Tuesday, August 31, 2010

Taxed Enough?

I was part of a small EMail exchange in which one of the participants talked about a friend, apparently out of the blue, saying we are not taxed enough.  This friend, with three children and a mortgage, had an effective federal income tax rate of 13%.  He was also a Democrat.  The first interlocutor then mentioned that fellow residents of Fairfax County, Virginia, who are registered Democrats argue that you can raise federal tax rates because people have nowhere else to go.

In response, another addressee, an Economics Professor, noted:
They have grasped one thing – the only chance of making income redistribution work is to have it at the national level.  What they do not accept is that the combination of maximum loss of efficiency that goes with virtually anything done at the national level and the disincentives to take risk (be entrepreneurial) means that the levels of income available to be re-distributed are going to fall.  As a result, what ultimately gets re-distributed is poverty and those in positions of authority are not on the receiving end of that transaction.  This is part of what is meant by “rent-seeking society”.  Sooner or later a rent-seeking society becomes synonymous with corrupt government.

The Fairfax County board member may not remember fleeing taxes but I do.  A good part of Costa Rican development is probably a direct function of US tax rates.  Also, it does not really matter if the people flee because they can send their capital abroad.
I agree with that analysis, but because we have a spending habit, and each of us has things we want the Federal Government to do, we have to tax.  I will agree that in a booming economy we can "outgrow" a debt problem, but only if we have a "booming" economy and we are not also adding to that debt by overspending our tax intake.

In DC they are like Grandparents at Christmas.  They are overdoing it.  My youngest son and his wife just impound the stuff and dole it out over time.  We no longer have someone like that in DC, after President Nixon's over zealous attempt to impound funds, which resulted in Congress passing the Budget and Impoundment Control Act of 1974.  Thus, there are no longer any adults in charge in DC (and another reason to think that President Nixon really messed up the Federal Government).

I have no solutions, but I do believe that the first step is getting the economy going and the second is electing people who think their job is to limit the reach and role of the Federal Government.  Are those two things compatible?

UPDATE:  (That was quick.)  A friend of mine in the analysis business with a focus on China just noted:
Was told that Hong Kong shipping companies have so many empty (unused) containers that they are leasing container ships (themselves otherwise idle) b/c HK port has no place to put them.
This is NOT a good sign.

Regards  —  Cliff

  Down in Virginia they have Counties, which are actual levels of Government and those Counties are part of the structure of Government, providing a unifying view above the City and Town level, but more local than far off Richmond.

5 comments:

  1. How does the word "taxes" become transmuted to "income redistribution?" Is that some sort of decrpytion for which you need a secret decoder ring? And by the way, what is wrong with income redistribution where those who have been given all the advantages that the nation, state, local governments and their parents are asked to share some of the results of that advantage?

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  2. All taxes are income redistribution.  And, I would like to thank you and yours for the $5 Million that has come to Lowell to encourage increased energy efficiency in the buildings in the Lowell Downtown Historic District.

    The power to tax is the power to destroy, or as Chief Justice John Marshall put it in 1819, "The power to tax involves the power to destroy."

    And, taxes are a source of social engineering.  I would think that all taxes have implications for society and how it evolves.

    As for your hypothetical, for those who have been given "all" the advantages of governments and society, they should share the outcome with the rest of us, but I think of that in terms of "service" or producing innovation or creating jobs.  Having all those advantages doesn't mean making lots of money.

    The question of taxing those "advantaged" people needs to be filtered through the issue of the opportunity cost of the taxation.

    Then, of course, there is the more fundamental question of if the individual was able to take advantage of being advantaged, although your reference to the parents suggests that is an assumption.  But, to continue to pull the thread, if you were given great advantages by local, state and national governments and then crashed and burned, don't you owe back also.

    But, back to the first question, I think it is clear that taxes are, by their nature, redistributive in nature.

    Regards  —  Cliff

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  3. Taxes are the price we pay for civilization. I am not sure who said that, but I believe it is true (and in fact taxes are the price we pay for a lack of civilization if we live in a dictatorship, totalarian regieme or something similar). And given the choice between civilization and the alternatives, taxes don't seem such a high price and they do help mitigate the deficit and the pending demise of our economy. Freedom has a price, and taxes is one of the contributions that we all can make, especially if we are not able to serve like you have.

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  4. OK, let me be clear here.  I fully realize that taxes are necessary to pay for the services we enjoy from our various levels of government.  Of course, here in Middlesex County we have taxation without representation, but that makes us like DC.

    I am sure there are those who think that there is no need for taxes, but I find that position to be immoral, in that we have debts, including interest, if for no other reason.

    To quote the blogger himself:  "I agree with that analysis, but because we have a spending habit, and each of us has things we want the Federal Government to do, we have to tax."

    The question is, when does the tax rate, or the types of taxes, discourage economic growth?  And, when does the complexity of the tax code (large and complicated from the US Congress using tax policy to favor or disfavor this or that industry or business model) create excessive costs for businesses, especially small businesses.

    I would be more confident in the fairness of the tax policy if the tax code wasn't thicker than the ASPR used to be (or as I remember it), but was significantly thinner than the current FAR.

    Regards  —  Cliff

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  5. I think that tax collection is the fourth oldest profession. The Bible certainly has many references to them and parables as well. Part of the case for the radicalism of Jesus is that he ate with them. He even told the people to render unto Ceasar ...

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Please be forthright, but please consider that this is not a barracks.