“The power to tax is the power to destroy.”
“♪♪ Send lawyers, guns, and money. ♪♪”
“Upon advice of counsel, I must invoke my right of non-self-incrimination under the Fifth Amendment.”
Taxes are involuntary payments of money. Other such payments include blackmail, extortion, getting mugged in the Soho district of New York City, getting mugged pretty near anywhere else, having Junior rifle through your dress trousers for small bills, and recouping the amount by raiding Junior's piggy bank while he sleeps. In contrast to all of the above, taxes are lawful. This feat is achieved by having the people shaking down the cash be the same people who also write the laws.
The ostensible reason for taxes is to raise money that allows government to function. Taxes let government maintain the armed forces, the courts, and the police, although there is plenty left over to harmonize dog licenses, fund outlandish green-energy schemes, and send to Brazil on the condition that the state-run airline buys its jet engines from a key political donor.
The actual reason for taxes is to let politicians grant favors to people who contributed to, and voted for, them, and let them punish everyone else.
In the Good Old Days, there were no taxes. Everyone did what the Chief wanted. If the tribe were attacked, and the Chief thought you had no better use than to take the first volley of arrows, that is what you would do. To grow or hunt food, you would go where the Chief sent you, and turn the results over to the Chief. This was not a tax; they were all his to begin with.
The next era was the era of kings. The King had two advantages over the Chief:
- The King had a jewel-encrusted crown, whereas the Chief only had a bent stick that really did not seem like a basis to boss other people around.
- The King had a nifty castle, and you did not want to cross him and have to see how long you lasted outside its walls.
Despite these superficial differences, Kings were essentially Chiefs. Subjects did not cultivate "my farm" for crops to sell in "my shop." The King said, "Go there and rake that," and you did, and you got fed, unless you started thinking you had a better way. When the King got old, he gifted the entire nation to an heir, such as any son he had that the other sons had not managed to kill off.
The final era was the era of rights. What Pat Buchanan calls "peasants with pitchforks" stormed up to the highest tower of the castle, stuck a parchment under the King's nose (on a pitchfork) and forced him to sign it. Suddenly, everyone was able to sock away coins and even morsels of food for those midnight pangs of hunger. They belonged to you.
Taxation was invented about five minutes later, when the King realized that he did not mean what he just signed. After all, if a foreign force rides up to the castle's walls, and the King tries to muster one hundred swords, and one hundred swordsmen say, "Piss off, your Lordship, I was saving that sword to include in a package deal to marry off that homely daughter of mine," then the nation will lose the war and the King will only have memories of the Good Old Days to mull over from the dungeon of someone else's castle.
Thus, taxes were a way for the King to claw back some of what used to be all his until he gave it away. They must never seem merely to be another of the ruler's broken promises. That is why they are cloaked in high-minded concepts such as due process and proportionality and equity. And why there is Tax Court, and it has no juries.
Types of tax
For a prince, plotting to inherit Daddy's kingdom is a classic zero-sum game: For him to win, everyone else must lose. This same thinking drives tax policy even now. Everyone claims his proposed tax reform is "an everyone-wins situation," and he is lying.
The beauty of taxation is that you can tax anyone or anything. The tragedy of taxation is that everything that is taxed tends to go away. The thing about the "power to destroy" is not just a nimble conversation-starter when you visit your bureaucrat in-laws for holiday dinner. No one wants to pay tax. They may change or curtail their activities to avoid the tax, move the thing taxed somewhere it won't be taxed, or go all the way and become Organized Crime, though rarely as organized as the tax collector.
The left denies this. They say, "Repeated studies have shown that there is no relation between high taxes and economic prosperity." These repeated studies always involve picking your own endpoints, compensating for any Inconvenient Truths, and ignoring time lags, to get the results the researchers and donors set out to achieve no matter what the data showed: to prove there is no difference between good government and bad government, that taxpayers will just grab their ankles and bend over further, and there are no unintended side-effects of any bad policy. It is the biggest latter-day religion after global warming. Paul Cardinal Krugman gives sermons for it in the New York Times, and he has a Nobel, as the all-inclusive Norwegians throw sops to hacks as well as actual economists from time to time.
Nevertheless, even leftie politicians, or at least the veterans, know that certain taxes produce national ruin so instantly that they ought to be avoided. Therefore, taxes around the world tend to take the forms that produce ruin more gradually and frustrate attempts to cast blame.
