Category Archives: Taxes

Needs and Wants

The TSPLOST frenzy has moved into high gear as we approach the July 31 election. The “pro” side makes some compelling arguments. Compelling that is until you actually think about them.

Needs and wants: It is argued that all projects are beneficial. Ok, I’ll bite. Every project is beneficial. But, just because some proposal IS beneficial in some tangential way, it does not then logically follow that it MUST be funded. Finishing out my basement, remodeling the kitchen and buying a new car are all beneficial for me…but does that necessarily mean I MUST do these things? No, I prioritize those things that are most important. The “pro” side seems to mistake wants for needs. Needs are limited, wants are unlimited; therein lies the danger of confusing the two.

Broad, low taxes are easier to hide than narrow, high taxes: We are told we need more revenue because motor fuel tax receipts have fallen over the last few decades (due to increased fuel efficiency). So why is the obvious solution of raising the motor fuel tax not on the table? Because it is politically unfeasible to add 30¢ of tax to a gallon of gas (currently 47¢ total or 29¢ of GA tax). However, it apparently is politically feasible to slip in a 1¢ tax on every dollar of every sale (except for motor fuel and automobiles, of course, the two things that, you know, are actually correlated to road use).

How much should we spend on roads?: Another argument is that we are spending $1 per year on roads and since this is not “working” the only solution is to spend $2 a year. In this “more is better” argument how does one ever determine “ok, this is enough.” Why not $3? $8? By what non-arbitrary method can anyone determine the ideal amount? Some say define it as a % of the economy or of tax revenue. Oh, please. Do you buy food based on what percentage it is of your total income? (“ahh yes, I better be sure I spend 5% of my pay on food this week!”). No, nobody does that. Pulling arbitrary percentages out of thin air does not provide a rational basis for determining the proper cost of anything. Ok, so how can we know the proper amount? The same way other scarce resources are allocated in a market economy: prices. If we had a mostly private road system prices would rationally allocate monetary resources where they are most needed (just as it does for other goods – prices inform us that it makes more sense to build homes out of wood than out of titanium). Heavily used roads would receive more attention (due to higher toll receipts) than lightly travelled roads.

Jobs: This argument is more of the same old Keynesian fallacies about government spending creating jobs. $18 billion in increased taxes merely removes $18 billion worth of some jobs in order to create $18 billion in other jobs. Moving money from my left pocket to my right pocket does not increase my wealth. The Keynesians are quite fond of this resource shuffle that suggests moving checkers around the board increases the number of checkers. For example, they use this argument to claim that new roads foster growth of new businesses (the “if you build it, they will come” argument). Businesses do come, however they are simply diverted from where they would have otherwise gone. Moving stuff is not the same as creating stuff.

A permanent tax to maintain a permanent bubble: For those old enough to remember Carnac the Magnificent  – the answer is: “Politicians plead to prevent a crisis of massive unemployment in heavy construction.” The question: “What will the news headline be in 2022 when the TSPLOST is up for renewal?” This tax is the quintessential government bubble: turn on the tax spigot to fill the tub but once that spigot is turned off the tub quickly drains. Anyone who threatens to turn off that spigot is vilified as anti-<insert locality> and anti-job.

The pro side insists, “We must DO something!” Yes, we must. Perhaps that “something” should be to force those in government to reprioritize expenditures with the money they already get. Maybe we’re “short” on funds due to massive mismanagement. Should we reward those that have already squandered our money with even more money, because this time, this time they promise to get it right?

On July 31, vote NO on TSPLOST.

Will you still pay me, when I’m sixty-four?

The mainstream media likes to occasionally publicize statistics demonstrating an ever-widening income/wealth gap. This is usually either in response to some left-wing talking head (Obama) mentioning it in a speech, or, it is simply a slow news day and nothing whips the masses into a frenzy like giving them the impression they are somehow being cheated out of their “fair share” of the economic pie, “yeah, let’s stick it to those evil rich people!” Yeah, grandma and grandpa are pretty evil, aren’t they? That’s the little tidbit they leave out of these numbers, although it is one that should be obvious: old people have lived longer than the rest of us, therefore they’ve had more to time to accumulate wealth and the work experience that allows them to demand higher wages. Duh. If the relative proportion of the aged in this country were constant the effect of age on relative changes in income distribution would be nil. But, the proportion of the aged is not constant, it is increasing. The “baby boomers”, the largest single age demographic in this country, are getting older. What do we get when we put those two together? We see a growing demographic that is increasingly earning and accruing more and more wealth. And how would we expect an increasing proportion of increasingly wealthy elderly to effect wealth distribution statistics? That’s right…a growing statistical disparity when people are lumped into wealth brackets that ignore age.

