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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The poor are from Earth; the born rich are from Jupiter

     Once upon a time (now over 25 years ago), John Gray wrote a book called "Men are from Mars, Women are from Venus". The primary precept was that most men have very different communication styles, history/usage of words, emotional needs, and modes of behavior from that of most women. Of course, the book was only an abridged version -- the full explanation of such is actually a multi-volume series that competes in length with, or exceeds, a set of the old Encyclopedia Britannica and goes out-of-date within weeks.
     Similar to George Washington's "cherry tree", it is highly unlikely that Marie Antoinette ever said "let them eat cake". But the concept that people might not have enough to eat was incomprehensible to her. Food had always just appeared (it was never visibly raised, purchased, transported, or prepared) for her. From the viewpoint of the poor, they felt they were being mocked and could not conceive of anyone being unaware of the pain, and work, needed for daily survival.
     Such a clash brought about the French Revolution and earnest use of the guillotine. The disjoint environments of the lowest class from the higher classes in Russia brought about the Bolshevik Revolution (followed by the Communist Revolution). In the United States, being a division of income rather than social class, it brought about the Great Depression.
     In an explicit class system (such as Britain, or India, or many other areas) each social class is clearly trained in expectation of their eventual roles. Certain language, and usage, is taught from an early age. Clothing has its clear do's and don'ts and has its own (usually unwritten -- but passed along from generation to generation) appropriateness depending on the situation. Most important, accepted behavior within the social class, as well as accepted behavior between levels of the social classes, are firmly indoctrinated. These social class behaviors and expectations are not directly associated with wealth but the lack of sufficient money can sometimes cause situations where it is difficult to properly meet the expectations of the social class.
     Movement between social class levels is very difficult. There is certainly a lot of explicit exclusion ("you cannot interact with them") but much of it is a severe discomfort which results from not having been raised from birth into the sub-societal expectations. Always a "fish out of water" and never fully accepted.
     In the case of income classes, movement is possible -- although presently becoming more and more difficult. Once again, however, if a person has never been an active part of an income class, it is a different world for them. We have heard millionaire politicians make statements very parallel to the mythical "let them eat cake" (in particular, not knowing how much a gallon of milk costs, the cost of rent in a local city, or how living costs are paid).
     If you have never been involuntarily hungry and have never worried about whether there will be food to eat then it is not a concept that is easily understood. If health care has been always available and never questioned then the idea of others not having health care is not understood. In even more severe form, if one has never even wondered how they have food, clothing, vacations, houses, and so forth then the innate assumption is that is true for everyone. Not only is it difficult them to understand -- but many fall back into the false assumption that "it must be their fault".
     Note that people who HAVE moved between income classes ("rags to riches" or "lost everything") can have a direct understanding of those income classes that they have been an active part of. People BORN within an income class have to deliberately self-educate (being part of the Peace Corps for a couple of years might help a lot for the wealthy to have some relevant experience) to understand other income classes.
     In the case of democratically elected governmental representatives, it is important to bypass the advertising, and campaign snapshots, and remember that they are there to REPRESENT you -- born millionaires (or born billionaires) will be severely crippled in the ability to understand, and represent, the general non-wealthy masses. Allowing non-representative people to represent the voters is a CHOICE and must be remembered as such. If you want your representatives to represent you, then you must choose people who understand, and have experienced, the problems that they need to address.

Is "free" ever free? -- a matter of choice and perception

     "Buy One Get One Free!" This is a famous advertising slogan within the U.S. Often it is shortened to just BOGO. Do they really give you one "free"? Of course not -- try asking for just the free one. They will respond with a laugh if they are in a good mood. Financially, it means they are selling the product for half price (50% discount) but -- from a consumer/shelf rotation point of view -- it is not quite that. By requiring you to buy two in order to get the discount, they are also increasing their sales volume. This is the non-food version of supersizing -- the food version of which I expand upon in my blog on "supersizing".
     This advertising method is also used for other percentages and other quantities. Buy Two Get Three Free (60% discount with five products sold). No matter what the actual proportions, it is a method of advertising and tricking the brain into thinking that something is "free". Another variant is to have a "sale" offering 10 of product G at D% off. Or, in a specific example, if the article usually sells at $1 the offer is to sell 10 for $6. Sometimes, the advertising also says "must buy 10" -- sometimes it doesn't -- but, a lot of the time, people will still feel the urge to buy a full 10. (Read the entire sales quote including the smaller print.)
     Of course, this type of "free" doesn't have to be within the same merchandise. "Buy Product X and, for a limited time, we will toss in Item Y (which we haven't been able to sell on its own) FREE." This has the big advantage of reducing inventory on Item Y. This is not saying that Item Y is not a good item -- but it doesn't have the appeal necessary to sell it by itself at a good profit margin. Product X gets a boost in sales attractiveness without directly discounting its price.
     In the above cases, the primary economic advantage is selling more products. In the U.S., and in most of the larger countries, consumerism is a heavy factor in the economies of the country. From this orientation towards consumerism, many factors are emphasized within society. These include expanding feature sets, obsoleted -- and "new" future fashions, minimal useful worklife, and so on. In the past decade, a transition has started being made from physical to electronic products -- higher profit margins and less required capital with an ecological benefit. However, this causes labor redistribution and retraining ("no free lunch" -- see next paragraph).
     "There is no such thing as a free lunch!" Absolutely true -- but it may be absorbed into another existing budget -- this can either be within a corporate advertising budget or within a system of taxation. As mentioned in the previous paragraph, it can also apply to benefits in one area requiring extra effort or pain in another.
     My wife and I often get calls of the nature: "you are the winner of a free vacation to our wonderful resort in Paradise, Country X". We are of a certain age that is expected to be looking towards retirement. We "won" because they have determined (from extensive data mining and other methods) that we can potentially afford something and that we have a reasonable chance of actually buying it. They may have also researched a "soft touch" factor on us (how well do we resist sales techniques). At any rate, we are part of a group of "winners" and, statistically, they are likely to get more profit/sales out of the group than it will cost up-front to get us all to their resort and pay for the advertised benefits.
     This isn't saying anything bad about the resort -- it may be fantastic and it might even be something for which we might be grateful for the opportunity to purchase. But it is an example of how something "free" is incorporated into a larger budgetary item -- in this case, advertising.
     Tax budgets are another situation where "free" items are incorporated into the budget. In this case, since the taxation is mandatory, the items labeled "free" are usually called such by a group of people wanting some OTHER use of the money (they rarely want the money left with the people -- though that may be denied). So, "free" is bad and implies that it is an unearned "gift" from the taxpayers.
     Taxpayer revenue forms a budgetary pool just like the general revenue of a corporation. Within that budget, there are various allocations. Each allocated budget item is "free" from the point of view that it is paid for by the entire pool of taxpayers. On the other hand, NONE of the budget items is "free" because they are ALL paid for by the entire pool of taxpayers. Priorities are determined within the budget for items and there is considerable disagreement between groups of people as to what those priorities should be -- but the use of "free" to describe usage of the budget is a political term and not a financial one.
     So, is free truly never free? No -- not quite. Currently, people can still breathe without cost. Freedom to drink potable water is becoming a greater and greater struggle but it is still free in some places (in others, it requires community subsidization and allocation). There are places in the wild where (often against the rules) you may be able to eat wild vegetation, or hunt/trap animals, just because you are there. I am sure there are other examples that are outside of the general economy. But -- within the societal economy -- "free" means being paid for via some other person, agency or budget. Can you think of exceptions within economic society?