When one laments that "the rich get richer," one is merely noticing that money is good for stuff, otherwise it would not be money at all, but Nutella. Anyone who does useful things with money (or just puts it in a bank so other people can) will, in a decade or two, have not $5 more but double his money. He can double it again if he just keeps it in play. Skimming away part of that flow means it takes many more years to double. Over enough time, any tax on capital aborts more goodness than it ever captures for the government.
Despite this minor drawback, taxing land and buildings avoids one of the problems noted above, because they aren't going anywhere. A tax resistor can hole up on his forty acres with a shotgun, but he cannot cut them out of the tax map and lug them across the state line to take advantage of a lower rate. It is even rare that an owner burns down his home to lower the assessment, though the Tea Party guy down the street really should stop playing poor-mouth and repair the shingles on his mansion.
Wealth taxes work the worst on "under-used" parcels, from nature conservancies to ballparks. Left Field cannot pay the taxes. However, it is government to the rescue, seizing the properties and operating them itself. This means the nature-lovers sit on a government board and the open space now has a three-story Teaching Center where a tree-hugger can nag her neighbors to sort their trash using their own money. Meanwhile, the taxpayers who thought the team owner had a sweetheart deal with the city tax office see how much more corrupt it can be with a municipal stadium.
Ability to pay is a mantra of all politicians. There is something to be said for not spending too much time demanding money from those who don't have it, for not asking the tattered pan-handler to fund the national space program.
Wealth taxes (see above) at least guarantee that the taxpayer has the resources to pay the taxes, at least until the city seizes the resources for non-payment. However, what the typical politician means by "ability to pay" is that it is a higher-yield game to go after people so productive that they never voted for a vandal like him in the first place. Consequently, most taxes don't kick in until a transaction takes place, and usually a transaction that produces wealth. Substituting for a goalie is rarely taxed.
- Income taxes are assessed on a person's annual income. The United States proudly touts its "voluntary tax system." This does not mean you can decide whether to pay or not, but simply that the taxpayer spends a week of evenings slogging through turgid tax forms rather than having the government send a bill. Mistakes are equally likely either way. When they happen, it is always the taxpayer's fault.
- Sales taxes are figured by the cash register and added to the purchase price, leading shopkeepers and customers to fierce argument over something that neither can do anything about. Nothing is more fun than that. The state, county, city, and regional transit district can each levy a sales tax, and it is Nobody's Fault when the total goes deep into double digits. In Europe, the value-added tax is a sales tax where the seller is forced to include the tax in the sticker price, as though he rather than the government were getting the money. This leads to about the same amount of angry debate. A typical V.A.T. begins its life already in double digits, though that is Nobody's Fault either.
Unfortunately, "funding the activities of government" is boring. It inspires voters much better to propose a new program that both does a good thing and obtains its money from a bad thing (the sin). Proposing a sin tax is a rare moment where the politician admits that taxing something tends to make it go away. The moment never lasts long enough for him to think about what his other taxes are doing to energy, transportation, telecom, medical devices, and high-earners. Nor does he consider that making the sin go away means his new tax won't raise the money he claims it will.
Barack Obama's forgotten first move was a sin tax, diverting $1 per pack from the unanimously hated cigarette and toward children's health care. No one could vote against this. Only when this test proved that the people were asleep did the big mischief start.
Advocates of sin taxes do not really care about funding government. Instead, they want to briefly touch every dollar anywhere, gently guiding it from an unwise activity, such as coal mining, toward a nice activity, such as solar cells. How are "good" and "bad" defined? As always, in terms of campaign contributions, and there is no Political Action Committee for chain-smokers.
Capital gains tax is really none-of-the-above. No one on the near side of Bernie Sanders (pictured) claims that holding shares of company stock is a sin. However, even he would assert that selling them is not a "real" transaction, as the shares themselves are a fiction that do nothing to create actual wealth. There is a buyer and a seller, and both of them receive confirmation tickets in the mail, but all that has happened is that cash moved in one direction among the investing class, whereas electronic book entries moved in the other direction. We agree that your chips placed on Double Zero are now mine, and I hand you a double-sawbuck. Nothing real happened. Wealth is neither created nor destroyed, and the factory rats at the River Rouge plant keep bolting Crown Vics together despite our exchange of bets.
Moreover, Ford Motor Company already pays corporate tax on its profits, as its banks do too; likewise each assembler on the shop floor. And even if the investor receives twice the money he put into the shares, the money goes less far than it used to when he bought them.