I’m not suggesting age is the sole contributor to changes in wealth/income disparities (increased productivity being another important factor) but it is obviously a major influence considering the overall “greying” of America (see US Census site and compare 1990 v 2025). And it is not merely the size of the group. The financial savvy of today’s “elderly” coupled with an increasingly productive economy have led to a poverty rate among those 65 and older one-third of what it was in 1967 (11% down from 33%). This is HALF the rate for those under 35 (22%). Bear in mind Social Security had been paying the elderly benefits since 1937, so it apparently wasn’t all that effective if the poverty rate was still 33% after 30 years of operation. We as a society need to shed the idea that old=poor and that Social Security is the only thing that stands in the way of grandma turning tricks for her next meal.

So what is the point? It is not to pick on the “age challenged”, but rather to point out that social benefits and tax policy based merely on age, race, or gender make no sense. They are inherently discriminatory insofar as such policies assume ALL in some demographic must be poor or disadvantaged in some way. If we must* have a government run social safety net or constituency-pandering tax breaks they should be means tested at the individual level, not group level. In other words, property tax breaks for the elderly: bad, but, property tax breaks based on income, good. Social Security based on age: bad, but Social Security based on need, good (I’ll leave it as an exercise to the reader as to how one should objectively define an inherently subjective concept like “need” – Warning, your head may explode).

We are a nation of individuals, not groups. We owe it to ourselves to evaluate need at the individual level, not the “group” level, else every self-entitled special interest group lobby will bankrupt this country as each group jockeys to live at the expense of every other group.

 

* Just not to leave anyone with the wrong impression here, I do not believe government is the most efficient vehicle by which assistance and charity can be distributed to those that truly need it, therefore I am in no way advocating a government run “safety-net”. I am merely suggesting that since it is politically unlikely that we will as a society unburden ourselves with the ponzi-esque social safety net we have established, the least we can do is force the government to run it more efficiently and effectively. Private charities do a fine job of that now and could do so much more were the government to get out of the way, lower the tax burden on the “wealthy” so they could give even more and allow the efficiencies of the market (good charities survive, bad ones go away) to provide needed help.

Crackle, SNAP, Pop(ular) goes the entitlements!

Do “food stamps” mitigate hunger among the American poor? No. Although with a name like “food stamps” one can be forgiven for falling into the trap of believing so. Following the current cutesy trend that apparently requires government programs have clever acronyms that describe their purpose (PATRIOT Act, HIRE Act, etc.) it has been renamed SNAP (get it, “snap” your fingers and food appears courtesy of the US taxpayer!) But I digress. Why do they not help? Three reasons: (a) fungibility & marginal utility, (b) socialized costs and (c) dehumanization through dependency.

Fungibility means that any given unit of something is indistinguishable from any other unit of the same material. For example, grain, silver or dollars are fungible, however diamonds or tires are not (as they vary in quality). Marginal utility is the concept that given some good, as one procures more of said good one values each subsequent unit less. So if you have a small amount of water, you value it highly as you must satisfy your most urgent needs first (thirst). But, as you gain access to more water you may then opt to “waste” it on less urgent needs, e.g. washing your car. Ok, so with that little economics lesson out of the way, how does this relate to food stamps? The food stamp money is fungible with regular money. In other words food stamps are no different than cash. Why? Absent food stamps the marginal value of the money recipients possess is very high and they will spend it on the most urgent needs (food) first. People in poverty aren’t going to NOT buy food and instead buy sneakers, movie tickets and haircuts. That would just be stupid. If we then give them money earmarked for food, they will still buy food (with food stamp money) AND NOW other (less urgent) goods with the money they used to spend on food. We are just playing a shell game, pretending this money is for this and that money is for that. It’s all just mixed together. Fungibilty is the reason some recipients can afford fancy nails and cell phones.

A secondary issue is that of socialized costs. Because the program exists people are willing to work for less than they would absent the program because they know they can count on it. If I know I need $15k/year to survive but I know the government will give me $5k/year in food stamps, then I’m going to be a lot more willing to work for $10k/year. So the employer pays less because the employee is willing to accept the lower wage BECAUSE OF the program. Then the government taxes the employer and hands the money over to the employee as food stamps. So in the end both end up with the same amount of money. So what did we accomplish here? Why not just cut out the middleman (the government) and pass the savings onto everyone? Once again we are just playing a shell game where the only beneficiary is the government.

