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.