Does Government Simply Spend “Other People’s Money?”

In Tuesday’s editions, the Times-Dispatch followed up its creedal statement of New Year’s Day with a self-review of the ways in which the paper put that creed into practice in 2006.

We won’t take issue with that self-assessment just now; what is more revealing is the brief editorial note at the bottom of the page. Noting various proposals by local politicians to spend money bolstering community college, preschool for poor kids, and road construction, the RTD notes that “When you’re spending other people’s money, no tax ever is” enough.

This raises a serious question: do government officials simply spend “other people’s money” when they allocate public funds?

A positive answer to that question implies that “government” is something apart from the people, an alien power in our midst, a Leviathan to be tamed. That image of government derives largely from the views of John Locke, writing in the 17th century, over a century before the emergence of the first modern democratic states. Locke was writing in reaction to defenders of absolutism, whether traditional royalists like Filmer or more sophisticated moderns like Thomas Hobbes. In that context, his concern was to limit government’s power to dominate individuals–because government in his experience really was an alien power.

Democratic theories of government have a different premise: the government belongs to us, and is “of the people, by the people, and for the people,” as a noted Republican president once put it.

This being the case, government officials who allocate public money are not supposed to be or be thought of as alien officials who spend other people’s money. Rather, they are to be thought of as our own representatives who make decisions on our behalf about how to spend our money for the sake of our common good. And when these representatives decide to raise revenues through additional taxation, they are authorized to do so by the power we have invested in them.

From the standpoint of democratic theory, then, the right question to ask is not whether government officials are addicted to spending other people’s money. The proper question is whether the proposals they forward and the decisions they make about raising and allocating public money are truly in the public interest and truly advance the common good.

Too little government spending on the right priorities can be as damaging to the commonwealth as too much, and if the legislature is persuaded that spending more money on these initiatives is the best way to advance the common interest, that’s exactly what they should do, without fear of being labeled as greedy, voracious consumers of “other people’s money.”

Published in: on January 2, 2007 at 10:05 pm  Comments (2)  

Misunderstanding the Social Contract

The Times-Dispatch this morning printed another letter on tax fairness this morning, this time from the far right. The letter writer, Horace McCowan of Richmond, does not get into the specifics of how much the rich actually pay in taxes. Instead, he attacks the conventional metric of whether a tax structure is progressive.

The conventional definition of a progressive tax structure is one in which individuals get taxed at steeper rates as their incomes increase. McCowan posits that the proper standard for judging a system’s progressivity should be the total amount of money paid by each taxpayer. On this definition, if Dale Earnhardt Jr. earns $5 million in a year and pays $25,000 in taxes, whereas the fellow who pumps his gas earns $25,000 a year and pays $2,500 in taxes, it’s still proper to call the system “progressive.”

Why? Because Earnhardt is paying ten times as much money into the coffers as the gas attendant.

The implication of McCowan’s letter is that the rich are being taxed at a vastly unfair rate even now, because our tax system requires them to pay more money into the system than the poor. Moreover, McCowan writes, if you look at who benefits from government services, it’s the poor, not the rich.  If we extend McCowan’s logic a bit further, we reach the surprising conclusion that the United States already is a socialist society, with its vast system of redistributive taxation.

Needless to say, this an extreme right-wing view, but there is a surface logic to the argument which merits a reply. Where does McCowan go wrong? In failing to consider who actually benefits most from the institution of government.

What does government actually do? Fundamentally, it protects and preserves property, and punishes those who don’t respect property (or life and limb). Why is it that day after day, the super-rich can enjoy their quiet days at the country club, undisturbed by anything other than the group ahead of them that is playing too slow or the latest slice into the woods?

It’s because they can be quite confident that the have-nots are not going to attempt to sieze their land or homes while they’re out on the golf course–and that if such attempt does take place, the legal system will respond and attempt to restore their property.

The police power of government provides for the basic social stabiilty that allows the rich (and all of us) to enjoy our property and material goods in a climate of reasonable security, in the knowledge that if our claims are violated, society will try to punish the offenders and restore our loss to the degree possible. Who benefits the most from this stability and security? Those who have more.

That point was made most poetically by Jean-Jacques Rousseau in his Discourse on the Origins of Inequality, but it also fully consistent with the account of government offered by John Locke, the favorite contract theorist of the American framers.

As society has gotten more complex, government has evolved beyond the exercise of police power to include other functions aimed at promoting the common good, from the provision of basic social insurance to management of macroeconomic policy. While some (though by no means all) of those policies benefit the poor in the most immediate sense, the overall impact is to maintain the basic social cohesion and stabiilty of the society. Who benefits the most from the fact that most people obey the law, that the United States is not racked by frequent violent strikes, that riots in the streets are rare, and that we don’t (a la contemporary Iraq) have marauding gangs everywhere taking whatever they want by force?

The rich. (Indeed, to the extent the United States is plagued by crime, it is the poor who are most vulnerable.)

It’s these considerations which underlie the conventional view that the rich are indeed obliged to pay more in taxes (both in absolute terms and as a percentage) than the poor and middle classes. Simply put, they benefit from the institution of government and the preservation of the social order more than the rest of us.

