On 2015 July 7, I published Thinking through a Fair Tax, in which I addressed my changing thoughts about workable tax structures with a simple economic model through which I could explore (and explain) an income tax, based on progressive rates against flat rates.
I built it because I’ve been a proponent (albeit a silent one) of a luxury sales tax: a tax that applies only to non-essential goods. My thought was that this tax would place the burden on those most able to bear it. There’s also been a “Fair Tax” based on a similar idea, except with taxes placed on all sales (with a “prebate” to offset essentials.)
BTW, luxury sales taxes don’t work, which is something I pointed out in my other post on the subject. Tracy Snell pointed out “A lesson from the yacht tax,” which demonstrated a core problem with taxes based on voluntary consumption: taxation changes behavior, such that the desired results are minimized, often with disastrous secondary results (in this case, the destruction of US-based yacht-building industry.)
I’m slowly becoming more inured to the idea of a progressive income tax, including a tax on capital gains, even though such a tax still bothers me. I just don’t see how the math – even on a simple level – works out for a sustainable tax structure otherwise.
My model was really, really weak. When I wrote about it, I pointed out one of the most obvious flaws: there are only six people, representing six incomes. Realistically, you’d have a lot of people in the lower income brackets, with a few people in the highest income brackets, which would affect the tax revenues and burden quite a bit; losing $1000 from a single low-income earner is a mild hit, but losing $1000 from each of a hundred low-income earners is quite a bit more severe.
However, that leads us to the biggest flaw in the model: the demand for taxes in the first place.
The goal of a tax system should not be “to gather as much money as can be had in the most pleasant way possible, but mostly to gather as much money as can be had.”
The goal of a tax system should be to gather funds in a way such that it’s able to fund necessary services in such a way that is punitive as little as possible. More on this as I progress.
My model assumed a constant tax basis need for six people, a number I pulled from my hat: $105,000 per year. (The actual rationale? I sort of guessed at what it would cost to hire a teacher, a fireman, a policeman, plus some supplies for them.)
The actual tax burden would probably be higher (there’s a feasible minimum: how many policemen are needed? How about firemen? Schools? More than one teacher?) but with six people, it’s difficult to model.
Here’s where my politics step in.
The goal should be for government to aspire to keep that tax burden as low as it can be, while not losing essential services.
That means there’s a question of what “essential services” means, of course; to a leftist, there are (probably) a lot more “essential services” than there would be to a Libertarian or to someone on the right, assuming someone’s actually on the right and not just claiming it.
What I’ve seen is that many people say they’re on the “right” of the political spectrum, only to mean that their definitions of essential services that the government provides are different rather than lesser.
To me, being on the political left implies a trust in a larger, more powerful government, implying trust in the government. For this to work, government has to not only mean well, but know well. The government ends up taking the place of a father, so to speak, and Father knows best.
Being on the right, on the other hand, implies self-sufficiency; the government represents corporate action (with “corporate” meaning “as a body” rather than “… of a corporation.”)
Maybe this is where some people on the left think people on the right are Fascists – because they’re idiots and can’t figure out that corporate action isn’t the same as action on behalf of a corporation; meanwhile, asserting that the government knows best for all seems actually more Fascist to me than the people who are accused of being Fascist in the first place! But all of this sounds unkind. Retracted.
People in the American Right seem to say “we want a smaller government” while still creating a giant government, just under the guise of privatization and a larger military/industrial complex. Private prisons aren’t the same as “smaller government” — they’re just managed differently, with imprisonment now being a profit center for someone; military expenditures are being used to prop up industrial concerns rather than actually supporting our troops. This is just as leftist as, well, the leftists are – just in different ways.
When I look at my politics, I end up being somewhat on the Left, which is surprising – but not very, because the common tests probably have to rely on my assumptions about what services I think should be necessarily provided by the government. I’m probably not reading “necessary services” as intended the authors of the test.
When I say necessary services, I mean services that are necessary for ethical and safe living in a world where not everyone subscribes to the same definitions of “ethical” and “safe.”
That means police departments, and fire departments. It also means services that provide education for our children as a whole, even though my wife and I homeschool our children. (I don’t think every family can or should homeschool, but it was the best choice we could make for our children.)
It means that I also accept the existence of a safety net. I actually don’t have a giant problem with the Affordable Care Act, except that it was presented dishonestly – which in itself justifies the people who are against it. It’s not the expense of the insurance; it’s that we were lied to in order to get our approval for it. (Well, it’s also the expense of the insurance, but mostly it’s the lies.)
