The Tax Man Taketh Away

There is an interesting discussion over at David Friedman’s blog, Ideas, involving the anchient Athenian tax scheme (particularly the comment thread).

The Athenian model was purely

a tax on wealth, whereas “modern democracies” (democracy is dangerous, by the way) favor a progressive tax scheme, which is a graduated tax, primarily on income, i.e. “from each according to his ability…”. In fact, the proponents of progressive taxation are quite varied. For instance, the following comes from the aforementioned Wikipedia article:

Thomas Jefferson: “We are all the more reconciled to the tax on importation, because it falls exclusively on the rich…In fact, the poor man in this country who uses nothing but what is made within his own farm or family, or within the United States, pays not a farthing of tax to the general government…the farmer will see his government supported, his children educated, and the face of his country made a paradise by the contributions of the rich alone…”

Karl Marx: “In the most advanced countries the following will be pretty generally applicable:..a heavy progressive or graduated income tax.”

It might appear, at first blush, that progressive taxation is intuitively rational. After all, it’s only fair, right? Those with more means ought to “give back” to society, so the thinking seems to go. Beyond that, there are economic arguments in favor of a progressive tax:

“As income levels rise, levels of consumption tend to fall. Thus it is often argued that economic demand can be stimulated by reducing tax burden on lower incomes while raising the burden on higher incomes.”

The idea that government ought to seize and redistribute wealth is not new. Arguably, it’s most notable proponent is John Maynard Keynes, who, in 1935, wrote: “I believe myself to be writing a book on economic theory which will largely revolutionize — not, I suppose, at once, but in the course of the next ten years — the way the world thinks about economic problems”. In short, his theory goes something like this:

Keynesians' belief in aggressive government action to stabilize the economy is based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being, (b) the government is knowledgeable and capable enough to improve upon the free market, and (c) unemployment is a more important problem than inflation.

Seventy years later, after innumerable examples of its failure (e.g. western Europe, socialist and communist countries world-wide and to some extent, post WWII America), folks still hope against hope that progressive taxation (i.e. coercive confiscation) is the solution to the problem of poverty and so-called “social injustice”.

Don’t misunderstand…I’m not suggesting that all taxation ought to be eliminated. I’m not an anarchist, so I believe that some form of government is necessary, albeit an irreducibly small one. That is, government ought to be empowered to do that which the market, in conjunction with free individuals, cannot do… nothing more. In such an environment, the best possible mechanism by which the basic functions of government could be funded is a tax on consumption, like the Fair Tax, for example. That way, taxation would be almost entirely voluntary, in that one is taxed only when one chooses to spend, as opposed to having an ever-increasing percentage of one’s income ravaged for the benefit of others; those who do nothing whatever to earn that which they receive from the beneficent hand of government.

Needless to say, the current paradigm creates a disincentive to create wealth, for the rich and poor alike. The former are punished for being successful, while the latter are rewarded for a lack of economic success. How did this become the

prevailing wisdom?

  • jed

    Whenever I see the so-called FairTax proposal mentioned, I just have to point to a rebuttal by Claire Wolfe and Aaron Zelman. There’ve been some other significant thrashings of the FairTax proposal, although I can’t find the one I hope I’m recalling correctly — I think it was at Reason.

  • chris

    Wow, the wolfe/zelman critique mostly seems to focus on doomsday predictions that don’t correlate to the FairTax; for example, they predict the enactment of a national ID card you’ll need to use to buy anything which, although genuinely spooky as a prospect, could happen under any tax system. The enactment of the FairTax wouldn’t cause this, nor would it cause any of the other terrifying conundrums they speculate (like home prices growing by 20% annually forever) any more or less than any other tax system.

    While it may be fair criticism to say that HR25/S25 ‘looks best’ seen in an optimistic light, it also ‘looks worst’ in doomsday paranoia-vision. This doesn’t say much about the plan, it says something about the context in which you look at it.

    Look for yourself. I have, and for me, (based on my current spending and income) adopting the FairTax as written would pretty much be a non-event. I’d end up paying about the same in tax. What tips it for me in the end, really, is two things: Sales taxes cost less to implement, and they’re visible.

    Today as a nation, we spend an estimated $300-500B just to comply with our taxes- and collect $1.6T. That’s a 29% expense, and it’s borne disproportionately by small business. In 2003, according to the Tax Foundation, small business paid on average $724 in compliance costs for each $100 it paid in tax. That’s crazy.

    One argument Wolfe and Zelman raised my eyebrows- they assert that the proposed rate would be too low to be revenue-neutral, and then use that as an argument against implementing it, apparrently operating on the belief that what we’re already paying would somehow be intolerable if we just saw it. In my view, that’s all the more reason to make the tax system transparent- so that we can see what we’re really paying.
    It should be noted that the data they base their assertion upon (the Gale study) has been thoroughly rebutted- it, too, is a critique based on something the proposed legislation is not.

  • Randy

    As with most opponents of the FairTax, Wolf and Zelman cannot come up with a convincing argument without twisting the facts.
    If pigs had wings they could fly, but they don’t and the FairTax does not have most of the things in it that Wolf and Zelman are speaking about. Yes there is room criminals to sell black-market goods and services, do they think there isn’t now? I have not heard anybody claim that it would be a perfect system, nothing would be. There warnings that the tax would be different for different items is sheer bull designed to incite.
    Oh and here’s a hint, the Amish purchase very few new manufactured goods, they make their own clothes, grow their own food and certainly don’t buy automobiles. Even if that were not the case are we going to let the effects it would have on .00001 percent (I’m guestimating here) of the population govern everybody else?
    I was not able to wade through all of their statements, the half truths and lies were starting to blend together. They do mention a few people who have done studies showing the FairTax in a bad light, but of course they fail to mention the open letter to President Bush signed by fifty that’s 5 0 of the countries top economists praising the plan.

  • Ken

    I’d prefer the Fair Tax be implemented in conjunction with the repeal of the 16th Amendment, not simply the abolition of income tax.

  • John Newman

    Here’s an idea, how about the government doing only what it was authorized to do, protect the shores and deliver the mail. How much tax money would it need for that?

  • Eric

    I say that the simplest way to get things under control, and one that can actually be potentially achieved is to get rid of the payroll deduction. Make us all write a check every quarter, or every year, for our tax bill. The only people in this country right now who realize what our tax burden really is are the ones that pay attention to something more than the front page and the 6 o’clock news.

  • Robert

    Tell me about it…I’m an independent sub-contractor, so I file the 1099 tax form. I’m well aware of my government-imposed obligation.