequences, as the title of Richard Weaver’s book points out. We are in the current financial mess not only because of the government spending money it does not have, but because we have accepted the “end justifies the means” principle, and forgot that people have a right to the fruits of their labor. Case closed.