Taxes

Governments require taxes. Governments need money raised through taxes to pay their elected and appointed leaders and the many other servants who fill out the departments of these leaders. They need money to build and maintain government buildings, to provide roads and schools and other services wanted by citizens, to train and equip and maintain armed forces, police departments, fire departments, courts, prisons, and other needed facilities. The Bible requires Christians to pay taxes: “Give to Caesar what is Caesar’s” (Matthew 22:21); “pay taxes when taxes are due” (Romans 13:6).

A dictatorship can set tax rates, demand taxes, and punish those who fail to pay. A democratically chosen government must listen to its citizens. On the one hand, many of them want lower taxes; on the other hand, many of them want more government services for themselves or for others. Leaders in a democracy must strike a balance—when the louder demand is for services, they must provide those services and raise taxes to pay for them; when the louder demand is for lower taxes, they must decide which services to reduce or eliminate.

The simplest tax is a head tax—everyone pays the same amount. Income taxes can require the same percentage from every worker, or they can be graduated, demanding a higher percentage of the earnings of higher-paid workers. Taxes are levied on property. Taxes are assessed and collected when things are bought and sold. Taxes appear as fees: vehicle license plates, drivers’ licenses, hunting and fishing licenses, marriage licenses, and so forth. Businesses are assessed taxes on their productivity and on their property; an increase in business taxes means that consumers will be paying higher prices.

A second purpose for taxes is the encourage some behavior and discourage other behavior. Do you want to persuade people not to smoke? Tax tobacco. Do you want to persuade them not to drink? Tax alcohol. Do you want to persuade them not to waste gasoline with inefficient cars? Tax gasoline. At the same time, offer tax incentives for efficient cars and for electric cars. Offer tax incentives for using alternate sources of energy. Use the tax structure to encourage people to enroll in higher education, to save money for their retirement, and to contribute money to charitable organizations.

In a pure socialist state, the government provides people with everything they need: food, clothing, shelter, medical care, education, legal services, even entertainment. The same government demands much from its people, both in taxes and in limitations upon freedom. Without competition of the free market, people accept the food and clothing and shoes and medical care that is provided. They have no choices. Their jobs are provided by the government, but most of their income returns to the government through taxes. Those who complain might be ignored, if they are lucky; often, those who complain are punished for resisting the will of the government. History shows that people tend to migrate away from such societies and to try to find homes in free market societies. The Berlin Wall eloquently illustrated the difference between socialism and the free market.

In pure capitalism, people buy what they can afford and do without the things they cannot afford—including food, clothing, shelter, medical care, and all the rest. In a free market, the government intervenes to provide some care to its poorer citizens. Food programs, government housing, Medicare, and other programs have been devised to assist people. Free education is provided through the twelfth grade, but not without competition from private schools and home schooling. Some citizens desire more government participation in health care—more care available for all people, treating health care as a human right rather than a privilege. Others want the free market to govern costs and expenses of health care, fearing that government control leads to higher costs and lower quality care. Unfortunately, the Affordable Health Care Act of 2010 focused more attention on medical insurance than on actual health care (although its many provisions did include some health care regulation beyond insurance coverage). In a future post, I will offer some alternate suggestions regarding affordable health care, measures that allow the free market to work but still ensure that needy citizens are not excluded from necessary care.

Taxation sometimes has unintended consequences. Wanting to discourage wasteful use of gasoline, state and local governments raised the tax on gasoline. They also offered tax incentives for more efficient vehicles. Their program was successful—drivers bought more efficient vehicles, and gas consumption fell. But the gasoline tax funded highway repair in those localities. Reduced gasoline usage meant less revenue from the tax that maintained the highways, to the point that some government officials proposed taxing electric cars and fuel-efficient vehicles to recover the missing income.

One of the most famous unintended consequences of taxation happened in 1990. The United States Congress approved a ten percent tax on the sale of luxury boats, any boat costing more than $100,000. The idea behind this tax was that wealthy people who could afford yachts could also afford to pay more money in taxes—money that could be used to help the poor, the needy, and the unemployed. Under the new tax, yacht sales fell from 7,500 in 1990 to 3,500 in 1992. Thirty thousand jobs were lost in the boatmaking industry. Instead of gaining additional tax revenue to help the poor and unemployed, the government increased the number of unemployed who needed help. Wiser minds prevailed, and the tax was eliminated. Lawmakers who try to reverse economic inequity through taxation of the rich must beware of such unintended consequences. J.

