A Terse Tax Talk
Updated: Jun 20, 2020
Let’s talk about the taxes you pay
Let me say right off that this is not a post advocating some politician’s tax plan or the enumeration of some regulations buried in the Internal Revenue Code. As my college accounting professor, Mr. Bearden, use to say of the subject of taxes, “No one reads about this stuff unless they absolutely have to.” As much as we’d like to ignore the subject altogether, we understand that taxes aren’t leaving anytime soon and that we ignore talking and thinking about them to our detriment. To that end I’ve offered some (mercifully brief) thoughts on how conservatives think about taxes.
In addition to it being a subject of wearisome boredom to most, taxes often evoke strong negative emotions. Thus, when politicians talk about taxes it’s almost always in scorn and in regards to how we must reduce them. Even those who advocate tax increases cloth their language in sensible-sounded words like invest or balance or revenue-neutral.
Americans for Tax Reform (ATR) president Grover Norquist has had phenomenal success at getting politicians of all stripes to sign the Taxpayer Protection Pledge. According to ATR’s website, by signing the Taxpayer Protection Pledge, “…Candidates and incumbents make a written commitment to oppose any and all tax increases…Since the Pledge is a prerequisite for many voters, it is considered binding as long as an individual holds the office for which he or she signed the Pledge.”
The Republican party, ostensibly being the party of smaller government, has significantly amped up their anti-tax rhetoric in recent elections to the point it can be difficult to see states with majority-Republican control ever increasing direct taxes (that word direct will come into play later). Conservatism, to the extent it is associated with the Republican party, has likewise been characterized as a political movement devoted to taking the opposing position on any tax. But can conservative views on taxation be boiled down to simply saying a conservative is hostile to taxes? Are all taxes equally bad? Are taxes even necessary?
Taxes are a necessary evil
The idea that taxes are necessary to even have a government should come as no surprise. Nevertheless, this is a good place to start for it tells us up front that, unless we subscribe to the idea of no government whatsoever, we are going to have to accept some minimal level of taxation.
The only forms of government I’m familiar with that don’t extract taxes from their citizens are anarchy and pure mercantilism. Conservatives would consider both forms of government morally reprehensible as the former offers no protection for you and your family and the latter requires enslaving whole people groups and exploiting their resources. So, if taxes are a necessary evil it just wouldn’t do to say that the conservative’s view on taxes is to simply be against them. Therefore, taxes should be defended to the extent they are necessary to operate the government.
That said, it should also be stressed that taxes—all taxes—diminish freedom. The higher the tax, the less liberty. In this sense it would be correct to say that a conservative supports lower taxes. If you earn $40,000 a year and the government takes $10,000 of that in various taxes, that restricts your freedom to procure, save, or invest by $10,000. Freedom implies the ability to make choices and, in the example above, the government has prohibited your ability to make choices with 25% of what you’ve earned. Some taxes may be less onerous than others, but in the end the individual will always be freer if they had paid no tax at all.
The Laffer Curve
In 1974 economist Arthur Laffer drew on a paper napkin a graph to depict his interpretation of the state of the economy to president Ford’s administration. That sketch became known as the Laffer Curve shown below:
The basic idea behind the Laffer Curve is that, as taxation increases, the incentive and ability of businesses to generate a profit diminishes. Therefore, reducing taxes to a level that allows businesses to prosper can have the effect of increasing government revenues. To severely oversimplify the matter: a government can’t expect to collect any revenue if its tax rate is at or near 0% (where so little would be collected it would be insufficient to fund government initiatives) or 100% (where no economic activity could take place and there would be nothing to collect).
President Ronald Reagan used the Laffer Curve as the cornerstone of his economic policy by enacting one of the largest tax cuts in history and resulted in tax revenues increasing from $517 billion in 1980 to $909 billion in 1988.
Much ink has been spilled both discrediting and defending the Laffer Curve. Since this is a brief post and I promised not to delve into jargon and technicalities I won’t take a side here. My larger point in mentioning the Laffer Curve is to highlight the similarities between it and the idea expressed above that taxes are both necessary but also limiting to freedom. Both ideas suggest the most appropriate tax rate “balances” competing interests. Therefore, a conservative believes we should strive for some happy middle ground in which taxes are low enough to allow for optimal economic output (freedom) but high enough to allow for optimal collection.
Taxes should be direct and transparent and not needlessly complicated
Taxpayers should have the ability to easily determine how much tax they’re actually paying. The most insidious taxes are often the least direct because the taxpayer doesn’t realize he’s paying. Governments seeking to balance their budget but uneasy about raising taxes directly on their constituents often show an insatiable desire to enact indirect taxes through hidden fees and fines. Suddenly that parking violation that cost you $20 and the better part of your lunch break at city hall last week has been elevated to your car being impounded and a hefty $200 fine to get it back. You didn’t realize your taxes had dramatically increased until it was too late to do much about it. The list of indirect taxation is endless. Inflation may well be the most insidious indirect taxation because its effect isn’t to reduce the amount of money in your wallet, but how much that money is worth.