There are a lot of aspects of the ACA that I approve of wholeheartedly. I have a friend who was unable to get insurance before the ACA; now he can, even though it’s amazingly expensive. But at least he can get it! On the other hand, health insurance remains exorbitantly expensive, which I thought was supposed to be what the ACA addressed. Oh, they lied about that so people wouldn’t be up in arms?…
I also don’t have a problem with welfare! I don’t like it – I think it’s done poorly in many ways. But the idea of a welfare system doesn’t bother me in and of itself. I think we do have a personal responsibility for the weakest among us, and the way we can maximize effort around that responsibility can be expressed through a system like welfare. Ideally, nobody would need it – but we don’t live in an ideal world.
The problem with my economic model is that it doesn’t address what services are necessary, or what criteria one should use for the services. It just assumes a conveniently constant demand, and works with an income tax model to meet that demand.
There lies the flaw in my economic model. It doesn’t address that question at all; it just assumes a constant demand, and works with an income tax model to fulfill that demand.
If we could address demands of the government, and bring them into line with what the community actually needs and is willing to pay for within reason, then we have a lot more flexibility with tax structure. Who knows? Maybe a luxury tax (or the suggested “fair tax,” which is a mostly-consistent sales tax) would work quite well, and the progressive tax wouldn’t be necessary at all.
I doubt it, though, because any sales tax would require that austerity not be a feature of the well-heeled, and part of how one becomes well-heeled is austerity in the first place.
There’s been a lot of discussion around taxation lately, with some advocating a flat (and fair) tax, and others saying we need to eat the rich, so to speak. I am one of those who used to advocate for a luxury tax – a flat tax based on sales of luxury items – but thinking through the psychology of such a tax has made me question that advocacy.
On Facebook, then, a discussion around a flat tax rose, with me gently advocating a progressive tax rate, using the phrase “we are our brothers’ keepers, in a way,” and the response to that got me thinking about the actual numbers involved in a progressive tax: could I actually model it?
TL;DR: no, I couldn’t. The model I came up with shows some interesting data, but it doesn’t factor in different types of taxes or tax jurisdictions, nor does it accurately model (in any way) population demographics. I still thought it was interesting – as shown by the next 1300+ words – but is it “accurate in any way?” No. Economists wouldn’t even find it funny; they’d find it sad.
I actually worked up a spreadsheet, with which I could put in some numbers to try to work out a balance between supply and demand from a taxation basis.
I created six people, starting at a 10k/year income, doubling for each person (so “John” makes $10k/year, and “Donald” makes $320k/year.) I assumed a flat tax rate of 10% on each person. I also assumed a representative expenditure rate (based somewhat on where I live) which works out to a single-bedroom apartment outside the city center, with groceries, utilities, and phone, which total up to an unrealistic $9336. No car, and no insurance costs were factored in.
If you can survive where I live on that budget, that’s FANTASTIC. Most people I know who work in the food industry, etc., have multiple jobs and roommates.
I’m assuming, for these six people, an average of the incomes for infrastructure – in other words, I’m assuming I need $105k a year for fire, road maintenance, schools, police, the works. I don’t think this is accurate; I think the actual need is much higher, but we’re working with a tiny sample.
At a flat 10% rate, our 10K earner – Joe – is in awesome shape, losing $336 a year before he purchases anything. He’s got $10 a day allocated for food and clothing. He does have a phone, though, so there’s that, and I’m hoping he has a pawn shop television or something, and God forbid that he drink or do drugs. He can’t afford them – or anything – unless he has an illegal source of income. A purchase of a McDonald’s meal is splurging for him. With a negative net income, anything that happens to affect his income is catastrophic: the flu, a work-related accident, a death in the family where he has to miss work to go to a funeral, or having to get a bus ticket to ride to work.
Betty, our $20K earner, is in much better shape, as long as she has exactly the same expenses as John does; she’s making $8664 a year. She has something of a safety net; she might own a TV, maybe internet along with her phone, all of which add up – she can afford public transportation, maybe even a car. Her car might cost her $150 a month plus a let’s-be-kind $80 a month for insurance on it – so that’s an easy $2760 a year out of her $8664 disposable income for the year. She can get her McDonald’s meal if she wants it – and even can save enough for a decent dinner date, or some clothes. (Remember, John is on $10 a day for everything, including clothes and food.)