The only point in taxing the transfer of Ford stock is our belief that any life cushy enough to be spent buying stock should be tarnished by having to fill out forms and make compulsory payments; anyone free enough to be a trader should get a quarterly reminder that he isn't free at all. Again, the basis of this tax is payback: the politician's glee over socking it to someone who would never vote for him in a million years.
Other taxes have special names, not because we needed more names, but because we needed for politicians to keep their promises.
- Taxes that kick in only when goods cross national borders are called tariffs and duties, as though paying all the other taxes were not a duty.
- Excise taxes are taxes that only target certain things, such as excise bicycles.
- The line on the tax form for failing to buy a great Obama-care policy is a shared responsibility payment and not a tax at all, because Obama doesn't tax the middle class, and a bill written in the U.S. Senate cannot impose a tax.
How taxes work
- Meaningless distinctions
Government defines and administers taxes. Frankly, it would not work for someone else, such as Taco Bell, to do this. The same government runs the border stations where guards determine whether the brick holding down the tarp over the hole in your car's floorboard is a building material subject to the 60% retaliatory tariff, or a vandalism tool, on which there are no tariffs at all. When the government turns its attention to taxes, the result is another portrait by the same artist. For example:
- A stock held for 365 days is an investment, a selfless sacrifice that strengthens the nation. It is taxed at a pleasantly low rate.
- A stock held for 364 days is greedy speculation, a selfish get-rich-quick scheme that seeks a fast profit at someone else's expense. It proves you don't really care about the company or the country, nor anything else than on-line gaming, probably. It gets a punishingly high rate.
The taxpayer who owns a calendar might be able to figure out when 365 days have passed. He can write down key dates for each of his holdings, as though they were women he is dating who get mad if he forgets their birthdays. But he cannot divine what are qualified dividends, deductible employment costs, non-reimbursable travel expenses, like-kind repurchases, and Section 9242(a)(3) pass-throughs. He needs professional help. (The people who wrote the tax code also need professional help. They will not ask for it but the taxpayer might.)
The tax code is never done. In the United States, every new Congress has a House Ways And Means committee, which is concerned with neither ways nor means, and a Senate Finance Committee, which knows nothing about money flows and other things one might call Finance. What they all know is re-election, which means satisfying people who gave money to their campaign, voted for them, and especially dressed up and came to Washington, D.C. to give "testimony" about what changes the nation needs next: usually the exact reverse of the changes made by the previous Congress.
H&R Block gives the most "testimony" of all, despite not caring in the least how the tax code winds up — as long as it is longer, and completely different from last year. This maximizes the number of taxpayers who give up and pay them to fill out their tax forms.
Everyone wants a simple tax law, a tax return that "fits on a postcard." Unfortunately, none of them goes to Washington to ask for it. Everyone goes to Washington to ask for the opposite, whether for his own sake or for the sake of sheer complexity. If there are ten proposals, lobbyists tell Senators' how clever they would be to pass a bill with pieces of all ten. No one will ever figure out what the law is then.
Another thing everyone wants is tax law that is not political. Unfortunately, it is the political system that writes it. Though the political parties are diametrically opposed, their common enemy is any constituent with a mind of his own. This includes anyone who does any of the following:
- Sells a stock so as to "lose money" but takes the money and buys the stock right back again.
- Puts his money in a designated health care account — then borrows against it and uses the loan for a trip to Las Vegas.
- Deliberately impoverishes himself to qualify for compassionate treatment.
The parties are united in hitting these cases of treachery with a Penalty Tax. The Instruction Booklet makes it clear that there is punishment — and claw-back of any concession already given — for taxpayers so willful as to learn the rules and pursue their own goals within them.
Though it might seem that legislators are carving special favors on a whim, there is actually a philosophy behind the tax code. It is that everything you earn rightfully belongs to the government. Bureaucrats continually tally "tax preferences" and report to the legislature the cost of any decision to tax you at less than 100%.
Again, bad governance might be bad but it has no real-world consequences. One party might complain that a 35% corporate tax is the highest in the developed world, but both parties agree that if the government "needs" twice the revenue, all it has to do is raise the rate to 70%. And if it finds it still needs twice the revenue, it can double the rate again.
Arthur Laffer drew a famous graph on a napkin showing that government takes in no money with taxes either at 0% or 100%. There is a high point somewhere in the middle. Unfortunately, he threw the napkin away after dinner and never wrote a paper. That is why Congress spends so much time arguing about how any proposed cut in taxes will be "paid for." As the Peter Principle tells us that everyone is promoted just above his own area of competence (except during an election, when many people rocket way above it), taxes are also always set above the rate where they would work best. The "Laffer Curve" now merely refers to the bend in Interstate 20 near Tuscaloosa, Alabama that is banked so poorly that all the trucks fly off.
