One of the dividing issues over the past four years was tax breaks. Under Bush, they were “tax breaks for the rich.” Under Obama and Clinton, they will be “tax breaks for the middle class.” The latter is more appealing politically, because there are way more middle class than rich, and this is an appeal to self-interest in exchange for a vote, better known as “The American Way.”
There is no one who likes taking the money they earned and handing it over to the government so that a bunch of people they don’t know can redistribute the taxpayer’s money. Taxes aren’t a rational discussion, but a purely self-serving one. Everyone hates paying taxes. We like some government services (the ones that do what we want done) and we hate the rest (especially the pork that we pay for so that incumbent politicians can get re-elected on our dime). But we still hate paying taxes.
Any view of taxes is going to be skewed by self-interest. If you’re rich, you argue that you pay the darn taxes so you should get a break. If you’re middle class, you argue that the rich have plenty of money and you’re struggling, so you should get a break. If you’re poor, then you should just get a break.
But Mike Cernovich at Crime & Federalism posts an example that is going to piss off a lot of people. But it makes its point very well. Plus, the example involves drinking beer on a daily basis, which makes it relevant in most people’s lives. Go read it, then come back here.
If you divorce the politics from the example, you have to admit that it makes its point.
Let’s admit something that is unpleasant. We want government to provide services, but we want someone else to pay for them. When it comes to taxes, the bottom line is that it’s unfair to you, no matter who you are. One of the best examples of a horribly conceived tax is the inheritance tax (called the “death tax” by those bad Republicans), except that they happen to be right on this one. Taxes are paid on the money coming in, but are then levied again when handed down to the next generation. Why is this right? Because it doesn’t affect most people, and it pays the freight out of someone else’s pocket. We can live with taxes that other people pay. It’s only the taxes we pay that suck.
It’s no crime to make money. It’s no crime to save and invest, and if all goes well, accumulate some degree of wealth. Sure, we indulge our socialist fantasies when we argue that “they can afford it,” but what we really mean is “better them than me.” So let’s all admit that what we really want is as free a ride as we can get, because we hate paying taxes.
Of course, the alternative is to elect people who don’t spend as much, or allocate funds toward things that really matter and stop dropping million dollar bombs, regardless of their positions on other issues. Of course, nobody would ever agree on what are worthy expenses. We all want the government to give us what we want, whether that includes health care for the poor or the mother of all bombs.
I’ve got to give Mike credit, not only for finding this but for being bold enough to post it.
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I am tired of beer. Do I have to keep paying $14 if I just drink water?
Actually, you don’t have to drink anything. But you still have to pay.
Actually, I think the estate tax is a relatively well-conceived tax, because it minimizes the disruptive effects of taxation. All taxes encourage people to substitute leisure (untaxed) for labor (taxed), but it seems to me that the estate tax does this less than most other taxes.
The primary victims of the estate tax, the heirs, cannot (directly) affect the actions of the party who makes the money that’s taxed.
Now, the ability to pass money on to children is certainly a motivator for many people. However, few people like thinking about their own deaths, especially while young. The people who are most “aware” of the estate tax are generally elderly and retired. Thus, they substitute all their labor for leisure anyway; the estate tax has no effect.
Further, the ability of people to pass on their wealth to their children, while a strong motivator to be productive, is not always a good thing for society. I would say, ceteris paribus, that income equality is good. The estate tax increases income mobility (by reducing the comparative advantage of children of the wealthy). On top of that, it encourages people to invest their money in children while they’re alive, rather than leaving it as cash. This often means spending money to educate them, increasing the stock of human capital.
There are problems. On some level, taxes that people are unaware of are inherently bad, because they reduce the apparent cost of government and encourage spending. Also, if the inheritance is not fungible, it may be difficult to pay in a practical way. But, on balance, I think an estate tax is a better tax than average.
While use of the taxing power as social incentive is one theory, it has its limits in providing legitimacy for methods of taxation. The greatest benefit of the estate tax is its political palatability, since relatively few are affected. But the power to tax is not made legitimate as a means of social engineering, but because it raises revenue. The social engineering is a side benefit, not a primary purpose. As a revenue raiser, it conceptual unjustifiable because it taxes already taxed income.
