Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Simple, obvious, and unobstructive: minimize the value-minus of taxes

Jerry Stratton, June 15, 2009

I mean, look at the response when Palin said that lower oil prices are better for Alaskans than higher oil prices. Higher oil prices are bad for the economy and that will hurt Alaska. Alaskans also use a lot of oil for heating. Beyond that, it isn’t her responsibility as Governor of Alaska to hope that the rest of America suffers. But there’s an even greater truth to her statement. I grew up in a state dominated by a single industry, and I can honestly say that Michigan would have been better off if we hadn’t made so much money on the automotive industry that it’s loss was catastrophic.

At a recent speech, Governor Palin said that there is no value-added in taxes. I almost put that quote alone on my site, but pulled it down before publishing it, because a statement like that can’t stand alone.

Obviously, if we’re going to have a government, that government needs some form of funding, even if it’s just to pay for the domain name. And I can’t see government funding becoming voluntary. “Bake sale for bombs” has an intrinsic appeal, but it will never happen.

So some form of taxes are necessary. But we must never forget that taxes are not themselves of value. They are a compromise between freedom and good intentions. Taxes should not exist for their own sake; today, too often, they do. We forget that the things we get from government came from our own wealth. And that every tax levied is an economic opportunity lost. Money spent on taxes does not produce or create productive jobs. The very act of taxing obstructs job creation, economic growth, and opportunity.

Taxes should be simple, they should be obvious, and they should be unobstructive.

Taxes should be simple

Taxes should be simple because when they’re complex they do two very bad things. The most obvious is that they make it more expensive to pay your taxes. I have an incredibly simple income stream; I own no property, hold only one job, am unmarried, and have all of my savings in one bank. I don’t even itemize. Even then, I have to buy tax software and spend hours answering questions that I mostly just hope I’m understanding correctly.

Undoubtedly I’m paying too much tax by doing it this way. But even overpaying can cause trouble. Every once in a while I’ll pull in $300 a year on Amazon sales. My expenses far outweigh that: the cost of running hoboes.com alone exceeds that. But it still isn’t worth it to spend hours figuring out how to deduct them correctly. So I just report the full amount. A few years ago, I received a letter from the IRS asking why I wasn’t paying quarterly social security taxes on this money. So I still had to spend the time—after my heart returned to my chest—writing a letter explaining that I’m not really making that much money, I just don’t want to deal with reducing it. And then hoping that I didn’t hear from them again afterwards (which I haven’t, so far).

Tax law complexity also adds to costs on the other end: the IRS spends a lot of money processing taxes, and of course that money reduces the amount of money we can use on what taxes are supposed to pay for.

Americans spend $250,000,000,000 to $300,000,000,000 each year just to prepare and file taxes. The tax preparation industry is so big, it can successfully lobby the government not to simplify taxes and keep the IRS from offering free online submission.

The GAO estimates that overall, it costs 20% of taxes to pay for taxes. That’s crazy inefficient. Think of what we could do with an extra 20% either in taxes or in the economy!

Simplifying taxes saves time and money throughout the tax chain. Both individuals and businesses expend too much time and money complying with our complex tax system—time and money they could use to create more products, buy more products, or hire more people. Removing tax complexity doesn’t just make individual lives easier, it makes our economy stronger by freeing our businesses to focus on their actual business. They can hire more people within their industry instead of having to hire more (expensive) tax compliance specialists.

Taxes should be obvious

It should be obvious when we’re paying taxes and how they’re being paid. Invisible taxes are easy to abuse, because the products of those taxes, no matter how inefficient, come to look like they’re free. The more invisible a tax is, the less incentive there is to keep the tax low and to use the tax well.

Taxes would be a lot lower right now, and tax money better spent, if everyone wrote a check for the full amount at the end of every month, rather than having it invisibly removed from their paycheck. We all know people who think that their tax rebate is free money.

Simplicity shouldn’t make taxes less obvious. For example, the simplest tax would be to have no levied taxes at all, and just let the government print more money when it needs more money. But because no one is actually paying this tax directly, there will be no limit to how much the government will spend—and then inflation will drive the prices of everything through the roof. A tax like this would almost certainly destroy any democracy. The cry for more “free” services will never stop when no one thinks they’re paying for it.