Setting tax rates absurdly high lets a politician promise corporations that, if they will just open a factory and create 100 jobs he can take credit for, they can get a special exemption from the high taxes, in a tiny Enterprise Zone exempt from the malaise his policies created. In gratitude, the factory welcomes him once every two years to speak to all the workers about how their livelihood depends on him.
Politicians go on trade missions in other states and countries to lure away employers for such deals; also to sample the local fine dining and whores, confident that their own investigative newsmen are back home reporting on the toddler who died while in state custody or the fact that Commuter Rail is not running.
In the capital, these Enterprise Zones are an example of a "win-win situation." The government makes a promise about future taxes, which means there is no effect on the current-year budget. The company promises to keep the factory open. The government, of course, cannot bind future legislatures; while the company might find that no one is buying solar cells in the shape of Donald Duck. Reducing employment is not an option, as it would make taxes snap back to their regular, high levels; but the company can always pull out of the state entirely, accepting a similar deal in the next state over, like a credit card holder moving from issuer to issuer to take advantage of their introductory low rates.
The reader will want to apply the information presented above toward selecting the best strategy going forward.
For the taxpayer
Much has been written about structuring one's affairs to minimize future taxes. But not here. Taxpayers who consult Uncyclopedia before setting up a Revocable Trust have only themselves to blame.
For the tax writer
Given that no one wants to pay taxes, it is clear that no one wants any new or higher ones. The dilemma for the legislator, in search of more loot to feed his cronies and backers, is how to sell a new bit of shameless self-dealing. However, the legislator should take heart, because if he were not a proven expert in advocating the loathsome, he would not be in the legislature himself. He should tout the proposed new tax as:
- Temporary and set to "auto-repeal" the moment a critical threshold is met, such as the government deciding there is no need for additional money, or the earth leaving its orbit around the sun. Best of all: a one-time tax, a claim as preposterous as it is effective, a plea to misbehave coupled with a promise never to do so again. It is simply why there are Battered Wives. In reality, the one-time tax will either fail to obtain revenue without wrecking the economy or it will again be the option of first recourse the next time there is a "crisis."
- Trivial — costing the average taxpayer only a pack of cigarettes a day. (And, you know, you shouldn't be smoking in the first place.) Last year's dollar-a-pack sin tax shows how two wrongs do make a right when selling a new tax.
- Only hitting the wealthy. It is never too late for another appeal to envy. As the legislator is at the podium, he should remember:
- For a good cause. Write the bill so the tax is "earmarked." Say, to rescue orphaned kittens who are stuck in trees. Every appeal to envy needs to be paired with a good appeal to pity. (When appealing to pitiless conservatives, say the tax will "pay down the debt and put the government's books on a solid footing again.") The average taxpayer will never realize that every dollar earmarked for this cause, toward which he would gladly have paid more tax, frees one dollar to double the subsidies for prune farmers.
- Small. Even the U.S. income tax was just three percent, until forward-thinking legislators "closed loopholes." A new tax can be written to be small (or even "trivial," about which see above), and it will continue to be small, like the local sports team having "momentum," up to the very moment that it isn't.
And never forget choice of words. The new tax is a "smart" tax. It is a "modern" tax. It is "direct" and "sensible" and "fair." As impoverished citizens are less able to pollute and despoil the planet, every new tax is a "green" tax. Remember, a constituent is less anxious to keep his earnings than to have his representatives confirm his high opinion of himself.
For the reformer
Every taxpayer knows how taxes should really work. Most taxpayers are in the middle class, which is different from lower-class individuals who don't pull their own weight, and from upper-class individuals who don't pay their fair share. A reformed tax system would favor the middle class, by shifting the burden somewhere else.
The few taxpayers who actually design a letterhead, acquire a mailing list, and open an office on K Street in Washington have one difference: They are vain enough to think that their tax reform will be the last change to the tax code, ever, and that it will get through the legislature without getting larded up with favors and loopholes itself.
It will tax more things, but at a lower rate. It will be simpler and "fairer." It might comply with all the promises made when the tax system was originally pitched. The legislature might even pass the reform with a minimum of pork riders. A decent reform might return the U.S. to the broad-based flat tax it had in 1986, except that no one anticipated the "work" of (1) future Democratic Presidents and (2) future Republican Presidents. Barring a gigantic stink bomb planted in the Capitol Rotunda, the usual suspects will return just after the election to sabotage it again.