Also, be careful making assumptions about heirs, etc. Most people are affected by the estate tax because of ongoing businesses passed down in a family (where all work for the family business/farm/etc.), and the tax may well undermine the viability of the business. There are a lot more small business owners than billionaires.
Tax power is indeed not made legitimate for it’s social engineering goals. However, given the need for a certain amount of taxation, the taxes with the fewest negative effects and the largest positive effects should be used. My primary arguement is not that the estate tax has positive social effects, but it has fewer of the negative effects common to all taxes.
The legitimacy arguement is strange to me. There is a economic transaction; the government sees fit to tax it. Almost all economic transactions take place with money that has already been taxed, but many are still taxed. It doesn’t hit people unfairly (except it hits the wealthy harder, but that is OK for the same reasons a progressive income tax is OK). There’s potentially a capital gains tax hit, too, but then the heirs get the assets with a higher tax basis.
As I mentioned, non-fungible inhertances are a problem, though I’m not convinced that they are as large a problem as portrayed. Under the current system, the first $1M or so is not taxed. Further significant deductions are possible if the transfer is gradual, via the limits before the gift tax kicks in. Businesses with that much assets, but without the capital or credit to pay the tax, are marginal already. Handling the transition properly requires some knowledge of the laws involved, but I don’t feel bad about requiring business owners (even small business owners) to show more finacial knowledge than the average person. Especially given that expertise is required only for a rare and generally foreseeable event.
This is going to be hard to explain if it’s not already part of your frame of reference, but the first $1 Million exclusion really doesn’t cover much in the transfer of a business. There’s a whole world of impact out there that you’re not seeing, but let’s save this discussion for another time since this is now the tail wagging the dog.
Gregory is unintentionally making a point that is objectionable about income, estate, capital gains and other taxes.
The governments’ tentacles are in everyone’s pockets [except for the poor who should just get a break, from the productive], and the rulemaking is based on subjective judgments about people’s activities that are none of the government’s business and is therefore arbitrary. And it forces the productive to organize their affairs to comply with the codes as they are written today, in their complexity, and to the extent it is possible to predict, may be rewritten, someday. The tendency of governments and their taxing powers over time is to get bigger, and more complex, to no useful purpose. Except for the bureaucrats, who, from another direction and figuratively speaking, are working on making jaywalking a felony, aren’t they?
A colossal waste of our time, and money.
I think he’s just messing with the incentive theory of taxation, without realizing that this is real money coming from real people who actually do real work to earn the money to pay it.
I have long been a single tax fan, primarily because the current method of collecting 742 different taxes, most of them hidden, prevents us from understanding and appreciating just how much of our money the government is pissing away, and what we are (not) getting for it. Send us all one big bill and then let people decide how wonderful their government is doing. Until it smacks people across the face, they just never seem to get it.
Per your request, I’ll stop discussing the estate tax.
I don’t think the current tax system really hides the cost of (federal) government, much. A vast majority (~80%) of the income comes from individual income and payroll taxes. A 20% jump in the tax bill isn’t going to shock many people into fiscal conservatism. The states’ habit of splitting the bill between income and sales might.
As for “[not] realizing that this is real money coming from real people”, taxes have to come from somewhere, as you mention. Somebody’s money has to get taken. I welcome the day that the American public is ready to reform social security, ditch the military-industrial complex, etc. But as long as the government continues to spend money, we may as well collect it in the most efficient way possible.
Milton Friedman, otherwise a very sensible economist regretted a moment of weakness while consulting for the feds during WWII, finding the solution to collecting from the broke, and otherwise recalitrant. Payroll deduction! Make employers tax agents. It was supposed to be temporary but what a dream that was. If most people had to write and sign checks, monthly or quarterly, and see it fly away, instead of never seeing it in the first place, we might have a better country. Instead of this micromanagement for, well, because the governments can. What was essentially a single or flat tax got ratched up, and sideways.
For social and financial [politician’s friends, primarily] incentives that no mass, or subset, of people can uniformily agree are worthwhile. Incentives always produce unintended consequences. It gets more micro all the time.