The state is our shepherd, we (the sheeple) shall not want.

The final issue is the social harm the program engenders through the promotion of an entitlement mentality (literally – the government is running ads trying to get people to join the SNAP rolls). This mentality dehumanizes the recipient by promoting the idea they are merely wards of the state who cannot survive without suckling at the state’s communal teat. The state is our shepherd, we (the sheeple) shall not want. Inherent to the structure of any entitlement program is an economic feedback incentive that promotes attachment. The more money you make the less benefits you qualify for. I think U2 captured the idea well, “running to stand still.” Why expend great effort to obtain that which you can obtain from no effort at all?

I know politicians mean well, but their complete ignorance of basic economics and incentives creates problems bigger than the ones they were trying to solve. Just because something seems intuitively obvious (state sponsored welfare helps people) doesn’t mean it is correct. The notion that the sun revolved around the earth was intuitively obvious for centuries until someone took the time to apply some thought to the question. Big problems require deliberate, contemplative analysis, not thoughtless, knee-jerk, feel-good solutions.

A reply to objections raised against Educational Responsibility

My “Education” editorial prompted a rational and cogent response from David Land in the Morgan County Citizen. This is one of the reasons I began writing this column, to engage those with differing views in polite discourse free of the usual “Left-Right” rhetoric. Thank you David. I would like to respond to the issues raised.

should anything benefiting the individual be subsidized by the state?

First point: Education is a public good because it tends to benefit society; therefore society should subsidize it. Anything that benefits the individual can benefit society (because society is composed of individuals). This begs the question: should anything benefiting the individual be subsidized by the state? For example, automobiles permit a broader range of employment options and access to goods, so one could argue businesses should subsidize (through taxes) automobile purchases, as that would ultimately benefit those businesses that will have access to more employees and customers. But we don’t do that. Why? Because the free market responded to the demand for this valuable good, thus transforming the car from a luxury available exclusively to the wealthy into a luxury available to every sector of society.  The point is that while a K-12 education is now extremely costly (+$100,000) this would not be the case had there been a free market in education all along, the cost would be closer to an affordable $30,000 over 13 years and thus the argument over “who should pay for it” would vanish. Companies need educated workers, but workers need an education to get jobs. It’s a two way street in which two parties engage in a mutually beneficial exchange (labor <–> money) and there is no a priori reason to assert that party A must provide resources to party B in order that party B may meet the requirements of said exchange and thereby benefit both parties. If you want to buy my house should I be forced to lend you money because said purchase ultimately benefits me?

If shifting costs from an employee to their employer tends to drive wages down, why is it hard to accept that shifting costs from an employer back to the employee would not drive wages up?

Second point: In a free market business owners would never pass on the tax savings derived from elimination of subsidized public education. I do understand the basis for this objection: normally if a business has a good year or receives a tax cut there is no incentive to simply divide the surplus among all employees. However the situation I was describing is unique because it is a specific trade of funds, namely, the tax being cut is used for a known (earmarked as it were) cost of living for the majority of employees. So the incentives are different from that of a “normal” tax cut. If we understand the incentives then we can understand why most would raise wages and/or lower prices. Let us suppose we could wave a magic wand and eliminate all property tax and most state income tax overnight. Employees would now find themselves in the position of having to pay for their children’s education directly. Those formerly subsidized employees would jointly demand higher wages to approximate their net increase in costs. The incentive to comply for the employer is two fold: 1) maintenance of employee morale through a raise that employers can easily afford (for example, we could easily afford this as we pay over $60k/year into the school system) and 2) lack of rehiring options if a trained employee quits over wages…most potential replacements would be demanding the same higher wage. But let us assume for the sake of argument that no employers would give raises. What would be the result? Because most (99%+) employees with children would value their children more than anything else in their lives they would pay for their education first, thus decreasing their demand for discretionary goods and services. The decline in that demand would result in lowered revenue for those businesses, who would then in turn lower their prices (which they could afford to do out of the tax savings) in an attempt to attract back customers…this would thus make goods and services more affordable for everyone. Even if nominal wages ($) are static, real wages (purchasing power) increase as prices decline (price deflation). Because education costs could drop by as much as 2/3rds the overall effect is a net gain to the aggregate productive capacity of the economy. If you’re still skeptical, ask yourself this: Imagine the reverse, imagine that the government instituted a new “food tax” that supported a program that provided all food for all citizens, would we not expect wages to decline over time (e.g. if you spend $12,000/year less on food it makes it easier to accept a lower wage)? So if shifting costs from an employee to their employer tends to drive wages down, why is it hard to accept that shifting costs from an employer back to the employee would not drive wages up?

