Plain Talk
about matters of interest in Washington State and, often, elsewhereApril 2007
How much tax we as a people should pay, and what our payments should or should not be spent on, are important but complex questions--so complex that it is inappropriate to try to deal with them in a summary manner. But what we can deal with in a more focussed way is the matter of how we are taxed: how do we allocate what the citizenry as a whole pays among the various individuals constituting that citizenry, and how do we collect from each?
(Still, it is worth remembering what a wise man once said: "Governments spend money for only three reasons: because they have to, because they want to, or because they have it to spend."
The governmental expenses that taxes pay for can be divided into two broad types, which we can call "universal" and "meterable". A meterable service is one whose use by an individual can be at least approximately measured, meaning that it is practical to collect the tax that pays for the service in fair proportion to the use made of that service. Examples of meterable services are municipal water-supply and sewerage taxes, and gasoline taxes (the wear and tear vehicles do to roads is proportional to both the miles they drive and their weight, factors that gas consumption measures tolerably well). Universal services are, obviously, those services which everyone benefits from more or less equally; the most obvious example of a universal service is national defense, since--at least presumably--the millionaire in his penthouse and the hobo sleeping under a bridge each have an equal interest, at least in proportion to their respective lives, in knowing that no foreign power will occupy the nation.
Occasionally, a service that seems to be of one sort is really of the other. For example, some people may never see the inside of a courtroom in their lives, but the courts are nonetheless a universal service because they are available to whoever needs them when they need them--their availability is a sort of insurance policy, and the taxes that pay for them are thus in the nature of an insurance premium. On the other hand, a fire department might seem a universal benefit, but in fact only property burns, and the degree of fire hazard (and size and nature of the property) can be assessed rather readily--insurance companies do it thousands of times a day across America--so a fair taxation for fire protection ought to be assessed per property based on risk.
Which services are meterable, and how to allocate and collect the taxes assignable to the costs of those services, are things that governments at every level, and their citizens, need to concern themselves with. But even all taken together, from every level of government, meterable services are not the preponderance of governmental costs: most of the big-ticket services, starting with the mother of all budget-busters, the national defense, are universal services. So how do we reasonably allocate and collect the costs for those?
Inasmuch as the services are "universal", one might think that everyone ought to pay equally for them; and there is a certain naive charm in such a proposition. Indeed, the United States Constitution, till the Sixteenth Amendment was ratified in 1913, was interpreted as forbidding much of what is today done in taxation, the chief point then being that the constitution indeed seem to require that taxes be allocated on a per person basis (for more on that fascinating topic, see the Wikipedia article on The Sixteenth Amendment).
But whatever once was, today no level of government in the United States is required to impose taxes on a purely per-person basis. Indeed, the reality is that in the United States, as in virtually every nation today, taxation is on a "progressive" basis, a drugstore word for the idea that the more you have, the higher the rate at which you are taxed. Mind that word "rate": if A makes ten times what B does, A will pay a lot more than just ten times the tax B pays (see the richly informative Concise Encyclopedia of Economics article on "Progressive Taxes"). Put more simply, the idea is that the rich should pay a lot more than the middle class, who should pay more than the poor, as a fraction of their income.
There is absolutely, positively no point at this moment in history in discussing whether that is, in principle or in fact, A Good Thing. It is inextricably woven into the fabric of all tax principles and practices everywhere. For the purpose of having a meaningful discussion, we accept it and go on from there. But there are some taxation principles worth visiting, and one is the question of precisely what "rich" means. It's just having money, isn't it? Or is it?
From time to time, one runs across a news story about some poor wretch who lived a life of hardship--cheap, shabby apartment, cheap shabby clothes, surviving on canned beans--but on whose death was discovered hundreds of thousands or even millions in cash stowed in a coat closet in old paper bags. To be sure, it doesn't happen every day or every week, but it does happen often enough that it is almost a cliche. Are such compulsive misers "rich"? In a technical sense, sure, they had the cash; but in a real-world sense? So long as they lived, no one would have dreamt of calling them "rich", and the discovery of their hoarded fortune doesn't really wipe out that impression. Rich is as rich does, one might say. Being rich doesn't mean just having lots of money--it means spending lots of money.
Now let's consider an apparently different issue. What makes a capitalist society run? Capital does. Duh. (It is fashionable these days to use the term "free-market economy", as if there were something shameful about the word "capitalism"; but a "free" market is simply a capitalist market.) If the people of a capitalist nation such as the United States do not invest capital in its economy, soon or late that economy grinds to a halt (or, as with America, more and more of the nation becomes the property of foreigners, who--unlike its own citizens-- are investing in America.)