This is one of the objections often raised against a value added tax (“VAT”) commonly seen throughout Europe. The VAT is a consumption tax that taxes the value added by businesses at each point in the production chain. As The Heritage Foundation notes, “The VAT’s biggest flaw is that, unless mandated otherwise, the amount of VAT paid by taxpayers is hidden…One fundamental principle of sound taxation is transparency, and most nations’ VATs flagrantly violate this principle.” Why? Because the consumer is often only aware of the price at the end of the production chain and not the various components that were taxed up to that point.
Hand in hand with the principle of direct and transparent is the idea that taxes should not be needlessly complicated. As a tax becomes more complicated the taxpayer again begins to lose his sense of how much he’s paying. But there’s another reason taxes should not be burdensomely complicated: The more complex the tax, the less free the taxpayer. Complications in the tax code offer the opportunity of exploitation for those with the means to afford professional tax support. But while the rich and powerful and connected may easily navigate a complex tax code and find ways to benefit from that complexity, most of us will be left to make up the difference. This is why the corporate tax rate of 35% in the United States (the highest in the developed world) is misleading in that many corporations find ways to avoid taxes to the extent fortune 500 companies have avoided hundreds of billions in taxes. Who makes up the difference? It’s likely people like you.
Ideally, taxes should be administered equally
Among the policies barely distinguishable between the Republican and Democrat parties these days is the idea that government should be involved in providing targeted tax breaks or even “bailouts” to private companies. Political leaders are often celebrated by their constituents as they tout the latest “deal” that was struck or special incentive that was provided to ensure some company keeps jobs in the country, or doesn’t have to close that vital plant down the street that employee so many in the community, or will hopefully contribute in the effort to find alternative energy sources, or any other noble and sensible-sounding endeavor.
The most recent example was Trump’s Carrie deal in which a private company was provided seven million in tax breaks to agree not to move operations overseas. In his editorial on the deal George Will minced no words:
“The Republican Party now shares one of progressivism’s defining aspirations — government industrial policy, with the political class picking winners and losers within, and between, economic sectors. This always involves the essence of socialism — capital allocation, whereby government overrides market signals about the efficient allocation of scarce resources. Therefore it inevitably subtracts from economic vitality and job creation…When Republican leaders denounce the free market as consistently harmful to Americans, they are repudiating almost everything conservatism has affirmed.”
Many in the Republican party who rightly decried president Obama’s bailouts of the auto industry and investing in green energy that led to the Solyndra scandal, costing taxpayers $535 million, are quick to turn a blind eye to similar games played on a smaller scale that benefit their cohorts. We would do well to remember that it’s not the scale of the tax incentive or the political expediency that determines whether governmental intervention into the free market has merit. We seek higher principles than what is currently politically fashionable.
Conservatives disagree on what level of governmental interference is preferable or justifiable in the free market and I’m by no means suggesting all governmental interference is short-sighted or dangerous. Specific principles will have to be expounded in a future post; nevertheless, as a general principle, it is better to have the free market chose winners and losers than politicians.
Taxes should be proportional to those benefiting from the programs or services funded by the tax
Ideally, those who receive the benefit of a government service should be responsible for paying the taxes that fund that service. For example, if a city raises property taxes to pay for a new park, those properties whose values will increase due to the new park should pay all or at least a larger portion of the tax. Or perhaps a simpler example is that road maintenance should only be paid by those who drive on roads. This can be accomplished by funding road maintenance with a gas tax. There is, of course, one notable exception. We shouldn’t expect the poor to disproportionally fund government services that are specifically targeted to assist them.
While the idea is simple, the application can be quite challenging. Ordinarily a gas tax funding road maintenance would distribute the cost of maintaining a road proportionally to the amount of times a driver is using the road. However, what are we to do with those who purchase vehicles that use alternative fuel sources such as electricity or natural gas? Their driving is producing just as much wear and tear on the roads, why should they get a special tax break? Or is it better to provide them with a tax break to encourage people to purchase alternative-fuel vehicles?
The problem becomes even more pronounced with sales taxes. Sales tax was an ideal model for the twentieth century. The taxpayer knew how much they were paying up front and, since it was a tax on consumption, they (theoretically) had the power to choose whether they’d pay the tax by how much they chose to consume. But as more and more purchases are done online that revenue is quickly drying up to the point local municipalities are forgoing billions annually in lost revenue. Taxing purchases online could kill or mitigate the innovative explosion of online retailers, not to mention significantly increase costs for the consumer. Continuing down this path, however, will inevitably lead to municipalities and government services running out of necessary funding and being forced to collect it elsewhere.
Here again, the aim of the conservative is balance. The conservative seeks to distribute the responsibility to pay taxes as evenly as possible among those benefiting from government services.