Wouldn’t we expect automobile ownership (that is, any luxury item) to be lower in Haiti?

Third point: Haiti as a real world example where a mostly private education system has failed. This is an interesting example, however it is an apples to oranges comparison that only underscores the expected market penetration of a luxury item in an impoverished country.  Education, while desirable and beneficial, is not essential to life and so it is economically classified as a luxury good. So are automobiles. If we were comparing automobile ownership between the US and Haiti wouldn’t we expect automobile ownership (that is, any luxury item) to be lower in Haiti? In fact they are: 12 vs. 808 per 1000 people. So if one luxury good has a low market penetration in a poor country wouldn’t we expect all other luxury goods to as well, including education? Using an impoverished country such as Haiti as an example of how the free market cannot provide education to all citizens is as fallacious as arguing that the private market in Haiti has been a failure in making automobiles available to all citizens and thus the only answer is a publicly subsidized automobile ownership program.

Fourth point: Children of the poor would suffer due to lack of educational opportunity. Poor children would not experience a lack of educational opportunities as schools would offer needs based scholarships (as private schools do today) and charitable organizations focused on education would quickly sprout up (funded by those who honorably believe it is their obligation). But let us assume again a worst-case scenario and that those in poverty could not go to school. Will they just lay down in the street and die? Of course not. If there is a demand, the market will respond. Perhaps home schooling co-ops might form. Perhaps businesses would charter trade-focused schools. One example of how the market can quickly and effectively provide a superior education to those in the low income spectrum was the destruction of the public school system in New Orleans by Hurricane Katrina. Charter schools were quickly legalized and the market responded with schools that have by every measure outperformed the old system (see video at 30:00 mark). The point is that the creative brain power of millions of people will find solutions to even the most challenging issues.

I could just as easily argue that public education was the cause of those countries’ poor GDP as I could argue that private education was the cause in Haiti.

Fifth point: Education drives productivity and since private education would result in fewer people being educated this would result in lowered US productivity. Again, private education would not result in fewer people being educated, but even if we assume for the sake of argument it is true it would not change the productivity of the US. Enhanced educational opportunities are not what drove the tremendous growth in the US, but rather are a result of it. It’s like saying “look at that wealthy guy with the fancy car… if I buy a fancy car then I can become wealthy too!” If we accept this assertion then we would expect in every country where there is public education we would find a GDP comparable to the US. But that is not what we see. There are numerous countries that have public education and a GDP near that of Haiti’s . Why would education be a determinant in GDP outcome in Haiti but not in these other countries? I could just as easily argue that public education was the cause of those countries’ poor GDP as I could argue that private education was the cause in Haiti. In point of fact, Cuba ranks above the US in the United Nations Education Index, so that alone should dispel any notion of education driving economic prosperity.

Sixth point: Uneducated masses being unable to secure jobs would turn to crime. The correlation between crime and education is real, but the assumed causal relationship is backwards: lack of education doesn’t make criminals, rather most of those with criminal proclivities are afflicted with a pre-existing condition: contempt for education (by either themselves, their families or culturally). Every criminal in our jails went through our public school system. Clearly a lack of educational opportunity played no roll in their current status.

If we had a non-monopolized private system of K-12 education then education would be one of those “luxuries” that all could enjoy, just as things that were once considered luxuries only for the wealthy are now commonplace (e.g. cars, cell-phones, ball point pens, air travel, air conditioning, etc). That’s what a free market does over time, it becomes more efficient at producing those goods and services in high demand until they become affordable for all. Affordability eliminates subsidization.

Education is your responsibility, not society’s

On the front page of the April 19, 2012 issue of the Morgan County Citizen there were two(1,2) apparently unrelated articles juxtaposed. They actually were as deeply related to each other as the eternal ying and yang of taxing and spending. The first pertained to a $4.8 million projected shortfall in the FY2012 budget for the Morgan County School System (MCSS). The second concerned a proposal to exempt seniors from paying ad valorem property taxes that fund the school system. The rationale for the exemption is that seniors have no children in the school system so why should they bear that cost burden. Why indeed? According to Madison city councilman Michael Naples, “the education of the local youth was the community’s responsibility” and that such support “has been a long standing practice in this country.” Hmmm… perhaps this “community responsibility” is part of this so-called “social contract” I keep hearing about but have yet to actually see anywhere?

