TAXES: Progressive versus Regressive versus Flat; among other matters

     “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.

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Spillover: When trickle-down meets the dam of unregulated income

     About three years ago, I wrote a blog about the "trickle-down" economic concept (Trickle Down Pyramid blog). In that blog, I talked about the difference between the advertised behavior of how the concept is supposed to behave and how it behaves in reality.

     However, at that time, I did NOT talk very much about how this split between concept and reality occurs. I will try to go into some of the aspects of how lack of regulation and proper progressive redistribution (whether via taxes or other method) makes this inevitable.

     Trickle-down seems to make sense (see the first distribution table from my earlier blog) as a concept. The idea is that you give resources (labor/money/etc.) to a set of people who can, and will, make use of it to increase productivity and the general welfare. In this process, they distribute the resources to a second "tier" of people who do the same thing by passing along to a third tier, and so forth. Thus, the resources are funnelled through the top of the pyramid and "trickle-down" to the rest of the population.

     This theory is not actually unique to capitalism. The same theory holds for many other economic philosophies. The differences lie in how the group is chosen to start the distribution and the rules of distribution. In the case of capitalism, the idea is that the people who have accumulated the most capital are the best at making use of the capital. In unregulated capitalism, these people are allowed to disperse the resources/labor/money as they see fit -- with the underlying expectation that, having previously used capital in such a manner to increase it, they are best qualified to continue to do so. Remember that money is only a symbol of resources -- so by increasing money supply they are, in theory, increasing the amount of resources (food/labor/clothing/health/etc.) I will use the world capital in the rest of this blog as a shorthand term for money/food/resources/clothing/health/etc.

     Looking at the above definition and reasoning, a number of potential problems are apparent. It is also true that, IF the person or group is competent and trying to distribute, and increase, resources that deviation from unregulated capitalism is not needed. Alas, that is very rarely the case (similar to the idea that an intelligent, benevolent, dictator can be the most effective and efficient -- but such people are very scarce and almost never succeed in continuing the system beyond the life of the original).

     The first potentially erroneous assumption is that the people who have accumulated the most capital are the best at making use of the capital. This is true only in the cases where they have demonstrated that they have these skills by starting with very little capital (perhaps only their own labor and ideas) and building it up by the proper use thereof.

     Note that, even in these cases, they are not using ONLY their own capital -- they are making use of lots of public capital (roads, energy supplies, education systems, health systems, safety systems, etc.) However, these people do demonstrate that they can make use of their own capital, in combination with public capital, to increase and accumulate. They do so with an inherited debt to the public for the contributions of the public capital.

     Can those who inherit capital have the skills? Yes -- but it is impossible to demonstrate or be certain of it. At the best, it is a different set of skills to those that are used from building up from initial levels. At the worst, it is a completely parasitic relationship -- where they are taking from the capital base and actually decreasing the distribution and use. It is "unearned" income and, arguably, undeserved. Possessing inherited capital does not indicate any ability to properly use it for the sake of the general population and should be limited as much as is possible within the system.

     The second potentially erroneous assumption is that they will make use of the capital (resources/money/labor/etc.) in a manner such that it will create MORE capital. This is the second aspect of "trickle-down". Capital has to move and be used. As in the previous blog, it cannot be held onto; it cannot be kept without circulation. Furthermore, it must be distributed to others who will ALSO be using it to create more capital. This is what creates the additional "tiers" which allow trickling to take effect.

    In summary, trickle-down runs into three specific problems. These problems are of inappropriate allocation and inheritance, retention, and lack of leveraged distribution.

     We will go into further detail as to how capital is properly distributed in another blog. However, if a group or individual is displaying a "lavish lifestyle" then it is NOT being properly distributed. As described in my blog of three years ago, the retention and personal use of excess income distorts and damages the economy.

Simplified is not necessarily better -- the tyranny of the average

There is a strong tendency in our society to try to make things "simple". I don't know whether it is because we are so time rushed or because we have such an imbalanced system of education. Sometimes having it simplified works to a specific person's benefit -- sometimes it is quite unfavorable to a specific person.

Simplification is often linked closely with statistics. As Mark Twain is quoted as saying -- "there are liars, damned liars, and statisticians". Statistics are applied math so they should be accurate -- however, the actual use of the formulas and numbers are decided by people and people make decisions based on what they want to have be true (either consciously or subconsciously).

One example of this are the figures quoted by politicians during election time. "The average income tax went down during my administration". Hmmm. Well, this statement could be "true" if the average income also went down during the time. It could be "true" if the tax rates went down (this is the interpretation the politician probably hopes you will make). It could be "true" if tax rates went down for one segment of the people (usually the high-income group) but went up slightly for other segments (and this has been happening in the U.S. for the past 12 years or so).

Three different realities -- all "supported" by the same "facts".

One area that hits hard for me is the Body Mass Index (BMI) number. The BMI is a fast, easy, "simple" method to indicate whether a person is overweight. It is reasonably accurate (+/- 5% or so) for about eight out of ten people. Who are the other 20% of the population? They are people who are particularly tall (more than 15% above average) or short (20% or more less than average) or people who have large amounts of muscle tissue -- yes, the "fit" are most at risk from inaccuracies on the BMI.

All of this would be academic if it wasn't so easy to fit these simplistic numbers into other formulas -- such as actuarial tables used by insurance companies. So, if you happen to be a body builder then be prepared to pay more from private insurance companies (on life and health) for being "too fat". If you are very short, then you can be rather overweight and still have the insurance count in your favor. If you are very tall, however, then you need to be prepared to pay more once again. Oh -- and I forgot to add -- computerized dating systems tend to like to use BMI in their calculations so expect body builders to be matched up with others of ample dimensions.

The reason the BMI is used is that it is easy and cheap -- take your weight (in kg) and divide it by your height (in meters) squared and you have a handy, dandy, all-purpose number. In order to really find out an accurate number, it is necessary to find real body fat percentage. There are formulas that measure different areas on one's body and then use those in conjunction with weight to get a number that works for 95%+ of the population. But it takes more time and more time means fewer patients seen and that means smaller profits. It is also possible to do a submersion test (where your body is submerged into a tank of water to accurately determine volume) that is the most accurate way to measure density (weight divided by volume equals density).

These are two methods where the average can hurt those who don't fit. There are many others. But do your best to understand the implications of statistical statements -- it may not mean what it seems.