Sometimes it makes sense to raise taxes
Perhaps you’d think me a heretic for saying it, but sometimes raising taxes is better than lowering them. The conservative’s first aim is fiscal responsibility, not lower taxes. It wouldn’t be prudent to lower taxes if there’s no reasonable evidence it would increase government revenue and government spending will not be reduced.
In my home state of Oklahoma the super-majority Republican house and senate enacted a series of cuts to the Oklahoma income tax that were designed to automatically go into effect when certain economic “triggers” occurred. Oklahoma State Auditor Gary Jones has been critical of the law, noting it was "written on the premise that taxes would be cut based on increasing revenues.” He stated further that, “Nothing could be further from the truth. Right now we have a defective statute that reduces taxes based on comparing estimates from different points in time. It does not reflect what is actually occurring in the state's revenue streams." As a result, Oklahoma state agencies have seen massive cuts in the face of a $1.3 billion revenue shortfall last year with a nearly $900 million budget deficit looming in the coming year. Money that could have gone to maintain infrastructure, bolster overcrowded correctional facilities, provide teachers in a state with the sixth lowest pay a raise, and much more has instead gone to a quarter percentage reduction in income taxes that has generated little economic activity.
Lest you think the Oklahoma legislators are a cohesive, conservative group with a plan for scaling back the scope of government in the state of Oklahoma with data-driven, sensible cuts designed to relinquish more oversight to efficient private sector counterparts, consider the fact they increased the agency who assists their staff payroll costs by 183% while other state agencies were gutted multiple times.
So, we have a group off lawmakers who are unwilling to live within the cuts they’ve forced upon other state agencies or increase funding for those agencies or identify data-supported areas where the state can save sufficient funds to avoid budget cuts. This is the result of governing chiefly from politically correct rhetoric rather than fiscal responsibility coming to fruition. Some may say this is a good thing; that all governments are much too big and should be scaled back. But what a government should be doing and whether we should adequately fund what it's currently doing are two entirely different questions.
It’s about keeping government small and limited more than keeping taxes low
I said above that it wouldn’t be prudent to lower taxes if there’s no reasonable evidence it would increase government revenue and government spending will not be reduced. Perhaps that idea strikes you as repudiating the conservative approach of cutting taxes for the sake of cutting taxes. Hang with me.
What generates the need for a tax in the first place? Government spending. Every dollar spent by the government will result, in one way or another, in a tax increase. Former congressman and presidential candidate Ron Paul put it best when he said, “When the federal government spends more each year than it collects in tax revenues, it has three choices: It can raise taxes, print money, or borrow money.” The effect of raising taxes is obvious. The effect of printing money is to dilute the value of the money in your wallet (inflation), which means the cost of everything you buy increases. The effect of borrowing money is for some future generation of Americans to have to eventually pay the piper. The effect of all three is the same: someone is going to pay for it.
Therefore, we could conclude that when the government spends a dollar, someone’s “tax” has just increased. It may be the case that certain government spending successfully stimulates economic activity in such a way that the result is less damaging to the overall health of the economy. But the fundamentals are still intact: the need for taxation is directly correlated to government spending.
Now let’s return to the idea that it wouldn’t be prudent to lower taxes if there’s no reasonable evidence it would increase government revenue and government spending will not be reduced. If we are unwilling to find ways to reduce government spending and a tax decrease results in no economic stimulation—and, therefore, no additional government revenues—what would be the effect? Inflation or deferred payments. A call for tax cuts that are not coupled with spending cuts or a strategy for stimulating the economy to maximize government revenue is really just a call for going from direct taxes we can see to indirect taxation that silently eats away at our wallets or our future. Tax cuts that ignore government spending are fiscally irresponsible.
This is perhaps the biggest misconception between conservative thought and common Republican rhetoric. It is also the most important concept to understand about taxes and the easiest to ignore. Many a politician has pledged to lower taxes and make government more efficient. Very few have turned their attention to the much more urgent business of reducing government spending and limiting government intrusion.
Taxes are necessary to run governmental institutions conservatives defend. They should be kept as low as possible to meet fiscal responsibilities because every tax diminishes freedom and economic activity to some degree. Because taxes hamper economic activity, conservatives seek a “balance” between maximizing government revenues and spurring economic growth.
But it’s not just about how high taxes are since not all taxes are equal. Taxes should be as direct and transparent as possible, so that the taxpayer knows what they are paying. They shouldn’t be needlessly complicated, which creates a disparage in payments between those who have the means to find loopholes and those left holding the bag. Ideally, we should administer taxes equally, with those benefiting from programs or services funded by the tax paying a larger share.
It may make sense to raise taxes if government collections are inadequate to fund government services and there is no willpower to reduce government spending. In the end, tax cuts begin with spending cuts and the conservative is more interested in the size and scope of government than the tax rate.