Perhaps this “community responsibility” is part of this so-called “social contract” I keep hearing about but have yet to actually see anywhere?

“Community responsibility” is an oxymoronic notion predicated on the notion that we are born into this world burdened by an obligation to support our fellow man under threat of violence and/or loss of liberty to ourselves if we refuse that obligation. Communities or groups do not have rights or responsibilities; only individuals do. Furthermore, to justify this practice based on the longevity of its existence is tautological! That’s the same argument that was used to justify maintaining slavery: “well, we can’t do away with slavery sir, it’s a long standing tradition in these parts!”

Seniors should be exempted from paying for the education of the youth. As should businesses. As should the childless. Other people’s children are not my responsibility. My children are my responsibility. But, this begs the question. What of those that can’t afford to educate their children? Cost would not be an issue were schools not run as government mandated monopolies. Like healthcare, which has also been subsidized and manipulated by government mandates, the reasons for increased education costs are too numerous to delve into here, however one of the principle reasons is the notion that a smaller student:teacher ratio is the solution to the declining educational standing of the US. When I was in the public school system in the 70’s and 80s class sizes were always right at 30 students to 1 teacher… and yet somehow I and the rest of my generation all managed to somehow get an education and become productive citizens. Using the MCSS as an example (see this document and MCMS website), I determined the approximate student:teacher ratio is anywhere from 18:1 to 10:1 (depending on whether or not you count educational support staff). If the county were to simply move that ratio back to 30:1 (i.e. terminate 2/3 of the teaching staff), the county would save approximately $14 million/year. Since 1970 we have more than tripled (see this link and this link ) the cost of education per student in this country with absolutely no change in test results, so clearly the 10:1 ratio is not paying off.

Education does not need to be subsidized by the state any more than day care does. Using simple calculations based on raw labor value inputs, I compute that monthly education costs per student (including administrative support and capital costs) should be around $200/month (using an annual teacher salary of $67k/year and 30 students per teacher + overhead). If you subtract what most are already paying in property taxes and state income taxes this would basically be a wash or net gain for most. Absent property and income taxes imposed on businesses the “poor” could demand higher wages and lower rents. One of the primary reasons private schools currently cater to the wealthy is that only they can afford to subsidize the education of multiple other children AND their own. If all were released from this subsidization requirement you would see a range of new private schools at different price points (just as we see a range of car options from Kia to BMW).  Doing the same thing over and over and expecting a different result is the definition of insanity. Let’s try something else, because clearly the last 40 years of government monopolized school systems have yielded no improvements.

Playing the “roads” card

Tax discussions invariably devolve to a point where one side finds it necessary to resort to the “roads” card. The assumption with this rejoinder is that “roads” are a major and necessary function of government. Setting aside the “necessary” aspect for now, let’s address the “major” assumption. At first glance it would seem something as ubiquitous as roads must carry a heavy cost burden: they are everywhere after all. But first glances are seldom correct. Let’s look at the numbers. In the state of Georgia the FY2012 budget allocates a mere 0.03% of the budget to transportation. The proposed Federal FY2012 budget allocates only 2.8% to transportation. Hmmmm… how can this major function of government be such a minor expense? The US contains approximately 4 million total miles of all road types. We could repave all of it EVERY YEAR and it would only cost roughly $400 billion (1/10th of the budget).

Tax discussions invariably devolve to a point where one side finds it necessary to resort to the “roads” card.

As I’m sure most are aware, the GA Department of Transportation has been busy around town the past few weeks, most notably with the repaving of the Hwy. 441 Bypass. This is a prime example of resource misallocation. This repaving was not necessary. I drive this stretch everyday. There was not a thing wrong with it and believe me I know bad roads! I lived in Indiana for several years where the roads were subjected to snow, ice and salt. They were rough, pot-holed and frost-heaved. They were only repaved when the cost of annual maintenance exceeded the cost of repaving. Our “old” Georgia roads would be the envy of any Hoosier! Why are we doing this? Jobs. The seen. We see the workers working; certainly this is good for the economy? What we don’t see are the jobs not created, the goods not purchased, all because present (taxes) or future (progeny taxation) funds have been redirected towards work that wasn’t even necessary.

