The debt hawks are to economics as the creationists are to biology.
Lately, there has been more talk about revising our taxes to be more “fair.” There even is an organization that calls itself FairTax.org, which promotes a national sales tax, a first cousin to the European style value-added tax.
All federal taxes remove money from our economy, and for that reason, all federal taxes hurt our economy. Unfortunately, the belief that federal taxes are necessary (They are not) is so powerfully ingrained, it is impossible to have a rational discussion on the subject.
So we are left with repeated attempts to fix the unfixable.
Tax fairness often is confused with tax simplification.
The U.S. Tax Code contains 50 Chapters. Each chapter is divided into Sub Chapters, each of which is divided into Parts, and then into Paragraphs, all of which are subject to interpretation by Congress, the Internal Revenue Service and the courts.
Because all elements of our economy are intertwined, the interpretation of one paragraph impacts the interpretations of other paragraphs, which then require further interpretations, which impact other paragraphs and ad infinitum. Thus, our Tax Code has acquired infinite complexity, which one could argue is unfair.
Supposedly there was a king who nailed laws too high to be read, then punished those who broke the laws. Would that have been fair?
Tax complexity is inevitable. Imagine the simplest possible tax idea: Tax every man, woman and child $1,000 per year. Period. Simple enough? Fair?
How long would it be before “modifications” would be made? Reduce this tax on the poor. Increase it on the rich. Multiple definitions of “poor” and “rich.” Various payment requirements (monthly? quarterly? annually?).
Charitable deductions allowed? Do businesses pay? Definitions of “business” vs. “person.” Even the simplest possible tax idea soon will turn ever more complex and so, unfair.
The American ethic is based on “getting ahead” and on “fairness.” However, being ahead seems unfair to those who are behind.
Taxes can be levied in a variety of ways, all justifiable as “fair” and all condemned as “unfair.” For instance:
A unit tax on individuals: Each person pays the same tax (similar to an airport departure tax). This tax is fair, because it treats every individual equally. This tax is unfair, because it takes as much from the poor as from the rich.
“Sin” or luxury taxes on cigarettes, liquor, entertainment, gambling, restaurants, travel, etc. are fair, because they tax things we do not need. These taxes are unfair, because they arbitrarily designate certain items as not being needed. (Is an apple “needed?”)
FICA is fair, because the people who pay are the people who receive Social Security and Medicare. This tax is unfair, because it is a regressive tax.
Sales taxes are fair, because each person pays according to his consumption. Sales taxes are unfair, because they place a burden on low income people, who spend a greater percentage of their income and save/invest less.
Flat-rate income tax is fair, because each person pays the same rate. These taxes are unfair, because the poor cannot afford to pay as high a rate as the wealthy. They also are unfair, because some people will pay more than others.
Progressive rate income tax is fair, because high earners can afford to pay a higher rate. This tax is unfair, because even at a flat rate, higher earners would pay more. A progressive rate compounds the unfairness.
Tax on Social Security benefits is fair, because social security is just another form of income. These taxes are unfair, because income tax already was paid on Social Security deposits. It is a double tax.
Tax on Medicare benefits. See above.
Inheritance tax is fair, because wealthy families can afford to pay more. This tax is unfair, because taxes already have been paid on the assets being inherited. It is a double tax.
Personal property tax is fair, because the wealthy can afford to pay more. This tax is unfair, because taxes already have been paid on the earnings needed to acquire the assets. It is another double tax.
Tax on stock dividends is fair, because dividends are no different from any other income. This tax is unfair, because companies cannot deduct the cost and already have paid taxes on the earnings. It is one more double tax.
Taxes on corporations are fair because business should pay its share. These taxes are unfair, because they penalize workers by reducing corporations’ ability to hire and to pay salaries and benefits.
All taxes are fair and unfair, depending on whose toes are pinched. Discussions of tax fairness are sophistry, demagoguery or both. If you hear someone arguing that one federal tax is fairer while another is unfair, mark that person as a liar or a fool.
The question of federal tax fairness is not an appropriate subject for economics’ discussions. No tax is fair, and the federal government doesn’t need tax money. Perhaps the discussion is more appropriate for a psychology seminar.
If taxes are wrongly to be collected for anti-inflation purposes, the real question should be: How harmful is it to the overall economy?
In nearly all cases, the tax will be harmful. (Exceptions may be taxes collected to curtail harmful items that politically cannot be eliminated by law. These include taxes on guns, drugs, cigarettes, etc.)
I submit that the most harmful taxes tend to be those most likely to widen the Gap between the rich and the rest, i.e. the most regressive taxes.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”
8 thoughts on “–Which Taxes Are Fairest? Which Taxes are Least Fair?”
The rich and powerful are able to pass the burden of taxation on to others. It does not work the other way around. Therefore, the fairest taxes, the ones that are shared more equitably throughout society, are taxes on the rich and powerful. 🙂
I find the humpty dumpty nature of the word ‘tax’ annoying. It’s used to discourage, it’s used needlessly to ‘raise funds’, it’s used to encourage and its used to redistribute.
I’d prefer to use the terms ‘levy’ and ‘duty’ when you increase the cost of something that has a ‘negative externality’. I don’t know if you use those terms States-side.
That way you can genuinely talk about scrapping taxes without getting into the ‘what about pollution taxes’ argument. The answer then becomes ‘we will maintain a levy on emissions’, etc.
Humpty Dumpty said, “When I use a word, it means just what I choose it to mean — neither more nor less.”
And wasn’t it another one of you Brits who wrote, “A rose by any other name . . .”?
You have us colonials confused. 🙂
If “the rich and powerful are able to pass the burden of taxation to others,” then wouldn’t taxing the rich and powerful put the burden on others?
Of course, Rodger, that’s what makes it fair.
OC, I was oversimplifying, but the idea of fairness of taxation assumes no systematic effects. People claim that tax is unfair to the people who are being taxed, since others are not. But some people are able to pass on their tax burdens, to some extent or other, while other people are not. Sometimes this is given as a counterargument: Don’t tax us, we’ll just pass the burden on to someone else. I am just turning that argument around. 🙂
I can’t comment on a tax being fair, but I can comment on one I believe would help the economy.
Instead of taxing labor (income taxes) and the production of useful goods and services (sales or value added taxes), tax the consumption of natural resources. Furthermore, set the value of the tax equal to the market rate “rent” the owners of the resource can get from those who want to use or harvest the resource.
It may not be “fair” in any of the senses listed above, but it would encourage those who own or control natural resources to use those resources productively or turn them over to those who would. No longer would speculators buy up land, mineral rights, or other resources and hoard them to gain monopoly profits. That would reduce the price and increase the availability of the resources for everyone else. For non-monetarily sovereign government agencies (like state and local governments), this would make it easy to raise money, eliminate loop holes, and allow the those agencies to provide a natural resources dividend to their consitutiuents.
What immediate or long term reasons is there for double taxations in the U.S.A. Social Security, Medicare? If property tax is necessary what advantage does a poor district gain for its surrounding schools?
Federal taxes do not fund federal spending, so in that sense, they are unnecessary. State and local taxes do fund state and local spending. How the money is spent can be debated.