Tuesday, February 18, 2014

The Problems of Spending and Taxes

NOTE: I am reproducing a number of essays on taxes which originally appeared in my now defunct blog Random Notes. I will also be reproducing articles on the FairTax in the next few days. I hope these essays will provide a good background for my planned essay examining the current state of the FairTax, as well as summarizing all my objections to it, those which have been answered and those which were not. Those interested in the topic may also find useful material in a number of essays printed in this blog (many reproduced from Random Notes), including: "Passing Thoughts on Taxes", "Two Thoughts on Taxation", "Government by Emotion", "Minimal Reforms", "Simplicity", "Reframing the Debate", "A Partial Reply to yt_knight", "Another Reply to yt_knight", "The Runaway Stagecoach", "The VAT Versus the FairTax", "Ch-Ch-Changes", "Gardasil and Logical Errors", "What is Wrong with a Prebate?", "Making Taxes Hurt", "Reply to FairTax Comments", "Reply to FairTax Comment II", "Reply to FairTax Comment III", "Short Reply to Doctor Adams", "Revisiting the FairTax", "If we must...", "What We Need", "The Consequences of Bad Laws" and "Truths About Taxation".

I wrote before (in "The Difficulty of Principle", "Don't Blame the Politicians" and "What We Deserve") about the problems we face in trying to reign in government power and government spending. Among the many problems are the fact that citizens have come to believe government really is the solution to any problem, so, even though they call for "smaller government", the moment a politician responds to a "crisis" by saying "the government should not be solving this", the same voters vote him out.

But there is another problem, and that is our tax system. Presently, the system is divorced from need. Regardless of what we spend, the system basically takes money. Of course, at present it takes in less than we spend, but the point is regardless of spending, the system is pretty much set up to take a fixed percentage. In fact, thanks to the theory of "progressive taxation", essentially using the system as a tool to level incomes, it cannot be tied to spending, it must automatically keep taking money regardless of spending.

But that fact undermines any effort at fiscal responsibility. After all, if money is going to be taken form me regardless, and money will continue to be borrowed, regardless, and certain fixed "entitlement" payment will always be made, it is near suicidal for me to refuse any government payments. After all, it is not as if my fiscal restraint will reduce the amount of taxes, or even borrowing. The money will still be taken, and either spent on something else, or just held and spent later. So it makes no difference if I refuse all federal aid, I still see just as big a bite. The only difference is that I recoup none of it.

And that is why "fiscal responsibility" is the wrong approach. To talk of balanced budgets, pay as you go and so on is all window dressing. People will continue to fight over federal benefits, as they won't see any advantage to refusing aid. The only difference pay as you go or a balanced budget will make will be that the fights will become a bit more nasty as pools of wealth shrink, or, more likely, accounting dodges will need to be found to circumvent those rules.

No, what we need is a threefold approach.

First, we need to ensure the government stops borrowing. It must spend only what it takes in, no more. No borrowing, no bonds, nothing. If it needs to spend more, then it needs to tax more. Make taxes honest so that we know exactly what the government costs. And that also means that we need to end all forms of taxes except for individual taxation. Corporate taxes, various fees, and so on, all are simply ways of hiding taxation. Rather than conceal taxes, by assessing them on companies which pass on most to customers, or concealing them in sales taxes, or in fees, we should require the federal government assess every dime directly against individuals, so they know precisely what they are paying*. Ideally, taxes would no longer be withheld, but would be paid quarterly or yearly, so that we would feel the pain more acutely, but that may be a later step.

Second, we need to start changing the laws so that payments form the government are not "entitlements", so that no one has a legal right to continued government payments outside of contractual obligations. The concept of "entitlements" keeps federal spending high, and needs to be eliminated. We need to end the concept of a right to payments form our fellow citizens, and instead establish the concept that any payments made by the state can be terminated at any time.

Finally, after we have established these principles I would like to see us move away from direct federal taxation entirely, and instead return to state funding of the federal government, so that the states would then establish the methods of taxation, allowing 50 different approaches to be tried and tested. At the same time, I would also like to see an end of the direct election of senators, so that the senate could once again become the voice of state interests, instead of mirroring the house as a popular assembly. In that way we would see a rapid decline in state pork projects, as the states come to see them for what they are, paying $10 to get back $5. Hopefully such a change would lead to a dramatic decline in federal spending, as well as federal control over the states via holding the purse strings. With the states in charge of money, the locus of power will shift back to the states from the federal government.

I think these three steps would do much more good than all the "pay as you go" plans or efforts to attack specific spending would do. We need to stop attacking specific programs, or even trying to establish specific spending goals, and instead change how we view taxes and spending entirely. It is only because we see spending as inevitable and are largely sheltered from the true burden of taxes through withholding, fees and concealed corporate taxes that we don't complain as much as we should.

Once taxes are made truly visible, and hit every citizen rather than just a small subset, tax and spending will become much more prominent issues.

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* Ideally, this first phase would include a flat tax with no exemptions, so that every individual would pay a fixed percentage of their income, whether they earn one dollar or a billion, so all citizens would feel the pain equally, but I doubt I could get that through as a first step.

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POSTSCRIPT
I have written on this issue many times. Most of my thoughts can be found in the following posts:
Very brief prologue
One Thought on the FairTax
Update
Two old ones (plus three)
Addendum
Unintended Consequences
For the record
Definitions
And so it starts...
By the way
The 22%
A New Record
What we need
Shot myself in the foot?
Short Comment on the FairTax
Will FairTax.org Answer THIS Time?
Why I Am Not A Libertarian
Standing By My Principles
A Simple Analogy
For Once A Concise Post
A Brief Update
One Final Brief Note
To Prove I Am Fair
Prelude
Mandatory April 15th Post
The Virtue of Humility
Our Biggest Hurdle
Short Reply To Doctor Adams
Revisiting the FairTax
A Very Brief Reply to the FairTax Advocates
Reply to FairTax Comments
Reply to Fair Tax Comment II
Why Do I Bother?
Making Taxes Hurt
Reply to FairTax Comment III
What is Wrong with a Prebate?
Hello!
Gardasil and Logical Errors
Why Argue
Ch-Ch-Changes
Imports and the FairTax (One Issue)
The VAT Versus The FairTax
Note
The Runaway Stagecoach
A Partial Reply to yt_knight
Truths About Taxation
Another Reply to Yt_knight
Reframing the Debate
FairTax Loophole
So Why Do I Care
Administrative Matters
Simplicity
The End of Taxes as an Election Issue
A Thought on the Clinton Surpluses
What I Want in a President
Paved With Good Intentions
Eye Opening Numbers
My Vision of Government
My Vision of Government Part II
A Question for my Readers
1st Annual St Jude Award
Above and Beyond
The Benefits of Federalism
An Interesting Analogy
Keyhole Thinking
Your Government At Work
A Brief Note
My Worst Idea Ever
Obviously, there are many others, but I think these cover the highlights.

Originally posted in Random Notes on 2010/01/08.



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