Ethics, government, and the economy

Should a human government follow the ethical principles described by Jesus in the Sermon on the Mount? The answer, in a word, is, no.

Jesus calls his followers to love their enemies, to turn the other cheek and to go the extra mile, to forgive those who sin against them and do good to those who persecute them. But the government is established by God to protect its citizens, to punish those who do wrong, to uphold the law. Instead of forgiving the sinner, the government must punish the wrongdoer, “eye for eye and tooth for tooth,” rendering justice on behalf of all its people.

During the Baroque Era (or Enlightenment), European philosophers described human rights and said that governments exist to protect those rights. John Locke wrote about rights to life, liberty, and property. (Thomas Jefferson, writing the Declaration of Independence, would fudge the third right to “pursuit of happiness.”) Governments protect the rights of their citizens—they take life only from enemies who attack the country or from the worst of criminals who threaten the lives of others. Governments protect the liberty of their citizens, only depriving criminals of freedom, and then only for a term that fits the crime. Governments protect the property of their citizens. They may claim some property as fines for misdemeanors, other property as fees for services, other property as taxes, and still other property to provide services such as roads. In general, though, governments take no more than they must take from their citizens. When they become overbearing, when they stop respecting the rights of their citizens, the citizens are entitled to change their government, to find new leaders who will respect and protect their rights.

Philosophers spoke of a social contract between citizens and their government. Citizens agree among themselves what they want the government to do, and they use their property and their energy to help the government accomplish these goals. If citizens want public schools, they agree to pay taxes to support those schools, and they agree to send their children to those schools. For protection from foreign enemies and domestic criminals, citizens are willing to limit some of their own freedoms and property. For other services from the government, some citizens are willing to accept further limits. Among any group of citizens, a range of opinions will be found: some want the government to do more, and they are willing to pay more for those government services; others want to cede less to the government, and in return they are happy to receive fewer government services.

To some Americans (including Franklin Roosevelt and Bill Clinton), some problems are so big that only the government can address them. To other Americans (including Ronald Reagan), the government is the biggest problem and life improves when government is reduced and limited. Pure capitalism demands that the government not involve itself in the economy—capitalists say laissez-faire, leave it alone. Even Adam Smith in Wealth of Nations acknowledged that some government regulation is necessary for the good of all citizens. Under socialism, the government controls more aspects of its citizens’ lives; in return, it demands more property and restricts more freedom of those citizens. In a free market economy, the government regulates what must be regulated but leaves more freedom and more property in the hands of its citizens.

The question remains: which economic system is better for all the citizens of a nation: socialism, or a free market economy? J.

Social Security

For as long as I can recall, every candidate for federal office has spoken about the need to rescue Social Security. I remember one Presidential debate, at least twenty years ago, in which one of the candidates referred to two unrelated opinion polls. One had asked young adult Americans whether they believed Social Security would still exist when they were ready to retire. The other had asked a similar demographic whether they believed that space aliens were visiting the Earth in UFOs. The result of the comparison was that more Americans believed in space aliens on UFOs than believed in Social Security.

Social Security was part of the New Deal enacted by Congress under President Franklin Roosevelt. Contrary to its name and to popular perceptions of the program, Social Security is a tax on working people used to pay other people—mostly the elderly and the disabled—not to work. The goal of the program, when it was created in 1935, was to open jobs for more workers and reduce unemployment by giving incentives to certain workers to leave the work force.

In 1935, the median average lifespan of Americans was seventy years. Today it is more than eighty years. This means that, when Social Security began, roughly half of the Americans who retired at age sixty-five could be expected to draw from the program for five years or less. Now, given better nutrition and health care than existed in the 1930s, more than half the Americans who retire at age sixty-five will draw from the program for fifteen years or more. No wonder many Americans doubt that Social Security can survive for another generation!

In 1935, each working American was taxed two percent of his or her income, but only up to $3000; money earned above that amount was untaxed. The tax was further hidden by requiring employers to match employee contributions, making the apparent tax only one percent. Today, the tax (including Medicare, which was added in the 1960s) is 15.3%, although it still seems less because employers are still matching employee contributions, making the tax appear to be less than eight percent (except for people who are self-employed). The ceiling of taxable income has risen from $3000 to $137,700.

