Wealth and Other Forms of Taxation

I feel so good come payday.
I think of all the things I’m gonna buy when I pick up my pay.

Don’t you know, but then they hand me that little brown envelope.
I peep inside,
Lord, I lose all hope.

‘Cause from those total wages earned,
Down to that net amount that’s due.
I feel the painful sense of loss between the two.

There goes that bracelet for her arm.
There goes that new fence for the farm.
There goes that brand new Pontiac.
There goes the shirt right off my back.

You can dream about a vacation in the sun.
You can dream, but you can’t never have one.
‘Cause by the time your good old Uncle Sam gets done,

You’ve got just enough for gas,
To see them city limits pass,
And if you get back home 4th class,
I’d say you won.

After Taxes  -   Johnny Cash  (1978)

…..

Taxes are a necessary part of a civilized society. They have been around for thousands of years. They fund those actions of the government that are deemed in the general interest of society. In Democratic Republics, they are assessed upon the people with their consent through their elected representatives. But not all taxes are created equal. Some are “better” than others.

So, what do I mean by “better?”  Ideally, taxes should raise necessary funds for the government with a minimum of interference with commerce. This, of course, is not what happens. Taxes, and tax credits, are used to subsidize products and behaviors that the government deems virtuous and to punish those that are considered harmful. Cigarettes are very heavily taxed while Electric Vehicles are subsidized, for example. This is sort of the “original sin” of tax abuse since this sort of thing has been going on since the Romans.

As much as I would like to see the use of the tax code in that way to change, it seems unlikely. So, instead I prefer to focus on another place where the imposition of taxes can also be abusive. That is when you impose a tax for simply owning something rather than a transaction-based tax. When taxes are imposed on transactions, be that income or a purchase for example, there is a cash flow involved with the transaction which has two characteristics that make the tax more equitable. First, income and purchases are in some ways voluntary. You do not pay a sales tax if you don’t buy something. You do not pay an income tax if you have not earned income. Secondly, there is cash flow involved which makes the payment of the tax possible. Your income gives you the cash from which to pay the income tax for example.

On the other hand, there are taxes for “existence.” The most obvious of these is the property tax. You pay it not because of any transaction but because the property exists and you own it. Originally, the purpose of these taxes was to pay for property related services such as the street to access your property and police and fire protection. That makes sense and is logical and fair. But property taxes now fund any number of things such as schools and mental health services and parks and general government overhead expenses. The problem is that these taxes can now become so high that a person can own a property for a long time and literally be “taxed out of it” as property taxes increase substantially more the owner’s income increases. Since the tax is not based on any transaction nor does most of it pay for property-related expenses, the owner can be forced to sell the property to pay the taxes if they do not have another source of cash to do so. It was a rash of such situations for homeowners in California in 1978 that started the famous Howard Jarvis tax revolt. As leftist as California is now, 45 years later the tax-hungry politicians have been unsuccessful in repealing that 1978 voter approved Proposition 13. They have tried. But the Howard Jarvis Taxpayers Association has been successful in stopping them.

Several states, including the aforementioned California, are now proposing “wealth taxes” as a means, ostensibly, to raise revenue and cure income inequality. The likes of Bernie Sanders, AOC and Elizabeth Warren are also unsurprisingly fans of the idea. It is a terrible idea for the reasons I have already mentioned. If you get taxed on what you own, in addition to the tax on what you earn, you have no revenue to pay it. You cannot avoid it by not engaging in a transaction. So, you have to sell things to pay the tax. There is already a federal estate and gift tax as well as state level death taxes in many states, to tax wealth when transferred to another generation. The wealth tax would be a mechanism to start taxing asset accumulation throughout life rather than just at or near death.

Same as excessive property taxes, in my mind wealth taxes are simply wrong and unfair in that there is no cash flow involved and it is effectively a “head tax” or a tax on living, based upon your accumulation of assets. But even if that were not the case, the dilatory affect that such a levy would have on capital for investment and therefore on growth would be huge. The net result would be everyone loses. Better to achieve more “income equality” by bringing the bottom up rather than bring everyone down.

So, in my perfect world, which will of course never exist, there would be no incentives or punishments in the tax code for various behaviors. The levies would be even and fair. And there would be no wealth tax and property taxes would only be in the amount necessary to pay for direct expenses to the government related to that property. We would have sales taxes and income taxes to fund the rest of government.

Some of you may be wondering what I think of the “Fair Tax” proposals which would replace the income tax with a national sales tax. I actually oppose it and always have. First you would need to repeal the 16th amendment to the constitution (authorizing a tax on incomes), or you would wind up with both a sales and an income tax. Making changes to the constitution is hard, as it should be. Secondly, the national sales tax would have to be at least 23% to replace the income tax. When combined with state sales taxes, you would have over 30% tax in most places. The incentive to make transactions “underground” would be huge and the degree of enforcement to prevent that would make the current IRS seem tiny and unintrusive by comparison.

One more observation on this general topic. Eight states now have no income tax. Some of those states are able to make that work with taxes from major in-state industries such as oil and gas or tourism. Others make up for it with higher sales or property taxes. I am actually not a fan of a state with no income tax if it results in very high property taxes for reasons I have explained above. And of course, some states have high taxes on everything. Interestingly, the states with the highest overall taxes tend to have the worst schools, worst roads, worst parks and generally underperform in so many areas. That is because they spend their money on crap rather than on real public services. I have long wondered if there were a high tax state, but it had the best roads, schools, parks, responsiveness at the DMV and everything else, would conservatives (and others) be willing to go there since they would be getting value for money? I think they would. Alas, no such state exists.

Taxes are necessary and have been around forever. How we impose them and of course, how the money is spent is a major determinate of the prosperity and happiness of a society. Social goals should not be attained through the tax system. Years ago, my father (who passed away 17 years ago) told me that he opposed a death tax because wealth rarely makes it past a 3rd generation in a family. “Eventually,” he told me, “the money will find its way to people who worked for it.”

If you look, you will see that wealth rarely makes it even three generations deep. Someone who inherited it will spend it or lose it. For a case study, see Hunter Biden.

I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free