Taxes: Swallow the Pill

In my last post I started a conversation about taxes. I tried my best to keep it bipartisan and simple because this issue is one that affects everyone regardless of political views. However, I felt that it was becoming too lengthy, so I stopped nearly mid-thought in hopes that the first post, which was less opinion and more basic economics, would prime the pump for me to share some personal thoughts.

Assuming that you have at least skimmed the last post, I will only briefly recap. First, I accept that taxes are important for any society to run even somewhat smoothly. That being said, taxation introduces inefficiencies into the market economy. Also, by their very nature, governments are not incentivesed to get the best value out of tax revenue. Often it is in their best interest to be outright wasteful.

Obviously, some major changes need to be made to America’s system of taxation. I don’t actually see that happening anytime soon so I tend to focus on what we, as individuals, can do. If you would like to do some reading on tax reform, I recommend reading “The Flat Tax Revolution” by Steve Forbes and “The Fair Tax Book” by Neal Boortz and John Linder. Both are viable options for complete overhauls of the tax code. I tend to agree with Boortz and Linder that getting rid of income tax altogether and making a complete switch to a consumption tax would maximize tax revenue and strengthen the economy by filtering much of the static caused by taxation. Sadly, Boortz and Linder also explain why neither of these common sense solutions will ever by applied. Major reform would dramatically reduce the size of government. Their would be little need for the IRS or for many of the business built around helping corporations and individuals navigate the convoluted tax code. No self respecting politician would vote thousands of people out of a job, even if it was in the best interest of the entire country. On a more general level, if politicians actually fixed problems, they would be out of a job, so can we really expect them to accomplish much?

Sounds somewhat disheartening, but all is not lost. We can leverage some of the tools each individual has to at least shift the conversation toward true reform. It is my belief that our most important tools are freedom of choice and the right to vote.

By “the right to vote” I am not speaking of going to the public library the first Tuesday of November and punching holes in a slip of paper. While I go through this process every year, I feel that this form of voting is nothing more than a placebo. Once the hole has been punched and the “I Voted” sticker is strategically placed where others can see it, the majority of people go about their lives thinking that they have somehow fulfilled their civic duty. Statistically this one little vote is meaningless and has no chance of changing the outcome of any election. It is the way that we live our daily lives that actually has the ability to stimulate societal change. The vote that I am speaking of is the use of our heard earned money. Each dollar we spend is a vote cast. These little dollar votes compound to become exponentially more powerful than any vote cast for, or against, an issue on the public ballot. Also, because “time is money” I would suggest that how we spend our time is equally important.

The largest example of how we vote with money is where we choose to live. Housing is generally the largest expense anyone accrues. Also, the communities we decide to live in is where we spend the majority of our time. By purchasing a house, paying property taxes and supporting local businesses we are funding the local government. If we do not like the local laws, tax rates, school districts or general way of life, we vote against it by moving to another city. Of course we should try to get involved in the local community and influence it for the better, but in the end the best way to vote is to move. Communities are then forced to compete to get people to relocate and stay. If you, for whatever reason, choose to live in an area where you dislike the political atmosphere, you will be using your money to vote in favor of issues that you disagree with and you’ll have to get used to the cognitive dissonance it will cause. Believe me, that can be hard.

This principale applies to everything we spend our time and money on; from the TV programs we watch, to the products we purchase. It also applies on the local, state, and national level. If we don’t like the values portrayed in a television show, we vote against it by not watching. If we don’t like the direction our country is headed politically, we can relocate. When nobody watches the TV show, it will get canceled and when people start leaving the county hand over fist, the government will eventually be forced to change. Basically, put your money (and time) where your mouth is.

I recently read Henry David Thoreau’Civil Disobedience and it really opened my eyes to how one should use their own freedom of choice to voice dissatisfaction with both governmental and societal rules. If you have never read Civil Disobedience, I would suggest that you stop reading this post, and take the time to do so now. I feel that everyone can benefit from it. It is just as applicable today as it was in 1849.

Thoreau’s theme is essentially that when we disagree with government, or society, the best way to protest is to simply refuse to participate. Because it is Black History Month, the best example that comes to my mind is Rosa Parks. Rosa chose not to participate in the societal rules dictating that Blacks were to sit at the back of the bus. It was small, non-violent, choices like this that eventually changed the rules of society. The same can be done for taxation.

Am I saying that we should all stop paying taxes? No, I am not. What I am saying is that in order to keep the government in check, there has to be a way, short of leaving altogether, to opt out in protest. Current laws require that tax, Medicare and Social Security payments be taken before wages are distributed. This ensures that the government gets its money. It also removes the freedom to choose from the equation. Having payroll taxes taken out automatically also removes much of the feeling of ownership in that money. If the entire gross wage was paid to every worker and it was their monthly responsibility to write a personal check for taxes, the government would surely be held more accountable. It wasn’t that long ago that payroll taxes weren’t taken out automatically, and the government found it hard to collect its revenue.

