2007 03 Taxes

Taxes

Imagine the brilliant pre-historic mind that invented taxes. He (or she) imagined making the world better by pooling resources to improve the common lot in life. It was such a selfless thought. “If we can collect a little bit from everyone, then we can do really great things for everyone.” Those less imaginative could see the wisdom of such a plan and willingly agreed to entrust a little bit of their property to the person who suggested the idea.
The inventor of taxes became the leader (king), elected out of trust that he would do the right thing. Gradually, the power of kingship went to his head (greed) and he realized that he had control over other people’s lives by invoking the fairness doctrine (you must pay your fair share to help us all). Presumably, out of arrogance, he started to exercise that control and make decisions (pass laws) which enhanced his power and gave him comforts and privileges of life. He could easily rationalize that he was worth the respect and privileges shown him because he had the power to do great things. Many surrounded him because it made them feel great as well. They started to get paid by their king to make pathways to the neighboring village so they could exchange stuff (commerce) which wasn’t available at home. When the neighboring village found out about how easy it was to set up this system, they stole the idea and applied it to their village as well.
Then, someone got the idea that the king had too much power (envy) and decided that he should be overthrown (coup). They had to do this surreptitiously because if the king found out about it, he’d react (anger). When the neighboring king found out about the plot he wanted to help so that he could extend his realm by taxing his neighbors as well as his own citizens. So the neighbor supported an overthrow.
Pretty soon, the more powerful king prevailed and his conquest gave him even more power which was defended by soldiers who wanted to position themselves next to greatness. The king raised taxes to pay for all the soldiers saying, “Look, our neighbors are trying to take us over. I’m here to defend you, but to do that I need more money.” In times of peace, kings did, in fact, do great work. They built pyramids, roads, water works, buildings and temples. They also did harm in that their grand ideas taxed their people into poverty. They perpetuated their rule by appointing sons to succeed them. Some of the sons were not so capable because they plundered what their fathers had built rather than seeing the vision of greatness for the benefit of their citizenry.
It has been just over two hundred years that some brilliant statesmen in the American colonies fought to give common people the right to influence how their taxes should be used. “No taxation without representation” was the cry. Their idea was that the presumption of power rests with the people. They elected leaders to decide what role government should play. In spite of their intentions, those leaders took on much of the characteristics of the old kings. They tended to be arrogant, thinking that they knew how best to run the world over which they had dominion. They tended to enjoy the power vested in them to influence outcomes. They were surrounded by minions who wanted to do their bidding to get close to that power.
When it came time to be elected, politicians promised great returns on the people’s loyalty. “If I’m elected, I’ll give you back this and that which won’t really cost you because THEY will pay for it.” So taxation became a means of shifting wealth just as it did in the old days. It really wasn’t the people who were deciding in the best interest of the whole, it was people deciding in their own self interest. Getting something for nothing became the goal. After a while, the taxes were not enough any more, so it was suggested that the government borrow money to do even greater works. Bonds were invented.
The sales pitch on bonds was that bonds are not really taxes. We can do all this great stuff now and not have to wait until we really have the money. I heard the other day that the service on the bond debt in California has gone from three percent per year to eight percent per year in the last several years. The principal is over a trillion dollars. In most cases bonds are paid back with tax revenue. If not paid by tax revenue bonds are paid by the users of the project (such as bridge tolls)—which is a tax by a different name.
In California, bonds are voted on by the people through ballot propositions. We are always told that there is a tremendous need which needs immediate attention. “Look what you can help us do by voting for this great bond measure which will be paid for by someone else!” What often isn’t said is that hidden in the fine print is “education” which goes back to the bond-sponsoring organization. They have nothing to lose by sponsoring boondoggles because they benefit if the measure wins. The world has become so fast paced, that we seem to have lost the patience in building great things over time. Immediate results are the primary measure of success. In Europe, cathedrals sometimes took a hundred years or more to build. In this country we have lost the art of patience.