Employment rates, salaries, longevity figures, and other numbers vary from year to year. Each year projections are offered to guess how long Social Security can continue to fund disabled and retired persons given current numbers. The dire prospect of running out of money for Social Security usually projects only a few more years of survival for the program, but somehow Social Security has continued to remain solvent even as some of the early years for its projected failure have passed.

The easiest way to keep a balance in Social Security are to raise the tax rate and to reduce the benefits paid. Neither of those options are popular in today’s political climate. Other questions can be addressed that might also help preserve Social Security as a government program for the foreseeable future:

  • Why place a ceiling on taxed earnings for Social Security? This practice causes Social Security to be more of a burden on low-income and middle-class taxpayers than on the wealthy. Removing the ceiling would generate more income for Social Security without adding any costs to the program.
  • Social Security earnings have never been taxed, but many recipients of Social Security are drawing more total income from various retirement programs and investments than the average American worker can earn. Replacing the ceiling on taxed earnings with an income above which Social Security is subject to withholding tax would generate income for the government without harming the average disabled or retired recipient of Social Security.
  • Retirement age needs to be reconsidered. Retirement at sixty-five (and early retirement at sixty-two) removes productive workers from their jobs while stressing the Social Security system. I plan to work full-time until I am seventy; I think most people my age are capable of doing the same. (Both my parents and all four of my grandparents lived into their eighties—two of the six into their nineties.)
  • Understand that Social Security never promised to provide a sustainable living income for retirees. Social Security is meant to supplement other investment and retirement income. Unlike life, liberty, and the pursuit of happiness, Social Security is not a God-given right. Social Security is a government program of taxation and payment of benefits which can be adjusted by the government whenever it chooses (remembering that the members of government are subject to replacement by the voters whenever they make and enforce unpopular laws).
  • Understand that currently Social Security is generating more government income than it is costing government expense. Predictions of the collapse of Social Security always depend upon extending current trends. Adjustments made over the years have sustained Social Security well beyond earlier forecasts of shortfalls. Continued adjustments will be more significant than any massive overhaul of the system.

In short, candidates for political office often threaten the end of Social Security as a way of scaring voters. Real assessments of the program show no need for worry or fear. Like other panics over illnesses, environmental changes, technological failures, and political confrontations, news of the collapse of Social Security is largely exaggerated and used to manipulate public opinion. J.

Taxation

The Christian attitude toward taxes is set in the New Testament. Jesus said, “Give Caesar what is Caesar’s, and give God what is God’s.” Paul wrote to the Romans, “If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor.” Christians living in a democracy can do more, though, than pay what they owe. They can advise their leaders on the topic of taxation, they can choose their leaders according to their statements about taxation, and they can speak and write to shape public opinion about taxation.

Taxes are part of the social contract between government and its citizens. Citizens surrender some property to the government in the form of taxes, and the government provides benefits for its citizens in exchange for that property. Benefits can include armed forces to protect the nation from attack and police forces to protect communities from crime. Using tax dollars, governments build and maintain roads, finance schools, and provide parks, museums, libraries, and community centers. Tax dollars maintain the judicial system in which criminals are prosecuted and (if found guilty) punished and by which two parties can settle their differences without resorting to physical attacks on one another.

Taxes can take many forms. In a head tax, every person pays the same amount. In a flat tax, every person pays the same percentage of his or her income. In a graduated tax, wealthy people pay a larger percentage of their income and poor people pay a small percentage (and some of them pay no income tax). Tolls are collected from people as they use highways or bridges. Import fees and export fees can be charged on products when they cross borders. Sales taxes can be assessed when products are bought and sold. Fees for licenses to own a car or a gun or a pet are taxes. Money paid for a marriage license or a fishing license is a tax. Landowners pay taxes on their land. Investors pay taxes on their profits. Even money won through gambling is taxed.