Another added disadvantage of automatic payroll tax is that it makes more confusing for individuals to know just how much they are paying in taxes. Do you know how much of each dollar earned you pay in taxes? On top of that, do you know exactly how much you pay in sales or property tax each year? Generally when we spend money, we understand the value before we pay. Taxes are the direct opposite, making it hard estimate the value of what is paid.

If it were easier to opt out of paying taxes wouldn’t everyone stop paying? Not at all. Refusing to pay taxes is, and always will be, against the law. There would still be heavy punishments for those who chose not to pay. The punishments would be both social and legal. That is how the theory of Civil Disobedience is applied. Those who choose to protest do so at a high cost, making the protest meaningful to them on a personal level. In order for this protest to be meaningful to society, many thousands of people would have to participate. When just one African-American woman refuses to stay at the back of the bus, nothing happens. When they all refuse, things change.

In conclusion, simply going to the polls and voting is more like taking a placebo than enacting change. Taxes are much the same. Most pay their 40%, or at least don’t give much of a fight when it’s taken, and feel they’ve given back to society in some meaningful manner. We can either ingest these pills and continue on our way, or we can use our remaining time and money to vote for what we truly believe in. If the time comes that we feel government has overstepped its bounds it might be time to stop participating in they system. Personally, I don’t feel that time is now. I generally don’t sympathize with people who go around touting that they don’t pay their taxes because I feel that most of them are stupid. That being said, I think we need to work toward a system where everyone understands exactly how much they pay in taxes before they actually pay it, everyone has to physically pay it themselves, and the majority of taxes are paid on a state level. This would enable individuals to better asses the value they are getting out of the system and relocate accordingly. If society as a whole started to feel that they were overtaxed, they might stop swallowing the pills and force some real change. It would never actually happen, but I think the higher threat might help better balance the budget.

Honestly, I could go on about this all day, and much of my opinions are not fully vetted. I thought that it would be nice to get them out of my head and see if anybody agreed or disagreed. Please let me know your thoughts.

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5 thoughts on “Taxes: Swallow the Pill

  1. Ha – from “The Flat Tax Revolution” to “Civil Disobedience”… you’re gonna get yourself on a list!

    When I was running the graphic design studio, we had a few municipal clients. I saw wastefulness more than once, but not in the way you might expect. On more than one occasion, I saw local government spend MORE money to give the appearance that they were spending less. They did this so voters would see them as underfunded and approve higher taxes.

    In probably the most egregious case, I had a client turn down 4-color printing on nice glossy paper in favor of 2-color printing. Of course it had to be on recycled paper printed at a union shop. The result was lower quality at more than twice the cost. But it looked cheap!

    See the cycle? Governments spend more to maintain appearances, which creates higher costs. So they need to raise taxes to cover the cost instead of just going with the better and cheaper alternative to begin with.

    That said, I don’t know that removing payroll deductions is the answer. I like the idea academically and on philosophical grounds, but I don’t know that it is practical. The US savings rate is currently around 5% and recently increased during the recession (note how the savings rate tends to increase during recession). It seems unlikely that removing the payroll deduction would increase this rate to the 10-20% that would be required to pay taxes, leaving citizens with a large tax liability in April and having to either dip into savings or borrow to pay it.

    That’s sad commentary on the savings discipline of our nation, but I think it is an unfortunate reality.

      • Not me, nor anyone I know. It’s easy to dismiss people as cynical or lazy. The majority of Americans, however, are neither: they’re just struggling, overwhelmed, they don’t know how to handle the complexity of modern life as gracefully as they might like to.

        But you’ll find if you engage people sincerely you will get a lot farther with them than if you expect them from the start to care more about, say, American Idol.

  2. I agree with your statement that consumption-based taxes set up much better incentives than production-based (i.e. income or value-added) taxes. However, I’m more optimistic that these taxes could become a political reality. Why? It’s usually conservatives and libertarians who tend to support these sorts of changes to tax policies. Liberals (in the mainstream political sense, not the economic sense) tend to oppose them as being regressive.

    I think that both sides have legitimate arguments here. There are strong reasons to support some degree of progressive taxation as it encourages wealth mobility in society as a whole, and provides some degree of cap on the amount of power that one individual can hold (through their financial wealth) — and I think this is a good thing.

    However, there are ways to make consumption-based taxes progressive. The simplest way is to provide an exemption (in the form of a regular cash rebate payment to all people) for a baseline cost-of-living, so that people who are spending only at the edge of their means are not required to pay any tax.

    Also, consumption-based taxes can be tied to environmental impact, such as a carbon tax, end-of-life product taxes, higher water fees, and so on. Including these sorts of consumption-based taxes would add a strong environmental-protection component to the tax system. This would please liberals.

    By balancing the sustainability-promoting incentives and progressive aspects of the tax, which liberals would like, with a simplification of the tax code and move away from income taxes, which conservatives and libertarians would like, one could create a politically-realistic package for real tax reform.

    I’m hopeful, and if you read my blog, such as my posts about sustainability and freedom or the post about sustainability: building a consensus between liberals and conservatives, you can see some more ideas that might encourage a move in this sort of direction.

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