Yes, roads need to be maintained, but absent any economic incentives (prices) bureaucrats have no way to efficiently allocate resources. Resources (money) get allocated based on personal whims and connections. I have no doubt somewhere in Georgia there are some beat up old roads that do need work (Fieldcrest Lane in east Morgan comes to mind!) but they are not political priorities.  Politicians waste money on pet projects and then have the audacity to put their hat in hand the following year asking for even more so they can accomplish what they failed to do the first time. And we give it to them, because we’re too busy with our own lives to care. We hear the President pontificate on our crumbling infrastructure. Nobody bothers to as ask why governments, the supposed stewards of our roads and bridges, were not setting aside funds all these years to properly maintain these depreciating assets. That’s what any good business does (good meaning one that does not go bankrupt due to mismanagement). With our revolving door governmental representation there is no accountability; 236 years of “the next guys problem” is the legacy we are left with. Concentrated benefits and diffuse costs perpetuate the problem.

So yes, we all love a nice new smooth road, but let’s consider the cost, in the end someone must pay. Let’s not spend money we don’t have.

Off budget

This is rather scary. Using figures directly from the IRS we see than in 2008 (the latest year for which there are figures and which represents most accurately pre-recession income since the recession did not start until the very end of the year) the total personal income was $8.3 trillion. Further we see that the income for all corporations in 2008 was $0.9 trillion for a total of $9.2 trillion. Due to the down economy it would not be expected to be significantly greater than that value by 2013. Obama’s proposed 2013 budget is $3.8 trillion.

In other words the President believes it is entirely justified that the federal government alone consume $41 out of every $100 earned.

In other words the President believes it is entirely justified that the federal government alone consume $41 out of every $100 earned. When you add in state and local taxes then all government spending consumes at least half of all income from the entire economy. Half. And we aren’t even paying for all of it right now. The 2013 budget has a deficit equal to 100% of all corporate income ($0.9 trillion). Obviously corporations can’t be taxed at 100% so clearly the bulk of the eventual tax increases will be from the $8.3 trillion in personal income rather than from a paltry $0.9 trillion in corporate income. Since we can assume that Obama will continue the current tax policy whereby 50% of all Americans pay no income tax that means the income taxes on everyone else (people and corporations alike) would necessarily have to double to close the gap. Double. Have any other expenses in your life doubled in the last year? Didn’t think so. And for those that believe everything government does is so essential we (or rather “they”) must simply be willing to fork over one out of every two dollars that we earn then consider this: From the founding of this country until the passage of the 16th Amendment in 1913 the government got by just fine with no income tax and consuming only 3% of GDP  as tax revenue from other sources. For 125 years somehow this country did not succumb to anarchy, chaos or mass starvation while operating on a mere 3% of GDP. Today 3% of GDP would be a budget of only $0.4 trillion (1/10th the current budget). That budget is entirely “doable” today if government was only concerned with its core focus of defense and judiciary. If 90% of that $0.4 trillion were devoted to national defense it would equal the defense budget we had in 2000. I don’t recall any outcries of America being woefully militarily vulnerable in 2000.

In closing I’d like to share a simple yet hard hitting illustration of this countries’ current budget problems. This has been going around the Internet recently and is really an excellent way to relate to the enormous sums of money discussed (numbers modified to reflect 2012 values).

US Budget 2012 (http://goo.gl/Ad9CD)

• United States Tax Revenue:              $2,468,599,000,000

• Federal Budget:                                $3,795,547,000,000

• New Debt:                                        $1,326,948,000,000

• National Debt:                                $15,400,000,000,000

• Recent budget cut:                               $38,500,000,000

Remove 8 zeros and pretend it’s a household budget.

• Annual family income:                                         $24,686

• Money the family spent:                                      $37,955

• New debt on credit card:                                      $13,269

• Outstanding debt on credit card:                         $154,000

• Total budget cuts:                                                   $385

There are only two candidates proposing any kind of serious budget cuts to solve this nightmare. Ron Paul, Republican and Gary Johnson, Libertarian ($1 trillion and $1.3 trillion respectively in 1 year, not 10 years). We finally have a real opportunity to fix this. Let’s not blow it.

Incentives and Taxes

Bill O’Reilly is disingenuous when he says high taxes might compel him to quit his lucrative job. Although there is a level where taxes can have that effect (why engage in challenging work if taxes limit your income to that of someone flipping burgers), we are nowhere near it. However, taxes and regulation do result in a net decline in businesses and jobs albeit by a different mechanism than “quitting”. The mechanism is attrition. Businesses fail due to normal changing market demands, bad luck, poor leadership or other reasons. New businesses take their place, however as taxes and regulations increase, the rate of business replacement declines. Why? Some business ideas are high risk and some are low risk and both types may have a high or low reward. A graphical metaphor works best here (Figure 1).