People "invest" in their economy by saving: money put money in a bank account or mutual fund or suchlike is invested by the bank or fund or whatever in stocks or bonds or mortgages, which are channels for getting the money available as capital (stocks) or loans (bonds, mortgages) to individuals and businesses who need it to finance building or business growth. Money saved (at least if not in paper bags in a coat closet) is money invested in the economy. But what is the personal savings rate in America today? It is not merely low: it is negative. Americans are not putting capital into our economy: they are taking it out of our economy. The American populace is, as a whole, spending more than it is making. We are siphoning gas out of the tank of our own economy.
Now let's connect those two thoughts: if 1) wealth is realistically manifested by what one spends, and 2) money not spent is money saved, and hence available to fuel the economy--then which does it make sound sense to tax: what people get or what they spend? Think about it: the only real difference between what goes in and what goes out is what comes in but doesn't go out--savings, that is. Taxing what goes out means savings are untaxed--but not forever, only till they're finally spent.
The loudest objection to shifting tax from what comes in (an income tax) to what goes out (a sales tax) is that sales taxes are "regressive"--the opposite of "progressive" taxes. That is supposed to mean that sales taxes proportionately hit the poor much harder than the rich. That is a truthful lie. It is truthful in that a bare sales tax, a sales tax on everything, certainly hits poorer people harder than wealthier people: if your annual household expenses are, say, $30,000, then $5,000 in taxes hurts badly; if your annual household expenses are $3,000,000, even the huge sum of $500,000 doesn't hurt you nearly so badly as the $5,000 hurts the poorer household, because you are still spending $2,500,000 after tax. Money may not buy happiness, but it can buy you a pretty snazzy Rolls Royce to drive around in while you're looking for it.
But if that part is truthful, the lie is in the naive assumption that a sales tax has to be a flat tax on everything. There is no reason why that should be so, and in virtually no place with sales taxes is it so: there are almost always significant exemptions. The key to a sound, fair sales tax is to exempt most of the things that constitute the reasonably necessary expenses of life: food; housing, up to the median cost in a given region; non-elective medical expenses (including insurance premiums); education; and perhaps a few other things. No one should claim that crafting such a tax is simple--consider just the question of determining median housing costs (what size household? what defines a region? how often are the numbers compiled?). But if the devil is in the details--no 12-second sound bites explaining it all--that does not mean that the task is impossible, just that it would take some time, common sense, and political will to craft properly.
And once you exempt the reasonable necessities of a typical household, you are then free in perfectly good conscience to tax all other expenditures to whatever level the budget requires, because it is all optional spending. When essential spending is untaxed while optional spending is taxed, there is a natural tendency to spend less, and thus to save more. Those who have lots of money to spend will spend it anyway, while those who don't, won't, so a strong element of progressiveness can exist with a sales tax if the exemptions are intelligently and ethically structured.
Income taxes have other drawbacks beyond discouraging saving. Over time, they become riddled with special provisions (designed to favor those with wealth), and become a procedural nightmare to complete in any but the very simplest of situations. Consumer Reports magazine from time to time presents a number of professional tax preparers with a few typical household financial cases (using invented data); invariably, no two come up with the same tax figure--and those are professionals. A nightmare, indeed. Ever seen these?
Combine lines 7 and 15 and enter the result. If line 16 is a loss, skip lines 17 through 20, and go on to line 21. If a gain, enter the gain on Form 1040, line 13, or Form 1040NR, line 14. Then go to line 17 below.
Enter your gross farming and fishing income reported on Form 4835, line 7; Schedule K-1 (Form 1065), box 14, code B; Schedule K-1 (Form 1120S), box 17, code T; and Schedule K-1 (Form 1041), line 14, code F (see page E-7).
Historically, the difficulty of tracking income, or even possessions, was well known. In medieval times, folk were taxed based on the number of windows in their houses, that being something impossible to hide while being a rough indicator of their manner of living--the more costly the building, the bigger it is, and hence the more the windows. (It's probably still a better indicator than Form 1040 and all its offspring.) In the modern world it's pretty easy to hide income, but it's rather difficult to hide expenditure: it requires a conspiracy by not only the buyer, but the seller as well. (Most income-tax fraud is detected by noting expenditures that don't jibe with reported income, not by detecting unreported income directly.) Taxing expenditure is very easy to police, and without anything like the grossly swollen yet wildly ineffective Internal Revenue Service.
For those, and yet other good reasons, there is a growing tide of sentiment on the national level for replacing our grotesque income-tax structure with a revenue-neutral change to a national sales tax with appropriate exemptions. ("Revenue-neutral" means that though the method of collection is changed, the actual money collected would be the same.)
So why, in the light of all that, would we in Washington want to run from a sales tax to an income tax?
(But could we please fix the sales tax we do have?)
Plain Talk is a more or less monthly feature carried in the weekly Ritzville Adams County Journal.
The text appearing above is a substantially expanded version of the published feature, which is limited by word count.