Franklin, our lucky $40k earner, is sitting pretty; he has $26664 as a base disposable income after taxes, so he could have a catastrophic injury after a year of careful saving and live at least as well as Betty. (Even after a catastrophic injury, he’d be far ahead of poor Joe.) Realistically, he’s going to have a much nicer apartment, perhaps a newer car. He can afford to eat out every day, should he so choose, although he’d be well-advised to skip the steakhouse, if only for economy’s sake.
Let’s skip over Muffy and Stewart, who make $80K and $160K respectively (with $62664 and $134664 liquid assets after they have a Joe-level apartment, which surely wouldn’t be the case in real life, but they could easily rent houses for $2K a month and still be living much better than even Betty or Franklin.)
Let’s look at Donald, who makes $320K a year. His tax base is $32000, and he therefore has a net income of $288k; if he lives as austerely as Joe has to, he’s got $278664 a year to spend as he likes. “New car, caviar, four star daydream,” indeed. (A football team, sadly, is still going to be beyond his means.)
For Donald, eating at the Steak House every night would be ill-advised – but mostly because of his waistline and cholesterol, not because of his expenses. What’s more, Donald is not even particularly upper-class yet.
Here’s the thing: at a 10% tax rate, with Joe losing money every month, the tax base is only $63k – our fine six here are going to live very different lives (with Joe not even making it hand-to-mouth, and realistically, Betty’s not doing that well either), with Muffy, Stewart, and Donald all being able to afford quite comfortable lives, with no worries about what’s going to happen if they need a new pair of shoes. (Joe gets to … not eat for a couple of days, or purchase very carefully at the second-hand store.)
Our tiny culture here is losing money every year, but everyone is paying a “fair share” based on their income.
If we change the tax rate slightly – to be more progressive – things change dramatically. Going to a 20% tax rate for everything over $100K/year (which includes Muffy and Donald) means that Joe still has nothing. Muffy and Donald now pay $32k and $64k in taxes – double what they would have under the flat 10% rate – which leaves poor Muffy with only $118664 a year to dispose of, and Donald is going to have to get by with $246664.
However, the tax base is now fixed: we now have $111k in taxes for the year.
But Joe is still screwed over. If we lower his taxes to 0% – he’s below the poverty line in a big way, after all – we lose his $1k contribution to the tax base (lowering it to $110k/year) but the big win here is that Joe is finally looking at having $664 a year as disposable income! Don’t spend that $55 each month in one place, my friend. In fact, you might want to save it, as it’s almost a month’s expenses.
Realistically, we’d need to change this calculation quite a bit; there are a lot of Joes in the real world, and that all adds up to the tax base need. The question of fair taxation really centers around what’s fair to all of those Joes and what’s fair to Donald and Muffy.
This is where my model broke down drastically; it has one Joe, not one hundred of them. I could change that, I guess, but I don’t think it’s necessary to do that to see the dynamic at work.
A fair tax doesn’t actually legitimately affect Muffy’s or Donald’s lifestyles; they’re still looking at fairly large disposable income levels. It does affect them, of course; it might mean the difference between a new car and two new cars.
A “fair tax” (meaning a “fairly non-progressive income tax” in this context) destroys all of the Joes out there, who don’t necessarily have the upward mobility that Franklin or Stewart have. When you’re living on the edge of bankruptcy (or past it, as Joe would be) there is no upward mobility; education is beyond reach, and the overall sense of desperation (in a Maslovian sense) is crippling.
An unfair tax – or a progressive income tax, if you like – addresses the tax base’s need, while freeing Joe from some of his burden. It can mean a difference to the lifestyles of the more financially enabled, but I don’t think it actually converts the upper crust to anything resembling the middle class; they’re still upper-class, just without quite as much, and realistically, I don’t think they’d actually miss the additional funds, with the result being that people like Joe can actually survive. (Who has ever really had to struggle with wondering which of the Maseratis to take to the golf course? If this is a real struggle for you, then you have an awesome life, and no idea of the desperation out there.)
I’m not willing to dress up the terms, personally; the right term is, I think, a “progressive” income tax (because it “progresses” higher as the income levels grow.) I think it almost has to be an income tax, for reasons I’ll explain better when I reach the discussion of the actual Fair Tax proposal.
I think the progressive income tax is an unfair tax structure, and that’s what I call it.