Similarly, as I wrote in Tax individuals, not organizations, sales taxes are better than business taxes. Business taxes are just like sales taxes except that they’re invisible. They still raise the price of the product, but they hide which part of that price is taxes.

Taxes should not obstruct

It isn’t contradictory to say that taxes should be obvious but unobstructive. Both relate to each other. Taxes should not get in the way of creating jobs, growing the economy, building a business, building a career, or saving for the future.

Taxes should not require lots of paperwork. They should not require that every business have a dedicated tax compliance department; this makes it harder for startups to compete with established businesses. Less competition means higher prices, a more fragile economy, and reduced innovation. Taxes should not be so complex that it is easy for individuals (and businesses) to accidentally break the law. They should not be so complex that large businesses easily lobby for rules that cripple their competitors.

Individuals should never make less money after taxes just because their income rose or they put away savings. That can only encourage cheating. The first year I started saving, the interest on my savings—about $5 or $10—increased my taxes by double that. Guess what? I cheated. Because I wasn’t alone, laws were created to keep us from cheating in the future, requiring every tiny bit of income to be reported and stored in a central database. Obstructive taxes create obstructive laws.

Taxes should also not grant government agencies legislative power. Tax authority shouldn’t be an authority to limit free speech or tell a company how to run its business.

What about low taxes?

This doesn’t say that taxes must be low. If taxes are simple and obvious, and people choose to support high taxes anyway, well, they’ve clearly chosen to do so. And as long as they’re simple and unobstructive, the taxes, high or low, will go more to what they’re collected for and less to the act of collecting them. Today, though, taxes are so insidious that few people know where they all are and how many they’re paying. And they’re so complex that at least 20% of the money spent on taxes don’t go to the taxes themselves, but are spent in the preparation and processing of taxes.

We pay taxes for the privilege of paying taxes.

What about low spending?

Nor does it say that spending must be low. But if taxes are obvious, and we still choose to spend that money, then fine. We know what’s being spent. We shouldn’t sneak money away from people: we should be proud of whatever programs we’re spending it on.

Government spending shouldn’t obstruct people and businesses from doing their job any more than taxes should. The government shouldn’t, through its spending, become the plum customer in an industry, because that industry will then ignore smaller customers—such as you and me and the places we work for. The obvious example is health care. If the health care industry decides that they can make more money catering to government bureaucrats than to us as patients, we’re screwed. Imagine all the problems you’ve had with your employer-based health care and multiply it by thousands.

High government spending in any one industry sucks up economic viability just like fire sucks up oxygen. It destroys it, or at least locks it away to where it can’t be reached.

Taxes never add value. They increase corruption, depress the economy, and reduce jobs. They are sometimes useful, sometimes even necessary, but we must never forget that they are a compromise between some thing that we want to force everyone to contribute to and freedom.

October 24, 2011: What’s wrong with a national sales tax?

A couple of years ago, the solution to our tax problems was the flat tax; today, the tax savior is the fair tax. The basic difference is that the flat tax is an income tax on all income (except possibly below a poverty threshold) and the fair tax is a national sales tax on all purchases (except possible necessities such as food, or, as in Herman Cain’s 9-9-9 plan, limited only to new purchases).

Is a sales tax better than an income tax? Any tax eventually gets used by the state to try and shape public action, whether to indulge in a bit of cronyism or progressivism. With income taxes, this shaping is limited: it’s very difficult to say that John Smith in Accounting should be taxed higher than Jane Doe the nurse, just because we like nurses more than accountants. We tend to limit our differentiation based on how much money people make, rather than on what job they have.

With a sales tax, however, it’s very easy to say we’re going to tax ice cream more than milk, because we want to discourage people from eating too much ice cream. We already do this all the time. Gasoline has historically had much higher sales taxes than other products in many, if not most, states.1 Cigarettes and liquor are also singled out for special taxes. And we actually have a national sales tax on those products: currently, $1.01 per pack of cigarettes and 18.4 cents per gallon of gas go to the federal government; the liquor tax is more complex. A national sales tax on all purchases will only make this worse: it will be easier to modify taxes for social engineering purposes once all products already have a federal sales tax and all merchants are required to collect a federal sales tax.

