A Brief History of Taxation and Solutions Moving Forward
What could possibly be less sexy than the tax code? For starters, it’s long. Most people assume that congress, the Federal Reserve, collage professors, and others in those circles understand the tax code, but in fact, the code is so extensive that no one person actually understands its inner workings. This lack of understanding leads to repetitive talking points, and leaves the public ready to throw their hands up in the air.
Additionally, the code is written in language where even the professionals struggle to understand the nuances. Congressional hearings, mainly populated by lawyers, spend countless hours asking questions about proposed tax laws attempting to understand their implications. And at the end of all the questioning, nobody has managed to change anybody’s mind. This is because the arguments are ideological. The amount of variables in the economy make politicians’ assertions un-scientific at best.
Adding to the complication is that there is little agreement about the cause and effect relationship of the laws that are already in place. Conservative and liberal scholars, Republican and Democratic politicians, and news commentators on both sides of the aisle, present different realities about the effects of tax laws. Neither side has a monopoly on intelligence, so how can the public be expected to ferret out which group of smart people are correct? It’s no surprise that most people stop digging for answers and instead simply pick a side, or worse, stop paying attention all together.
To unpack this problem, we can start by agreeing on how we got here in the first place. There is nothing inherently partisan about the fundamentals of creating a tax code, which may allow us to find some common ground. There isn’t much debate on the origins of taxation, and other than utopianists, most people understand the current and historical need for taxation.
Stability has always been the goal for any group of people. For Earth’s original nations, the threat of outside invaders slaughtering their citizens and pillaging their goods was the most controllable threat to stability. Things like floods, disease, and famine were also threats, but largely without solutions. Government and taxation were developed mainly as a way to protect people from outside threats through the creation of the military, and this primary cause remains today.
However, the other threats to stability remained, and famine became the next challenge that taxation attempted to fix. Famously from the pseudo-historical story of Jacob in the Old Testament, the King of Egypt learns to harvest extra crops and maintain food reserves so that when famine hits, the nation is not toppled. Later, the Kings of Europe would tax their people extensively, not solely to enrich themselves as often believed, but also in an attempt to manage their military and food reserves. The kings knew that a starving population would turn on their own leaders. Although their taxation methods likely held their governments together longer that they would have otherwise, taxation itself become a new threat to stability.
The over-taxation of certain groups considered unnecessary to maintain stability, and tax “breaks” for groups needed by the government to maintain order (often religious leadership) led to bloody civil clashes and the toppling of more than one monarchy. As taxation became a matter of life and death for large swaths of people, it became one of the most important political issues of all time, and was even a key factor in America’s revolution. When industrialization relatively minimized starvation over the course of a few generations in the western world, the anti-tax sentiment weakened among the population, but still maintains a strong under-current in many political factions to this day.
In democratic governments, taxation has now expanded in an effort to create a wide variety of stabilizing factors. The belief that an educated population is more stable gave rise to taxation for nationalized education. Regulating immigration, another action considered to have a stabilizing effect, requires funding through taxation. Police forces, unemployment benefits, and healthcare are other examples of items that people believe have stabilizing effects on a nation, and of course, all require funding.
Finally, one of the more recent incarnations of taxation (although not totally new) are taxes designed to control the behavior of citizens. Taxing behaviors that have undesirable effects, like smoking cigarettes, is an attempt to create stabilization through “social engineering” taxation. Giving tax breaks to things like marriage is also supposed to have a stabilizing effect. These social engineering tax laws are often the most contentious because their cause and effect relationships tends to be ambiguous. Some suggest that giving a tax break to people who invest their money encourages wealthy people to invest more money and therefore create more opportunities for everyone. The opposition argues that wealthy people don’t need to be encouraged to invest, and it only serves to create more wealth disparity. These social engineering taxes and their lack of provable assertions have brought us to today’s impasse.
Before moving on to solutions, one last aspect of the tax code should be understood. Every tax law is a deal struck by the legislature. Because of competing interests, clean tax laws are rare, and even if they are, some people end up winners and others losers. True, sometimes the “losers” are a segment of the wealthy who don’t really feel the pain, but it doesn’t necessarily make it seem “fair” in their eyes. In other cases, the “losers” might be smokers who never suffer disease from their habit, but have to pay increased taxes anyway. Even when the common good is served, individuals still lose out. There is a saying in politics which asserts that the public does not want to see “how the sausage is made,” because it is frightful. But once these laws become part of the massive code, the public is stuck with these “sausages” long after the legislators who created them are dead and gone. The complexity of the code and the countless backroom deals that created it makes it all but impossible to unwind, and tinkering around the edges only helps special interests.