Taxes at the Federal level are some of the most insidious. It is really easy to say, “Let’s get help from the Federal Government.” It has become so big, that many people believe it to be the solution to local woes because somebody else—the vast faceless others—will pick up the tab for a close-to-home project. Citizens in one state are taxed to solve another state’s problem. It is another redistribution scheme. Wealthy people are deemed to have already bilked others of their money, so the idea of taxing them more seems fair to many people. But capitalism needs capital to start a business. Before you can sell lemonade, you need lemons. And if the people don’t want a wealthy person’s product at the price they are willing to pay, they either shouldn’t buy that product or they should compete and produce it more cheaply.
It has been proposed that a flat income tax is the most fair way to distribute wealth for the common good. However, that mechanism has a basic flaw. Entrepreneurs don’t get a normal paycheck. They have legitimate expenses before they can sell even one widget. What is a legitimate business expense becomes the subject of a tax code which is many thousands of pages long. An industry of preparers, Enrolled Agents, accountants, attorneys and software programs has sprung up to help people comply with the complexities of legitimacy. Interpretations vary based on a myriad of multifarious methodologies.
So we live with taxes. What can be fairer than that we all pay a little bit to make our world a better place? To a degree, that makes sense. However, when all taxes exceed 50% of earnings, they become onerous by my way of thinking. Currently a successful person in California pays income tax at the rate of 38% to the Federal government and 9% to the State government. In addition, there is sales tax of 8.25% on any purchases (except food from a grocery store to be taken home.) Gasoline is taxed, luxury items are taxed, gifts are taxed, estates are taxed, and real estate is taxed at various rates, depending on when you bought your home. If you run a business, you pay taxes on behalf of your employees by matching social security while your own social security tax is 15%. In addition you provide for employees welfare through the mandatory workers compensation insurance system. So for every dollar earned by selling your product, expenses in the form of taxes hover around 70%.
I predict that at some point, the scale will tip and the government will not be able to sustain itself. The burden of debt will become so large that the system we’ve allowed to develop will collapse. This will happen because there is no one person or entity which is responsibly watching the whole. Local taxes, State income taxes, State property taxes, Federal income taxes, corporate taxes, county taxes, city taxes, gas taxes, social security taxes all work independently of one another so the taxing authorities can look to each one and say, “That’s not such a big tax, it’s only $100 per parcel to keep our libraries open. Look at the great social problem we’re fixing with this little burden on everyone.” Few will predict when the scale will actually tip. I predict that almost everyone will be taken by surprise. Nevertheless, the fingers of blame will point with great authority, “I told you so. It’s the fault of …(fill in the blank).”
Those who survive this debacle will be those who can best be self sufficient. I predict looting and plunder and a call to arms to defend property. Food will be difficult to obtain. Gold with its limited availability will become a medium of exchange, In short we will have another great depression. There will be great despair. The government which caused the problem will be asked to provide the solution which it will be incapable of doing. The cry will go out to our elected officials to do something immediately. They will publish edicts and initiate programs to help the needy. They will try to convince us that they have the solution to our woes. The cycle of government “solutions” will begin even before the worst of the disaster has run its course.
Is there any hope of avoiding this doomsday scenario? I believe only if we elect people who exercise long range vision and restraint. They will have to run on a platform that helping the people means deferred gratification rather than quick results. Things which are wants, not needs, must be postponed until long after the term of office is completed. The platform will require more self-sufficiency on the local level and less big government intervention to solve problems. It will be a platform that encourages entrepreneurism and the investment of capital. It must include the lowering of taxes across the board so that more can be accomplished in the private sector where the drive to profit will benefit more people who will be willing to spend their money because they will reap the enjoyment of a better life. It must be a platform where blame is absent. We must make do with what we have rather than yearn for what we don’t have. It will be a platform where the veto pen is used often.
It won’t be easy to sell the small government platform, because people want big benefits without paying the true price for them. That is valid in life insurance planning just as it is in government—People refuse to plan for an event where the odds are 100% certain. But armed with knowledge about what the future holds, some bright individual will decide that more taxes are not the answer to our problems. The citizenry will listen and elect that person, crowning him or her with glory for making the difference which actually saves our way of life. That person could be me. Or the next time you vote, it could be you.

©Frank Bliss 2007 All rights reserved
March, 2007