Imagine a square, the left side indicates increasing reward (bottom to top) and the bottom indicates increasing risk (left to right). As taxes and regulations increase it makes those endeavors in the lower right corner (high risk-low reward) less appealing because of reward diminishment (taxes and regulation costs consume the reward). As taxes and regulation climb we continue to move across the square from lower right to upper left along a diagonal front: everything to the right of the diagonal will not be attempted, everything to the left will be attempted. As taxes and regulations continue their march upward that diagonal shifts further and further to the left until the only thing remaining is extremely low risk-high reward ideas.

Why should taxes and regulations yield such a result? Let’s say you need an income of $50,000/year to live on and you start a business with a 2:1 return on invested capital. That means if you invest $25k you’ll reap a profit of $50k. If you are taxed at 50% then you will be left with only $25k. So you would steer clear of investing in such a business since the reward is insufficient for your needs. You would only invest in a business that had a much higher return on capital, at least 4:1. The aggregate net result is that a lot of otherwise profitable businesses simply don’t get started or funded because their potential for gain after taxes simply isn’t worth the risk relative to other ways the money could be spent. And if no potential projects exist with a sufficiently low risk and high reward then investors simply sit on their cash until one does come along.

Some hold the condescending view that if a business can’t turn a profit after taxes then it just shouldn’t exist. The presumption is that if people aren’t willing to pay a price with large embedded taxes and regulatory costs then they have no right to such a good or service. The fatal flaw in this reasoning is an assumption that it is impossible for there to exist a level of taxation or regulatory burden that is unjustifiable. This mindset leads to business destruction. When a business is caught between government mandated costs and the unwillingness of the public to pay prices that reflect those costs then that business is squeezed out of existence.

If ten businesses fail each year and only seven new ones start there will be a net decline in businesses. Absent high taxes and regulations there would have be another five that would have opened. We don’t see what wasn’t created so there is no obvious cause and effect at first glance. Analyzing the problem from an economic incentives framework quickly reveals the source of the problem. Regulations and taxes are like a flood – they drown everything in its path. To restore prosperity we must allow good ideas to flourish by removing the artificial shackles that incentivize only low risk-high reward ventures.

Tax Fairness (Part 3): Answers to questions on the Equal Tax

The Equal Tax (a head tax system) treats all citizens equally. It is the homeowners association model – everyone pays the same fee regardless of their income level. Those that believe in wealth redistribution won’t like it but then again thieves don’t like security systems. So, without further ado:

Arguments against the Equal Tax – Answered

1) How would you collect the tax? Government becomes just another service paid for monthly, like a cell phone bill. You could choose to pay it all at once or have it drafted monthly or weekly. Your employer no longer acts as the middleman for the IRS. Retailers no longer act as middleman for the local sales tax authority. You are responsible for yourself and you alone bear the consequences of not paying just as you would any other bill you do not pay. All restrictions on immigration would be repealed. Prospective immigrants would simply pass a criminal background check and then be issued an ID# for Equal Tax accounting (an increase in the population would naturally drive the tax down as the required budget is divided by a growing population).

2) What about those that sneak in and don’t pay the tax? Without immigration restrictions there is no incentive to sneak in. The incentive to sneak in was due to an artificially long time frame for entry. Remove the wait time and you remove the reason to “cut” in line. Immigrants will gladly sign up to get their ID# so they can reside here legally. To catch the few that would try to cheat the tax system we would employ the honor system found in many subway systems. In these systems there are no turnstiles, anyone can go through whether they have a ticket or not. This works because the fine for not having a ticket is extremely steep…virtually no one risks it (would you risk a $1,000 fine to avoid a $1 ticket?) High risk and low reward incentivizes compliance.

3) It’s not “fair” because the wealthy would pay little relative to their income! In no other arena of goods or service purchasing are we asked what our income is before we are given a price. The price of a gallon of milk doesn’t change depending on who is buying it. So why should the cost of government services change depending on who’s buying it? Paying based on income is subsidization. Subsidization is theft. Last time I checked, theft is considered unfair.

4) The per capita cost would be too high because the wealthy would no longer be subsidizing it! Exactly! It would force a reduction of our bloated government. If government were cut down to its core functions (defense, justice, contract enforcement) it would be affordable for everyone (considering that all income, property and sales taxes would be abolished). The tax would be driven downward as voters demanded ever more efficient government.