However, I don’t think being “unfair” matters; if Joe has value, then Donald and Muffy actually do have some responsibility in a human sense (not a legal sense) to share in his struggle, if only obliquely (remember, Donald could pay Joe’s tax burden for a year and not even notice, in a real sense. If he has to pay for two thousand Joes, on the other hand…)
Joe is actually responsible for himself, no matter where he started from, of course; given drive and dedication, he can improve his personal situation. But that is an individual motivation; we’re still going to need janitors, restaurant line workers, and other people whose jobs simply don’t pay enough to move them well past Joe’s circumstances (which is the basis for the “higher minimum wage” efforts going on – they’re trying to make it where people like Joe are forcibly given higher wages.)
The difference is, though, that easing the burden from a taxation standpoint is far, far, far easier and more fair for Donald than it is for an army of Joes, each one of which would have to face that loss per month. For Donald, it’s the loss of some optional expenditures – that third car, perhaps. For Joe, it’s life and death if he gets ill.
To me, I’m far more willing to suggest that Donald not have that car. A fair income tax, from a humane standpoint, is not an even tax; it’s a progressive income tax, even at its flattest.
There is, of course, a “fair tax” initiative, that is based around an idea that I like quite a bit: it’s a pure sales tax, with a “prebate” that offsets the cost of the tax, especially for lower incomes.
As I understand it, the idea is that what you buy determines your actual taxes. There is no income tax. If you buy only food and clothing below a certain amount, the prebate would offset the taxes associated with those items, such that your actual tax rate would be 0%. If, on the other hand, you bought large screen TVs, a yacht, a new car, and a new Mac Pro, you’d exceed what the prebate would cover, and your tax rate would be close to 23% (the proposed tax rate is 23%, but the prebate applies to everyone, so you’d never quite reach 23%.)
If you’re thrifty – if you’re Donald from my progressive model, but live as if you’re on Joe’s means – your tax rate might actually be 0%, because you’re only taxed on what you spend, not what you make.
This is, in fact, what I consider to be a fair tax, and the libertarian in me loves it (not least because I try not to buy stuff I don’t need.)
But it has a severe weakness; the wisdom of its citizens.
The fair tax relies on people, especially the well-heeled, to be big spenders. It means that Joe is desperate for Donald to buy a yacht if he can, because otherwise the tax revenues that the region needs aren’t going to be available. It ties the supply of tax dollars strictly to the wisdom and austerity of the citizenry; any kind of local recession would have catastrophic effects on the tax base, because the revenues needed to keep the local services running during the recession would dry up further because of the recession. (In a local recession, people would save their money, which would dry up the fair tax revenues, which would make the local recession more powerful, which would cause people to save even more money, which would…)
From a personal, selfish perspective, I love the idea of the fair tax, because I have no problem not spending what money I have (or so I think). However, from the perspective of the society in which I live, a fair tax means that I, and people like me, could easily become predators on our fellow taxpayers, because we’d be hoping they’d be out buying boats, cars, televisions, and other such things to make up for the taxes that we’d be trying hard not to offer.
That’s human nature, and I think that a tax code that relies on greed to succeed is, while fair, not good enough to be workable.
Weasel words are great. And yes, I know, I left out weasel words in making that statement.
Weasel words are words like “some” and “may.” Most clickbait authors – i.e., people on Facebook – are allergic to them, so you get fine headlines like “Conservatives hate the gays!” instead of the less-click-baitish and far-more-accurate “Some conservatives hate gays.”
Yet weasel words – sometimes seen as poor writing – aren’t poor writing at all. (See?) Weasel words allow you to describe things without being absolute about the description. They also allow you to temper a statement – which might even lead to more temperate statements, so instead of “Conservatives hate gays!” you might write “Some conservatives hate gays!” and then the ironically more-inclusive “Some people hate gays.”
Weasel words also create an allowance for error. Saying “Conservatives hate gays” means you’re liable to be countered by some conservative pointing out that he or she demonstratively does not hate homosexuals, which means your entire weasel-free claim is invalidated, since it makes no allowance for exceptions.
“Ah, but exceptions are implied,” you might be saying – but no, they’re not. Not on the internet. If you don’t provide room for the exceptions, the internet – which amplifies everything you write, since there’s nothing to temper a statement like body language or tone – makes it seem that there are no exceptions.
Nearly everyone is doggedly literal on the Internet. Acting like your audience is made entirely of people who are not doggedly literal is ill-advised.
So: Befriend the weasel words, folks. Really. They’ll help create actual dialogue, by allowing nuance.
(Reposted here from a Facebook post of mine, of all things, to preserve it.)