Taxes, Economics, Rawls & Nozick

In the current fight between Democrats and Republicans concerning the debt limit increase, one hears the former primarily focus on the notion of 'fairness' of taxation.
That is, the president and his party's members of Congress will take a few favorite elements of the existing tax code, such as existing rates for higher-income earners, reduced under President Bush in his first term, and grudgingly extended last year, or special provisions for private business aircraft, and hold them up as 'unfair' to lower-income earners.

Of course, from a purely objective perspective, the reason for taxes is to raise money to fund governmental operations. As these posts on taxes that I've written discuss, tax policy has consequences on taxpayer behavior, regardless of whether politicians believe it to be so, or the CBO models such affected behavior.

It's common knowledge that the CBO uses what is known as 'static scoring,' wherein simple arithmetic changes are modeled for tax policy changes. That is, an hypothetical change is modeled as ex post on pre-existing incomes, spending, investing, etc., with no assumption that such a change may have, in reality, changed prior behavior.

Along with this myopic scoring goes the misguided concept of 'paying for tax cuts.' This peculiar view assumes that some tax revenue level is due to the government, so any change in tax law that results in the static scoring showing lower total tax revenues must be 'paid for' by either new taxes or higher rates elsewhere.

Of course, any fool who reads that second sentence instantly realizes its idiocy. You get less of what you tax, so trying to raise more tax revenues through higher rates or new taxes is, overall, self-defeating.

This is why, among the 22 tax-related posts I've written, you will find a couple detailing economic research leading to Hauser's Law, wherein, over time, a fairly consistent 18% of US GDP is collected via taxes, regardless of tax rate structures.

Once you understand and accept that relationship, it becomes obvious that the way to increase gross federal tax receipts is to set rates at levels that maximize GDP.

But this assumes one uses tax policy primarily as a means to fund government. And it distinguishes between tax rates, and tax receipts, which may be inversely related.

But many liberal elected federal government officials in Congress and the White House choose to discuss tax policy primarily as a tool to enforce "fairness."

Unfortunately, when you attempt to make a single policy, such as tax policy, serve two objectives, such as raising maximal or sufficient government funding, and enforcing some undefined notion of "fairness," you get, well, a mess. Especially when measures of fairness are not obvious.

Yes, there are various indices of differences between high and low incomes or taxes paid. As with the subject of concentration of market share in sectors, one can design various measures purported to indicate relative uniform distribution or distortions of any variable.

However, the basic notion that there is some "fair" amount of tax receipts, or their income, which "the rich" should pay, doesn't seem to be any sort of bedrock, fundamental Constitutional principle.

In fact, if you read the Constitution, as I did this morning, it was originally written rather vaguely and imprecisely on the subject of taxes. The only thing that was fairly clear about taxes in the original, pre-1912 Constitution, was that taxes were levied on business activity, not people.

Even today, one could choose to replace the income tax with a spending tax, if one so chose. There isn't really anything special, per se, about income-based taxes, except that it appears to penalize those who earn more.

By the way, which should be the subject of fairness- tax rates, or tax revenues, or percentage of toal taxes paid? Or is it subjective, i.e., whichever soaks the rich more is "fairer?"

On that subject, and this one, it so happened that I stumbled upon a discussion of this topic yesterday morning on CNBC. Due to the loss of Erin Burnett to CNN, and Mark Haines to death, the network has switched its co-anchor lineups, replacing Carlos Whathisname in the 6-9AM slot with Andrew Ross Sorkin, a NY Times liberal media darling.

At issue, with Michele Caruso-Cabrera defending the conservative viewpoint, was whether high-income taxpayers are "giving back" to the nation by paying a lot of gross dollars in taxes. Apparently the president recently called out Apple's Steve Jobs, by name, for failing to "give back" sufficiently to America via charity, as his rival, Bill Gates, has done.

This is an excellent example of why it is dangerous to allow government to begin to use concepts such as "fairness" in taxation policy.

Who is to be our arbiter of what is "fair" for anyone to pay in taxes, or charity, to the nation? Why is it necessary that tax rates even rise with income level? Surely, if there were one flat rate of, say, 10%, then a person earning $1MM would already be paying 10 times the amount paid by someone earning only $100K.

Isn't that "fair?"

The Constitution is notably silent through most of its original language on the topic of citizens having direct relationships with the federal government. One surely does not get the idea, when reading it, that the Constitution had as any of its purposes to enshrine a climate of punishing those Americans who either earned high incomes or amassed large amounts of assets.

How odd, now, to hear one party continually beat a drum for all conversations involving government debt, deficits and spending, to immediately become about "the rich" paying "their fair (meaning higher) share" of taxes.

I find it helpful to step back and recall studying, as a graduate student, two well-known Harvard philosophy professors- John Rawls and Robert Nozick.

At the time, being young, I was enamored of Rawls' concepts as stated in A Theory of Justice. Being a good social liberal, Rawls was big on equity of distribution. I thought this was important at the time.

In contrast, Nozick, a libertarian, concentrated on minimalist states which provided the barest necessary levels and tools of government, in order to leave individuals with maximal liberty and responsibility for their own destinies, as he wrote about in Anarchy, State and Utopia.

I suspect because it's easier for most people to grasp the notion of dividing up an existing pie of resources, or tax obligations, they do not pay as much attention to the notion that some tax and government schemes create substantially larger pies of resources, such that either smaller assessments raise as much tax revenues, or equal assessments raise even more.

It seems that our current Democratic office-holders can't grasp the notion that the US economy would grow faster with simpler, lower tax rates, thus providing even more tax revenues than much higher rates which distort economic resource allocation and retard economic growth.

Besides the purely subjective nature of class-warfare style polemics characterizing whatever "the rich" pay in taxes as "insufficient" or "unfair," such approaches ignore the more basic, pressing function of tax policy, i.e., to fund our government.

And nowhere in the Constitution is there any language concerning what is "fair" about treating high income earners or the wealthy differently than anybody else.