“The only things certain are death and taxes”. Just what are taxes and why are they present everywhere? As I wrote about in 2014, money is an abstraction of resources and energy. At the very foundation, the basis is about the things that you directly interact with — eat, drink, feel comfort, enjoy, and so forth. The larger the community, the more specialization that occurs and the more abstract money becomes.
So, what does all of this have to do with taxes? Taxes are allocations of resources/money for communal use. The rest of the resources/money is for personal use. ALL of it comes from the same pool of resources/money.
What is the Government Sector and How do Taxes Relate to it?
Taxes are collected by, or for, sections of the community that are collectively called “government”. We often think of government as those people “in charge” — whether they were put there by democratic vote or as an act of a group of oligarchs or as part of a drafted group of people or a group that overwhelmed and took over from the previous government. But government is divided up more for purpose than of particular titles or functions. Government is composed of decision makers but it is also composed of the manifold people who carry out those decisions and make the system work (sometimes called the “bureaucracy”). A data entry person in a municipal water works is part of government. If it is a separate, for-profit, business then it is not government. The delineation is that the government portion is paid for by the community as a whole and gives service to the community as a whole.
Benefits for Citizens from Taxes
This is often an area of irritation for taxpayers. “Why should I have to pay school taxes when I don’t have a child in school?” “Why should I pay taxes to the federal government when they are spending money on this, or that, “frivolous” item?” “I don’t have a car, why do I have to pay for taxes that take care of the roads?” “I don’t go out of my house, why should I pay for National Parks?” “I am proud of being illiterate and ignorant, why should I pay for libraries or schools?”
The answer to such questions is a matter of direct and indirect use. You may not drive on the roads but every person who delivers something to you DOES use them. You may not go to the National Parks but you DO benefit from protections of the environment with better breathing and a general ecosystem. You may not have a child in school but I am certain that you make use of services from people (likely including yourself) who DID move through the educational system. Indirect benefits of taxes are easily forgotten when one is trying to balance the budget for the month. Every rich person is totally dependent on hundreds or thousands of other people who are making use of services that are taxpayer-funded — and so are the rich people.
When a person is choosing (if they have that opportunity) where to live, cost-of-living is an important factor. This includes taxes. You will probably save money in moving to a low tax area. But lower taxes are also likely to lead to poorer infrastructure and services. Poorer roads, poorer school systems, poorer fire and police departments, and so forth. Although poorer does mean less well-funded, many of these departments may still do very well because of the dedication of the people who work there — funding is not everything — but funding does matter.
How are Taxes Allocated?
There are many ways that taxes may be levied. In the United States, ONLY Congress can create taxes. Neither the Executive nor the Judiciary branches can create taxes although the Judiciary can determine whether the Constitution allows a particular type of tax to be levied upon the citizenry. Prior to the Sixteenth Amendment in 1913, all taxes levied by the federal government had to be allocated based upon a state’s population. This made any type of income tax upon an individual very complicated as it would mean a double index of tax responsibility — first allocating based upon the state population, then some individual allocation based on another formula. After the Sixteenth Amendment, the federal government was freed from the need to tax only upon basis of a state’s population — though the ability to tax continued to reside with Congress.
In the US, income taxes are based on income divisions, with higher income brackets having to pay a higher percentage of income in taxes. Alas, this is made very complex with loopholes, deductions, special credits and other methods of reducing or eliminating taxes. Since tax structures, and laws, are primarily created by the wealthy for the wealthy most of those loopholes and such primarily benefit the wealthy.
There are many other types of taxes. Tariffs, which can be created and managed ONLY by Congress are a type of sales tax paid by the consumer directly or indirectly via the price charged by the manufacturer/distributor. Sales taxes are based on the value of an article purchased. Property taxes are according to the current value of a piece of property. Payroll taxes are charged against specific types of benefits associated with employees. Capital gains taxes, broken into short-term and long-term investment, are levied against any profits (or losses) associated with buying and selling stocks or other intangible value. The last major category is associated with “wealth transfer” — moving items of value from one person to another such as a parent transferring wealth to a child upon their death.
The Uses of Taxes
A tax is money accumulated from the community as a whole which benefits the community as a whole. It should be that, the more taxes that are given to the government, the more the government does for the taxed citizenry. It is often true — but not always because it is always possible that the money will go to only certain segments of the population. In a representative democracy, it is up to us to make sure that our candidates really represent our wishes — that they truly represent us.
Types of Taxes
Tax structures can be progressive, regressive, or flat. They can also be uneven based upon special exceptions so that, even if a tax starts off as a certain category, for certain companies or individuals it can effectively be something different.
A progressive tax has the underlying motivation of having those who are more able to pay taxes — do such. As mentioned before in previous newsletters, there is no direct relationship between income and the earning of income. Much depends on the tax laws and other work laws. We may SAY that a great teacher is the most important job in society — but that is NOT reflected in wages, requirements, or expressed appreciation. On the other hand, a CEO may be a great figurehead of a company and may (or may not) be involved in corporate leadership, product direction, and other things that lend support to the earnings, and value, of a company — but they do not produce that value themselves.
A progressive tax tries to encourage a desire to do one’s “best” within a capitalist society while spreading the recompense among all the workers who generate the corporate value and wealth. The head of a company making $400 million dollars might be taxed $200 million (leaving “only” $200 million) and a worker producing value make $40,000 dollars and be taxed $200. This is determined by a combination of tax laws, wage laws, and unions (which are designed to represent the people creating the value).
A regressive tax works in the opposite direction. That $400 million dollar position might pay an effective tax (because of loopholes, deductions, and credits) of only $500 while the $40,000 dollar/year worker pays $10,000. Normally, such regressive taxes are not done via income taxes (much too obvious) but via loopholes, credits, and special deviations from common tax law.
Another method of imposing regressive taxes is by taxing things that poorer people use more of, as a percentage of expenditures, than richer people. For example, tariffs are often a regressive tax because a $100 tariff on a television set is so much larger of an amount for a poorer person than it would be for a richer person.
Flat taxes always come up in conversations about tax system improvements. It has the huge advantage of being simple. But it only works without loopholes or other special aspects of the law. The rich pay more because they have more — they don’t like the removal of the loopholes. However, a person earning just enough to live on will be hurt considerably by a fixed tax whereas a rich person getting excessive income may not even notice it.
Tax Fairness
Different formulas can work and they can approach fairness but loopholes, credits, and special situations can, and will, sink any reform. When we are paying taxes and are not receiving the services and value that we expect, it is time to find new representatives.
We pay taxes as a whole to receive benefits as a whole. When we pay higher taxes, we deserve higher benefits. But if we prefer lower taxes, we should expect lower (perhaps much lower) benefits.