5) And what of the poor, this would surely harm them the most? Not at all. It would drive up their wages by an amount at least equivalent to the additional tax (and employers could easily afford that as they aren’t paying income and payroll taxes). Why would it drive up wages? Consider: if you are the sole wage earner for a family of four and make $15k/year and your tax bill just went up by $10k, you’d be a fool to work for anything less than $25k/year – NOBODY would work for less thus wages would necessarily go up (market based minimum wage). Likewise costs of goods would drop as the tremendous tax burden built into every good and service is eliminated. Everyone would be much better off in terms of purchasing power.

6) What about those that are disabled or on fixed incomes? Private charities would step in to assist people truly in need of tax help just as they assist them with their other needs today. Charity donations would explode because of the dramatically lower tax burden. Those on fixed incomes would no longer owe income, property or sales taxes and as described in Question 5 the purchasing power of their dollars would go up – so they would be much better off.

The idea of a progressive tax system has been ingrained into our psyche since birth so I can understand why the Equal Tax might seem bizarre. But if you consider the logic behind it, it is undeniably the best tax system. It is fair. It is fraud proof. It incentivizes smaller government. What more can you ask for?

Tax Fairness (Part 2): Solved with the Equal Tax

Our tax systems (income, property, sales) share a common problem. They are applied in a discriminatory manner that harms some to the benefit of others. Rather than discrimination based on race or gender it is discrimination based on behavior or actions. Those that behave in a government desired manner pay less. Those that are good at hiding income or gaming the system pay less. Everyone else pays more. These systems are easily bypassed both purposefully and accidentally thus driving up tax rates in order to compensate for such losses. Lastly, they can transform the average citizen into an unwitting criminal if they happen to take a wrong step in the minefield of tax rules. In short they are an imperfect and unfair mess.

A fair tax system would have a universal/non-discriminatory target: those that benefit from core government services (defense, courts, contracts) by virtue of their residency: all permanent residents. It would have an inescapable calculation method: one’s tax bill would be based on a single universal metric and would not be a function of an individual’s behavior. What is this perfect tax system? I call it the “Equal Tax” which is otherwise known as a capitation or head tax. Each and every person would owe the same amount of tax.

What problems does the Equal Tax solve?

1) Fairness: The foundation of “fairness” is universality. Rules in a game are “fair” and  “uniform” because they apply to all players and they have an equal result. But sometimes a rule can be uniform yet still be unfair and it is this that we wish to avoid. For example if taxes were based on weight (i.e. pay $x/lb) this would be a uniform rule as it would apply to everyone but the result of such a rule would be obviously unfair. In the same way one might claim that an income tax or property tax is “uniform” because it is methodologically applied in the same way to each person, however the outcome is clearly unfair since some end up paying more following this “uniform” rule. The Equal Tax solves this issue because both the method and the result are uniform. It applies to every man, woman and child residing in the US (obviously parents would pay for their minor child’s obligation). The measure (i.e. amount) of this tax will be driven to the lowest level possible by altering the incentive structure that currently governs our tax system. Rather than attracting votes by promising local pork-barrel projects (i.e. leading to higher taxes) elected officials will attract votes by promising to decrease the tax burden. This inherent incentive of cost reduction will necessarily drive the genie of big government back in the bottle until government is reduced to its core essential functions.

2) Fraud: It is inescapable. There is no point in hiding income, no point in understating your home’s value, no point buying over the internet solely to avoid sales tax…your tax bill is the same as your neighbors and it isn’t going to change based on anything you do or don’t do. Payments won’t be 100% every year, but at least we’ll know exactly how much revenue is short rather than pie in the sky guesses.

3) Impossible to inadvertently violate tax laws. There are no complex rules to follow. You owe $x each year. Period. If you don’t pay it, you know you’re not paying it, so it can’t be accidental.

4) Engagement of all citizens in the political process keeps government in check. Congress will hear from every citizen “Why are we funding that program? It’s costly and I’m PAYING for it, get rid of it.” This would force government to provide only the essential functions that everyone agrees on. Our current system minimizes incentives for citizens to be involved in the political process because the vast majority don’t care because they pay little to no taxes. In short, the involvement of citizens would force government to remain affordable to even those with the lowest income thereby imposing real restraint on the growth of government.

How much would it cost? Assuming all Federal, State and Local governments adopted such a method and only core functions of government are funded it would cost roughly $2400/year/person (based on US Budget figure for 2010 (publicly available at Wikipedia) and public figures for local county and state budgets). I’m sure the idea of the Equal Tax has raised a lot of questions, some of them good and valid and some of them unthinking knee-jerk reactions. I answer those concerns here…