Last week I explained the rationale behind a progressive tax model, and outlined how it can be determined in a reasonably fair fashion. But determination and application are two different things.
For roughly a century, since the passage of the Sixteenth Amendment, the United States has been applying a progressive tax via income taxes. Income taxes are far better in theory than in practice, though. In theory, you apply a progressive tax, and link the tax rate to the amount of income one collects over the course of a year. In practice, accounting for all of that income is horrifically complex, and results in several burdens on all of us, beyond the dollars charged in taxes.
The first burden is damage to the Bill of Rights. Despite having a protection against self-incrimination (the Fifth Amendment), in an income tax world one is obligated to report all income, regardless of source…even if the source is illegal activity. So we are legally required to self-incriminate. This has made it possible for people to be convicted of tax evasion when the Bill of Rights would otherwise have protected them from conviction. This clearly violates the intent of the Bill of Rights.
Furthermore, unlike in criminal law, with income tax law, taxpayers are guilty until proven innocent. That is, if the IRS says you owe money, you have to prove that you don’t in order to avoid payment. This violates the principles of the Fourth Amendment, and possibly the Sixth Amendment.
Given how important those Amendments are to the personal security of Americans, carving out exceptions should occur only when the value of what is achieved is substantial to the broder society, and when there is no reasonable alternative. This is how limits to the First Amendment have been decided through the 20th century; the limit needs to be the minimum necessary to achieve the broad social benefit.
The second burden is the cost to taxpayers of calculating the appropriate amount of tax. We are all required to keep records, and follow a very complex set of rules in determining one’s taxes. Every taxpayer must pay in time and/or money, simply to pay money to the government. The burden is sufficiently great to maintain an entire tax preparation industry. While employment is a good thing for the economy, employment put to use in something that benefits society as a whole is far better.
The third burden is the relative ease of tax evasion. When taxes are self-reported, and when the effective tax rate is in excess of 10% (this rate is based on historical research), there is a significant incentive for tax evasion. This is certainly the case with federal income taxes. The underground economy is estimated in the annual $1-3T range, and its size is influenced by both the tax rate and the amount of otherwise illegal activity present in the economy. The people earning money through the underground economy do not pay income taxes, which shifts the burden of paying for federal government services to those who do.
I’m in favor of progressive taxes for a couple of related reasons. First, it is an effective means of minimizing money eddies, places where money sits without directly adding economic activity. Second, it delivers the highest ratio of tax revenues to economic drag. That is, collecting an additional dollar of tax in a progressive tax model has less of a deleterious effect on the economy than collecting that same dollar in a flat tax model. The effects show up in the regression analysis I did for Take 2: Could Employing Tax Cuts Tax Employment.
If income taxes were the only means of achieving a progressive tax model, I might grudgingly accept an income tax. Maybe. But there are other options. In future posts, I’ll discuss them in turn.
- Fair and Balanced (538refugees.wordpress.com)