Governments assess taxes for several reasons. The most obvious reason is, of course, to gather money for government services. However, taxes can be used to discourage some kinds of behavior and to encourage other kinds of behavior. Taxes on tobacco and on alcohol discourage people from smoking and from drinking. Taxes on gasoline might motivate drivers to drive less or to purchase more efficient vehicles. On the other hand, capital gains are taxed at a lower rate to encourage people with extra money to invest in businesses that provide jobs.  Property taxes on industrial land frequently are reduced or eliminated when a city or state wants to encourage companies to build new facilities that will provide jobs.

Taxes sometimes have unintended consequences. Some years ago a state wanted to raise more money to cover unemployment benefits, and it wanted to raise that money by taxing only wealthy people. For that reason, the state government enacted a special sales tax on luxury yachts. To avoid paying that tax, the wealthy people in that state decided not to buy new luxury yachts. Because yachts were not being bought, the yacht manufacturing companies had to lay off workers. Instead of raising money to cover unemployment benefits, the state’s yacht tax only increased unemployment.

An increase in the gasoline tax causes an increase in the price of a loaf of bread. Farmers need gasoline to operate their machinery when they plant the seeds and when they harvest the grain. Then the grain must be driven to the mill, and the flour must be driven from the mill to the bakery, and the bread must be driven from the bakery to the store. No one in this chain of production is willing to pay more for fuel while receiving the same amount of money for their work. The cost gets passed along the line until it reaches the man or woman who is buying the loaf of bread. By the same token, other taxes on products and the producers of products only raise prices in the stores. Governments that tax the factory owner may think that they are taxing the wealthy, but they are only driving up prices for all people, including the poor.

Many citizens would like to pay less money for taxes. To achieve that, they have to be willing to have the government provide fewer benefits to its citizens. Other people want the government to do more for its citizens. They have to be willing to pay higher taxes. Any request to have the government do more to help one group of people while asking another group to pay for the service with higher taxes misses the point. People pay taxes willingly only when they know they are getting something for their money. Again, this is part of the social contract.

On its own, a tax is neither good nor bad. It just is. The value of a tax comes from the government’s ability to use tax dollars to provide citizens with the services they want. Politicians who want to be elected sometimes promise to cut taxes without reducing popular services. Others promise to provide more services without raising taxes. They rarely keep these promises if they are elected. Sometimes politicians who have been elected threaten to cut funding for popular programs (or actually do cut that funding) until citizens object, funding is restored, and taxes are not reduced. If I were running for office, I would never make a promise I couldn’t keep. If I were elected, I would be responsible with your tax dollars; I would not play tricks with them or waste your money. J.

 

The social contract

All people have rights. When we all try to exercise our rights at the same time, we fall into conflict. Therefore, we make an unspoken agreement with one another. We surrender some of our rights to the government, and we give that government the power to protect our remaining rights. Which rights we surrender and which we maintain—that is the difficult question. Nations differ from one another in their answer to that question, and citizens within nations argue with each other about the answer to that question.

Like many ideas of western philosophy, the idea of the social contract has its roots in the writings of Plato and Aristotle. The idea first reached its full structure in the writings of Thomas Hobbes, John Locke, and Jean Jacques Rousseau. All three agreed that government is a necessary evil. All three wanted to see the size and the power of the government limited. Hobbes even compared human government to the Biblical monster, Leviathan, writing that it must be tamed as much as possible, because things would be worse without it.

All people have rights. Locke summarized these rights as life, liberty, and property; in the Declaration of Independence of the United States, Thomas Jefferson rephrased the third right as “the purfuit of happineff.” (All his Ss looked like Fs—Stan Freberg.) Governments exist to protect the rights of their citizens to life, liberty, and property; they do not exist to take these rights away. Locke, and later Jefferson, said that when a government fails in this basic duty, citizens have an additional right to take power from their government and give it to a new government. Locke saw that very event happen twice, first with the end of the Puritan Commonwealth and the restoration of the monarchy in 1660, and later with the Glorious Revolution bringing William and Mary to power in Great Britain in 1689. Jefferson was, of course, key in seeing the same thing happen in the British colonies on the Atlantic coast of North America.

All people have a right to life, but government can deprive a murderer of life, since that person has deprived someone else of life. All people have a right to liberty, but government can put a convicted criminal in prison to protect its other citizens. All people have a right to property, but the government can take property away from some people in the form of fines if they have broken certain laws. Citizens surrender to the government the power to seek, capture, convict, and punish criminals rather than having each citizen responsible for defending his or her life, liberty, and property all the time.