Solutions
Several tax models have been presented in recent years. With names like the “flat” tax or the “fair” tax, they aim to eliminate the imbalances created by today’s current mess, but while their names imply simplicity, they actually maintain several of the most partisan “social engineering” tax laws. These proposals, along with the VAT tax, primarily focus on leveling the tax playing field, but still gives special breaks to some businesses and the investing class based on the belief that their wealth will fuel economic growth. Not only are these claims difficult to prove, allowing these special breaks for targeted groups undermines the sense of balance needed to create trust and stability.
Perhaps the biggest barrier to creating a balanced tax code is not the lack of a rational plan, but is politics itself. Politicians like having the power to give advantages to their constituents and campaign contributors. A stable, balanced code does not allow politicians to deliver new laws that benefit specific populations, which lessons congressional power. Politicians, almost invariably, vote to conserve or increase their control, not to lesson it, making it difficult for a stable code to gain traction. This is why new versions of conservative and liberal tax codes only seek to eliminate the benefits afforded to the opposition and maintain the advantages to their own sides.
Another problem, separate from the specifics regarding a reformed tax code, is that individual citizens do not know if they are benefiting from the current inequities or not. As already mentioned, the code is so complex that no one person actually understands the ramifications. This means that if presented with the opportunity to support a truly fair code, most people would worry that they might lose out. Keeping the status quo can become appealing when staring down change without the ability to understand the surrounding facts.
Setting aside those who would let fear make them cling to the status quo, there are some common agreements, which can serve as the bases of a reformed tax code. Here are the things that the vast majority agrees upon;
1. The code should have some progressive form. Almost nobody supports requiring all citizens to contribute $10K annually, regardless of their income. How the progressive structure should be formed is the main subject of debate.
2. The code should require a contribution from all citizens. A majority of spending can directly support the middle and lower classes, but creating tax loopholes for these segments of the population leads to a corruption of the system. When loopholes can exist, those in power will take advantage and create even greater loopholes that serve their own interests. Tax breaks are often considered “spending” in political circles, which is a semantic trick. Actual congressional spending provides specific services and opportunities.
3. The tax code should be neutral on controlling the behavior of citizens. Attempts to control people by taking away their money or giving them extra money creates distortions & inequities.
4. The tax code should allow for a balanced budget and a reasonable amount of leveraged debt.
There is a basic method of taxation that meets all of these standards. If all other taxes were removed, and instead each transaction was taxed at the same rate, regardless of what the transaction was, all four of these areas of agreement could be met. Conservatives will complain that this affects the “investing class” and liberals will complain that this affects the poor. Both sides seem to ignore the fact that if the investing class and the poor are not taxed, the only people left to tax are the middle class! The initial reaction to maintain the status quo kicks in for some people at this point, but further explanation may help. Here is how a transaction tax meets the four agreements already established.
1. This tax is progressive. Not only do wealthy people spend more money, so their ultimate contributions are higher, this eliminates the caps currently set on taxation of their wealth. Corporations would be unable to hide money in offshore accounts. Additionally, wealthier Americans would be taxed on their investment transactions, many of which they currently avoid. The fact that conservatives may argue against taxing investment and liberals argue that a consistent percentage is not progressive enough, establishes that this method actually threads the needle of progressive taxation.
2. This tax applies to everyone. The poor, who do not currently pay income tax, already pay a variety of other taxes. This tax would replace the other taxes they already pay. Universal contribution prevents certain segments of the population from “gaming the system” and using political power to tip the scales in their favor.
3. This tax does not attempt to control the behavior of citizens. Since every action yields the same tax result, people will make their spending and investment decisions based upon their actual beliefs and desires, rather than convoluted tax motivations.
4. The tax can create a balanced budget by basing the tax percentage on annual spending levels.
By replacing all of our current taxes with a single transaction tax, we return to the original point of taxes in the first place—creating stability. A simple tax code does not frighten people into inaction like a complex one. A simple transaction tax combats the idea that the code is slanted in one group’s direction or the other. The transaction tax creates more stability by minimizing the market distortions created by “social engineering” taxes.
Some nations already include “transaction” style taxation, but only as a part of larger tax code, which un-does some of the best parts about the method. Others have tried to propose the “transaction tax” but have coupled it with special benefits for certain groups to gain political traction. Be wary of these political attempts.
Conservatives should champion the idea in its purest form because it supports a broad tax base, and liberals should cheer the elimination of loopholes for the wealthy. The American public should embrace stopping those who make campaign contributions from also writing the tax code. Make no mistake, there are those in power who benefit from the status quo, and they know it. Those people will brace against losing their control, but the stability that will emerge helps all ships rise.