On another note, McCowan also writes that the 5th and 14th Amendments of the Constitution do not “authorize” progressive taxation or redistribution. Presumably he is referring to the due process clauses in each amendment. Again, this is a fundamental misunderstanding. The purpose of those amendments is not to prevent government from passing legitimate laws which regulate property, but to protect individuals against arbitrary incursions on private property undertaken by the government with no concern for the common good.

McCowan may believe those amendments provide grounds for rejecting the constitutionality of progressive taxation, but he’s going to have to overturn a long history of judicial interpretation on that one. Good luck. There’s also the small matter of the 16th Amendment to the Constitution, which specifically authorizes the federal government to “lay and collect taxes on income.”

Published in: on December 19, 2006 at 3:06 pm  Leave a Comment  

Letters to the Editor on Tax Fairness

The Times-Dispatch today printed two letters responding to Barton Hinkle’s recent column on economic populism, focussed on how much of the overall tax burden the rich actually carry.

The first is an extract from this site’s post on Taxation and Fairness, stressing the fact that social insurance taxes are regressive, which offsets the progressivity in the income tax. The second letter, making almost the identical point, is written by Lee Hollett of Ashland, who used tax software to compare the estimated tax burden of a minimum wage worker and a corporate executive.

Published in: on December 9, 2006 at 9:19 pm  Comments (1)  

Taxation and Fairness

Now on to Barton Hinkle’s second big point in his effort to dissuade readers that economic inequality is a serious issue: the question of taxes, and who pays them.

Hinkle cites data indicating that the top 1% pay over 30% of all income taxes (the exact percentage in 2003 was 34%)  as evidence of the progressive nature of our tax system. 

That is a valid statistic, but looking at it out of context paints a seriously misleading picture. Five crucial points in particular need to be stressed.

First, the top 1% of the income distribution garner (as of 2003) over 17% of all income reported to the IRS. As the overall distribution of income becomes more unequal, the proportion paid by the top 1% should increase as a matter of simple math. Put another way, statistics about the proportion of taxes paid by the richest say as much about the highly unequal overall distribution of income as they do about the tax code.

Second, following from this observation, the best way to get a good picture of how progressive the tax code is to look at the actual rates. Doing so reveals that income tax policy has been getting steadily less progressive over the past 40 years; rates on the richest have fallen from 77% as late as the 1960s to just 35% today. (Bush I and Clinton succeeded in raising the top rate from its Reagan-era low of 28% to first 31% and then 39.6%.)

Third, income taxes account for just under half of all federal revenue, and looking at them alone provides a distorted picture of the actual tax burden. Most significantly, social insurance taxes, which account for some 37% of all tax receipts, are essentially regressive: a fixed rate is paid on all income up to a ceiling ($87,000 in 2003); income above that line is exempt. Looking at this bigger picture, the Congressional Budget Office reports that the top 1% paid just 20.1% of all federal taxes in 2004–a percentage only slightly higher than their share of overall income.

Fourth, the effective tax rate on corporations has been falling for decades, with corporate income taxes now accounting for just over 10% of federal revenue, down from as high as 32% in the 1950s.

Fifth, and most pertinent for the question at hand (does the U.S. have an inequality problem?),  after-tax income inequality has grown steadily in the past generation. In 1980, real after-tax income for the poorest quintile of Americans averaged (in 2003 dollars) $13,000, compared to $305,800 for the richest 1%. By 1990, the figures were $13,100 and $520,000, respectively; in 2003, the figures were $14,100 and $701,500.

Here, then, is the bigger picture: however progressive the income tax system may be, it hasn’t come close to offset the effects of the massive increase in overall economic inequality over the past generation. Moreover, looking at the income tax in isolation from the rest of the federal tax structure leads to a dramatic over-estimate of the system’s overall progressivity.

What is a fair tax rate for the rich to pay? The answer to that question depends on the answer to a prior, more fundamental question: Is the distribution of (after-tax) income generated by our economic system consistent with maintaining a society based on equal citizenship and the provision of substantive equality of opportunity to each of its citizens?

If the answer to that question is “no,” that higher effective taxes on the rich have to be considered seriously as one important strategy for correcting that imbalance and leveling the playing field. 

The place to start is not even with the top 1%, but with the richest of the rich, the top 0.1% of all taxpayers. As David Cay Johnston of The New York Times has documented, the effective tax rate paid by those select households actually declined from 1992 to 2000. Persons at this level of income hire tax evasion specialists who help them arrange their assets in ways that the federal government can’t get at them very easily, and they can claim all manner of perks and tax breaks unavailable to the working stiff.

By far the best source on the topic of how the super-rich evade income taxes is Johnston’s 2003 book Perfectly Legal; for a detailed look at the related issue of tax evasion by the rich and well-connected, see this book edited by economist Max Sawicky.