This is why I think the best tax is not a tax on individuals, but a tax on states; states will be able to experiment with the best tax regime for the people in their area. Every state can learn from the innovations of their neighbors.

That said, while all taxes have problems, income taxes are probably the fairest tax we can have. Business taxes are hidden taxes on consumers and on employees. Federal sales taxes will inevitably lead to social engineering.2

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September 15, 2011: No corporation pays taxes

Congressman Paul Ryan is doing a great job explaining what we need to do to let the economy turn itself around, rather than shackle it to a permanent depression. His videos are simple, honest, and to the point. In his latest, he talks about leveling the corporate tax rate playing field by removing loopholes and lowering the overall rate so that the overall rate is revenue neutral.

I disagree with Ryan’s formulation of the problem, however. He says that some corporations pay taxes; and some corporations pay lobbyists to lobby for loopholes to not pay taxes. In fact, no corporation pays taxes. Some corporations, as Ryan says, choose to hire lobbyists to reduce their tax burdens, thus allowing them to pay higher wages or charge lower prices for their products. Other corporations choose to take the full tax burden and pass that burden on to their customers and their employees.

No corporation pays taxes, because corporations exist to provide goods or services. Every cost that goes into making those goods and services either raises the price of the good/service, or lowers the wages that can be paid to employees. The money has to come from somewhere, and it comes from the cost of what the business sells or how much their employees make. It is the consumer and the employee who pay those taxes. Otherwise, the corporation would go out of business—you can’t sell something for less than it costs to make it, and stay in business. Corporate taxes are an invisible tax on consumers and employees. They are a sneaky sales or income tax increase.

The difference between the two models is, which behavior do we want to encourage? One in which businesses are experts at making some product or providing some service, or one in which businesses are experts in lobbying Washington DC?

Ryan said that: “Every dollar that companies spend lobbying for a better tax deal is a dollar they’re not spending making a better product… We don’t want a tax system that rewards people for coming to Washington and getting special favors.” But his proposal doesn’t fix that. His proposal lowers taxes for those who don’t hire lobbyists, and raises taxes for those who, in the past, did hire lobbyists. In general that’s good, because it is, as he said, fair. It evens the playing field.

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July 3, 2011: How to raise taxes in a Tea Party world

I saw a headline on memeorandum today from the New York Times that 2 Republicans Open Door to Increases in Revenue. As is often the case for the Times, the headline didn’t really match the article. The two republicans were Senators John McCain and John Cornyn, but they were clearly “opposed to any tax hikes”. What they’re open to is tax reform, mainly what Republicans like Congressman Paul Ryan have been calling for all along: removing special tax breaks in a revenue neutral manner to simplify our tax laws.

So if it’s revenue neutral, then how does it bring about “increases in revenue” as the headline said? Pretty simple, and it’s also what we did under Reagan: simplifying complex tax codes makes it easier for businesses to make money; when businesses make more money they pay more in taxes. In this context, “revenue neutral” doesn’t mean that the revenue remains the same, it means that the combined tax rate remains the same.

In other words, if the combined rate with the tax breaks is x%, and the tax breaks are removed, the base rate must be reduced by a similar amount so that, all things remaining equal, companies still pay x% and we haven’t lowered or raised taxes by making this change.

Because this is a neutral change, tax revenue won’t go down. But because it simplifies the tax code, profits—and thus the taxes on those profits—are likely to go up. All things haven’t remained equal: we’ve made it easier for companies to focus on their core business (and thus make more money and pay more taxes even though the rates are lower).

Promises to cut spending are rarely kept after raising taxes.

Cornyn and McCain did not say they were open to just plain raising taxes. Which is good, because Americans have learned that politicians who combine increased taxes with lower spending can’t be trusted: the tax increases are always real and the spending cuts rarely are. This year’s budget debacle proved it: almost all of the cuts occur in future budgets where they can be removed by future congresses.

If the Democrats (and Republicans) want to raise taxes along with cuts, they need to do so in a way that shows we can trust them: cut this year, and when we can see that the cuts are real and not just accounting tricks, raise temporary taxes next year. As long as the cuts remain real, they’ll have no problem renewing the tax increases year-by-year, because we’ll see that we can trust them.

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  1. <- Resistance to media bias
  2. Attack policy, not people ->