(Bumped from the Bush era.)
The picture to the right, in case you were wondering, is John Collier’s artistic rendition of Lady Godiva. She graces our presence because her notorious ride was in fact a tax protest. Every now and then, at a domestic tax demonstration, there are rumors that a similarly-clad rider will appear. I don’t know whether it ever really happens.
We live in a world where just about everything is taxed, sometimes overtly and sometimes with subtlety. Aside from being the source of government revenue, each tax is a little piece of social engineering, causing people to change their behavior to avoid paying. Sometimes this behavior modification is deliberate, such as the high cigarette taxes designed to discourage sales. Other times it’s accidental, such as the “yacht tax” of a few years ago, which drove boat builders out of business.
Here are some fundamental tax types:
- Consumption taxes, such as sales tax, which tax you for stuff you use
- Production taxes, such as income tax, which tax you for your productivity
- Property taxes, which tax you for stuff you own
- Transfer taxes and fees, which tax you for transactions in which non-consumable goods change hands
- Taxes on capital gains and investment income, which tax you on the growth of assets you hold
- As the final insult, there’s a death tax
Excessive taxes can suck the life out of an economy. Some types of taxes are more toxic than others. A strong economic argument can be made favoring the consumption tax over the alternatives. Taxing consumption rather than production encourages savings, which are an essential part of the foundation upon which a prosperous economy is built. Also, taxing consumption levels the playing field with respect to domestic production, since all goods are taxed at the same rate regardless of origin, instead of having domestic goods weighed down by built-in taxes. Unfortunately, it’s politically awkward for an elected official to advocate rational tax policy, because the political opposition strives to make good ideas sound ugly. Lowering or (gasp!) eliminating capital gains and income taxes appears to be a sop to the rich, and indeed it will make the lives of the rich easier. Of course, the rich take care of themselves in any case; a simpler tax structure makes their job less inefficient, and also makes it easier for the less-than-rich to aspire to riches. But that’s a hard message to get across in a world where the misery merchants reinforce a sense of individual helplessness.
The FairTax organization is promoting an ambitious plan to abolish the IRS and replace the existing tax structure with a national sales tax that will generate the same level of revenue. That sounds like a wonderful idea to me. Imagine an end to income taxes and record keeping and all the other intrusive nonsense we put up with in order to assure the government takes its “fair” share of the fruits of our labor. But you can see this movement, as great as it is, faces an uphill battle.
Let’s talk about the history of income tax for a moment. Another April 15 disaster was the sinking of the Titanic in 1912. Immediately afterwards, the Sixteenth Amendment was ratified, authorizing the American government to levy a tax on income. And the rest, as they say, is history.
Income tax rates have gone up and down over the years. Here is an interesting historical chart. You’ll see some high marginal rates in the early years, but these only applied to the very very very rich. When we got into WWII, the income level at which confiscatory rates cut in dropped precipitously, and they stayed pretty much in place until Ronald Reagan’s tax cuts. The high rates didn’t affect the average wage earner, but they created a firm barrier against becoming rich through a salary. This made for what amounted to a national wage cap. Getting rich required, among other things, some very creative accounting.
As a practical matter, between George Bush’s inclination to spend money and the Democratic inclination to take money, I don’t imminently expect any tax reforms that will do more good than harm. If any of you are in a position to conjure up Lady Godiva, now would be a good time.