The overall picture that emerges from Johnston’s work is that the political capacity of the super-rich to manipulate the tax system in their favor has increased in lockstep with the overall increase in economic inequality, with each trend reinforcing the other. I hope Jim Webb has read Johnston’s book; calling a few hearings in 2007 on some of the most remarkable abuses of the tax system by America’s most wealthy would be a good move by the senator-elect and a necessary first step towards reform.

Next time: Why should we care about inequality at all?

Published in: on November 26, 2006 at 4:46 pm  Comments (6)  

Jim Webb’s Economics, II

The Times-Dispatch finally saw fit to give Jim Webb space to air his economic views on Tuesday, reprinting an op-ed which originally appeared in the Wall Street Journal last week. Curiously, however, the op-ed staff chose to give top billing on the printed page to a piece by regular columnist Barton Hinkle—even though Hinkle’s piece is clearly a response to Webb.

Webb writes that many of the relatively privileged have put great effort into downplaying the scale and significance of the vast increase in economic inequality witnessed over the last generation. Hinkle proves Webb’s point in his article, intended to persuade us that Webb’s economic populism only “skims the surface” of the real economy.

Hinkle’s piece trots out several old chestnuts of conservative “wisdom” concerning economic justice. First, Hinkle assures us of the degree of social mobility which American capitalism affords, by pointing to the fact that many people rise and fall through the income quintiles over the course of the life cycle. Second, Hinkle assures us that the rich are already paying a great deal in taxes. Third, Hinkle argues that inequality measures really aren’t important anyway, because the real standard of living is rising over time.

Each of those claims is contentious and, I believe, either wrong or seriously misleading. To provide an adequate response to each of those points would be too much for a single humble blog posting. So over the remainder of the week, this space will roll out responses to each of those core claims in three separate blog postings; look for the first one tomorrow morning.

Published in: on November 21, 2006 at 4:00 pm  Leave a Comment  

Shared Obligations

Does the Richmond Times-Dispatch editorial page take itself seriously? There is a school of thought that the RTD sees itself providing entertainment for that portion of its readership that wants a nice helping of liberal-baiting red meat in the morning, presumably as an appetizer for an afternoon of listening to Rush and co.

Reality, I think, is a bit more complicated. A substantial portion of the paper’s staff editorials are devoted to innocuous, unobjectionable observations about local events, and at times the editorials display a centrist, “common sense” sensibility.

But about once every couple of days (I haven’t quantified the ratio yet), there appears an editorial comment notable not only for its right-wing ideological content but also for a tone of mean-spiritedness and/or sarcasm.

A good example is a brief Saturday editorial about taxes. The editorial observes that few Americans voluntarily make donations to government above and beyond their tax obligation, then sardonically calls on those who support higher taxes to start making more voluntary contributions.

As far as this reader can tell, the editorial serves no purpose other than to mock those (presumably “liberals”) who do support higher taxes. The implicit ideological point is this: some people support higher taxes, but won’t put their money where their mouth is.

Let’s break down the RTD’s proposition on its own terms.

No one supports higher taxes as an end in itself (as the editorial insinuates). Rather, some people support greater provision of public goods such as education, health care, transportation, public safety, and help for those who cannot help themselves. Taxes are a necessary price for securing the resources to provide such goods.

It follows that people can reasonably be willing to pay higher taxes ourselves, so long as others are making a fair contribution themselves. This is a rational position for two kinds of reasons. The first is a simple matter of fairness; it’s unreasonable to ask people who support greater provision of public goods to disadvantage themselves relative to those who do not. The logical outcome of that kind of reasoning would be a society that taxed some more than others based on their political preferences–and hence, a society in which the very notion of shared obligation soon dissipated.

Second, if what “liberals” and others want is more effective provision of public goods, not higher taxes for their own sake, than it’s highly unlikely that making a voluntary donation to the state coffers will secure that end. Paying an extra $50 to the state is not going to improve the schools, or any other good worth caring about. But paying an extra $50 along with a milliion of your fellow citizens is a totally different story. In the one case the individual has made a donation with notable personal cost and negligible public payoff. In the other case the the individual has made a contribution with notable personal cost and potentially quite important public payoff.

So much for the question of self-imposing “extra” taxes. But the RTD editorial, perhaps unintentionally, raises another kind of question: what should the wealthy or affluent “liberal” who supports greater provision of public goods, and can afford to give money away with minimal personal cost, do with their discretionary money?

I agree that such people should do something with some of those funds that helps put their beliefs and preferences into action.

But handing over that money to the federal government at large, and letting a Republican-controlled government decide how the money will be spent, is going to be one of the least efficient ways possible to advance the wealthy liberal’s goals. Some of that money will be spent on weapons contracts, some on servicing the national debt, some on White House dinners, some on Halliburton cost overruns, and some precious percentage on the public goods one actually cares about.

The rational thing for such a person to do is to give money directly to organizations and efforts that directly help schools or help poor people or help secure some other valued end. That, of course, is what many wealthy (and some not-so-wealthy) liberals and moderates already do–a point conveniently ignored by the RTD editorial in its eagerness to suggest that liberals are hypocrites.

Published in: on September 9, 2006 at 1:53 pm  Comments (2)