In additional ways, citizens surrender liberty and property to the government for the greater good. (In times of war, some citizens even risk their lives for the good of their country.) Many people want to travel between City A and City B. If each citizen made his or her own path between the two cities, many property rights would be threatened, and the environment in general would be harmed. With the agreement of the citizens, the government claims a strip of land between the cities, giving the owners of that property due value. The government then builds a road on that strip of land. The road belongs to the government, by agreement of all the citizens. Therefore the government can charge people money to use that road, whether through tolls or through gasoline taxes or through fees paid for vehicle licenses and drivers’ licenses. Because the government owns the road, and make and enforce rules about the road, such as speed limits, stop signs, and laws against littering. Citizens agree to use the road and to obey the rules. This is how the social contract works.

In every family, parents could teach their own children; or groups of families could band together to provide private schools for their children. However, the citizens living in a town or city have an interest in seeing that all the children are in school, both to keep them out of trouble and to prepare them for useful lives in the future. Generally in the United States public schools are funded largely by property taxes. Even households without children and families which homeschool or send their children to a private school pay for the public school, because it is in everyone’s best interests to send the neighbor’s children to school. This is how the social contract works.

Taxes are a visible result of the social contract, but most political controversies also concern the social contract. Governments decide how best to protect the lives and liberty and property of all citizens. Sometimes, however, the rights of two people conflict, and the government must decide which right to protect or how to compromise the conflicting rights. Does a child’s right to life deserve more protection than the right of the child’s mother to liberty and the pursuit of happiness? If so, when does that right to life begin—at conception, at birth, at some arbitrary time between conception and birth, or perhaps a certain number of years after birth? Americans disagree with one another about the answer to that question, as do the members of the American government. Because of the social contract, the government must provide and enforce some kind of answer.

In socialism, the government owns all businesses and industries and decides how much workers will be paid and how much products will cost. Socialist governments generally charge high taxes and then provide many services for free. These can include public transportation, education, medical care, and even housing. In capitalism, private citizens own business and industries. Those private citizens decide how much workers will be paid and how much products will cost. Taxes are lower, but people must pay for things that they need and want. Even in capitalism, though, a social contract exists. Citizens trust the government to inspect factories for the safety of the workers and the quality of the products (such as food and medicine) that are produced. Citizens trust the government to regulate industries to reduce pollution, noise, and other problems. Citizens trust the government to make laws about child labor, limits on how many hours of work a worker must perform each day and week, and even minimum wage rules. Some liberty is surrendered to the government for the good of workers and of customers. People debate the details of such regulations, some wanting more and others wanting less regulation, but very few people want absolutely no regulation of privately-owned businesses and industries.

Human life requires food and shelter. To protect the right to life, should a government guarantee that every citizen has access to food and to shelter? Locke and Jefferson would have said “no,” but today American government provides unemployment compensation, food stamps and other welfare programs, and low-rent government-owned housing. Citizens object to abuses of the welfare system, but few would say it ought to be abolished. Most Americans are willing to see some of their tax money spent to feed the hungry, shelter the homeless, and care for the poor people who are our neighbors.

Access to health care is also necessary for human life. Since the 1960s, American citizens have debated heatedly the question of government involvement in the nation’s healthcare system. Most Americans are opposed to socialized health care in which the government owns all the hospitals, medical clinics, pharmacies, and other health care institutions. In socialized healthcare the government pays the doctors, nurses, pharmacists, and other health care professionals. That same government sets rates for medical procedures, making the most essential procedures available for free to those who are poor. Most Americans prefer capitalism in health care. Most Americans do not want governments to own the entire system. Most Americans want doctors and other professionals to have freedom to do their jobs in the way they think is best. Most Americans want freedom to make their own choices among doctors, hospitals, and the like. Americans disagree with one another about how much the government can control the health system through regulation. The goal of government participation in health care is to protect the right to life of poorer citizens. However, the same government participation reduces the liberty of doctors and patients, and reduces the property of citizens who must pay taxes to support the system. Discussion of what compromises should be made among these conflicting rights is part of the social contract.

On another occasion, I will write more about taxation and the social contract. J.