October 29th, 2016

What is the purpose of the income tax?

I always thought the main purpose was to raise money for the services the federal government provides—defense, for example; and in more recent decades, entitlements.

As for the tax structure, its progressive nature was meant to be “fair” in the sense that people with an enormous amount of money could afford to pay a much higher percentage of it without feeling any sort of pinch. Whether or not you or I consider that fair, or whether we’d rather have a flat tax or some other arrangement, that’s been the way it’s worked for most of my life.

Back in 2008, when Obama was running for president, there was a big furor when he had a conversation with Joe the Plumber (remember Joe?), regarding Obama’s tax proposals:

“Your new tax plan is going to tax me more, isn’t it?” the blue-collar worker asked.

After Obama responded that it would, Wurzelbacher continued: “I’ve worked hard . . . I work 10 to 12 hours a day and I’m buying this company and I’m going to continue working that way. I’m getting taxed more and more while fulfilling the American Dream.”

“It’s not that I want to punish your success,” Obama told him. “I want to make sure that everybody who is behind you, that they’ve got a chance for success, too.

Then, Obama explained his trickle-up theory of economics.

“My attitude is that if the economy’s good for folks from the bottom up, it’s gonna be good for everybody. I think when you spread the wealth around, it’s good for everybody.”

“Spread the wealth around” was the controversial phrase and was considered evidence of Obama’s socialist predilections, something he had previously kept somewhat under wraps. But it struck me, on reading this article at AEI, that such thoughts have now become unremarkable and mainstream in eight short years.

Our choice of a small progressive tax system has important policy implications. The relatively steep progressivity of our tax system tends to reduce income inequality by redistributing income from rich to poor. But the small size of our tax system pushes in the opposite direction, limiting the amount of redistribution that it can induce…

…[A] larger tax system could significantly reduce inequality even if it was not very progressive, particularly if the taxes were used to finance larger benefit payments to those with lower incomes. In general, the same volume of redistribution can be achieved with a smaller, more progressive system or with a larger, less progressive system.

There’s much more to the article, which is interesting in terms of what it says about our tax system compared with Europe’s. But what struck me most forcibly is how the authors seem to accept that a major and desirable goal of the tax structure is the same “spreading the wealth around” for which Obama was so criticized in 2008. And this is at AEI, a supposedly conservative think tank.

27 Responses to “What is the purpose of the income tax?”

  1. IGotBupkis, "Si tacuisses, philosophus mansisses" Says:

    The ORIGINAL idea of the income tax was to “gouge the uber rich” — only the top echelon was to be taxed… even though the uber rich had ALREADY created an out in the form of tax free foundations: “The Bill and Melinda Gates Foundation”. “The Buffet Foundation”. ‘The Pew Charitable Trust”, and, yes — “The Clinton Foundation”.***

    By putting the majority of your assets into an organization like this, you are no longer subject to income taxes, except on that which you are paid for “administering” the foundation, typically a fraction of the ROI from the foundation itself.

    And, over the century since we got the IT, we ALL have become subject to its demands… not just the “top 5%” of those who don’t make enough to put everything into a foundation.

    Most Americans now pay out over 40% of their direct income into taxes (not all of it income tax, granted). And our schools no longer seem to make much note of the fact that the American Revolution, among other things, was very much a TAX rebellion… over taxes amounting to a paltry 2-3%.

    ==================
    *** This points up the abject futility of trying to use laws to get at the Uber Rich, aka “The Rich Bastards”. THEY have better access to the corridors of power than you do, and, as a result, will always be able to Delay, Obfuscate, and otherwise slow down ANY legislation you attempt to target them with long enough to also slide in an Out into the legal process so that it will fall on someone else, typically those who would challenge their power.

  2. Paul in Boston Says:

    If I had my druthers, which I don’t, I’d repeal the 16th amendment and just have a federal sales tax. Everyone pays, everyone sees what Uncle Sam is getting, and there are no free riders voting for ever more programs that they don’t pay for, i.e., sharing the wealth, aka, vote buying.

    As it is, the code is a convoluted morrass, by design, so that people with access can escape from taxes. A tax lawyer I’m aquainted with explained to me that there are provisions of the IRS code that only apply to a single person or specfic company. It’s corrupt as corrupt can be and as we’ve seen can be used for political purposes against political opponents, c.f., the Tea Party 501(c) 3s.

  3. sdferr Says:

    Heh. Of redistribution: “the transfers”, which I suppose is the soothing way J.J. Rousseau would have put that; whereas “the theft” may more abruptly be accorded to J. Locke’s way of thinking. Somewhere in the middle we might look for concord on property: that is to say, whose to dispose? and to what purpose?

  4. expat Says:

    More money doesn’t always help the poor live better. Read this:
    http://www.nytimes.com/2016/10/30/opinion/sunday/3-tvs-and-no-food-growing-up-poor-in-america.html?ref=opinion
    There are other factors like not knowing how to buy food and cook, being ashamed to ask about things they don’t know, acting white, and feeling like they have to have the latest clothing or gadgets pushed by celebrities.
    Neighbors of my brother didn’t know about the public library a block and a half from their home, even though both liked to read. They didn’t know they could ask the librarian for recommendations or use the computers there. Had you given them more money, they would have bought a fancier cell phone. I think I helped one break through some of this, but it’s a one on one job.
    The do-gooders who think raising welfare payments will do the job need to get out of their bubbles. The Joseph Project is a good example. Our country has become so fixated on giving things to kids that the ignore doing things that will give them a sense of accomplishment. This is what really motivates people to learn skils and improve their lives.

  5. Brian E Says:

    Washington state has a sales tax, no income tax. Every so often the politicians float a referendum to institute a small income tax, which has always been voted down.
    I see another ballot measure initiating a 1.5% income tax on wage earners above $200,000.
    They never give up.

    One of the problems with the income tax, where low wage earners don’t feel the effects encourages them to support raising taxes– it doesn’t affect them.

  6. Frog Says:

    The 16th Amendment was part of the great first Progressive wave that enabled the building of the massive Federal government. Like other Progressive initiatives, it was built on lies (“Tax only the few wealthiest”). Creation of the Federal Reserve Bank, direct election of US Senators, and entry into WWI all occurred in close proximity (the last despite Woodrow’s campaign promise against entering).

    See the Alternative Income Tax for a more recent iteration of Progressive tax “fairness”. Set up to only tax (yet again) a few fat cats that paid zero income tax, it now plunders the middle class…for having too many deductions, like too many kids too sick, and thus too high medical deductions. For which they are more heavily taxed.

  7. sdferr Says:

    “. . . it doesn’t affect them.”

    When, of course, it should affect them. Y’know, hell, it’s only fair.

    Now and again we do see suggestions of that sort of quid pro quo, such as making receipt of public “entitlement” dollars contingent on an exchange for the recipient taking educational classes or signing in with a jobs center, or other such relatively benign gestures — all grand humiliations, we can be sure. Still, one can only wonder what changes in the public fisc would take place were the contingent exchange to be tax-dollars for mild but very public beatings. “Unka Sam means to make you care, and he ain’t jokin’, peon,” being the sense of the matter.

  8. Phil Underwood Says:

    I’d not only like to see our present tax system replaced with a national sales tax, I’d like to see the rate made adjustable to cover the real-time cost of government.

  9. charles Says:

    “the authors seem to accept that a major and desirable goal of the tax structure is the same “spreading the wealth around” for which Obama was so criticized in 2008.”

    This is sooo true. No one seems to be bothered about taking money (or any other means of wealth) from someone to give to someone else – especially if the someone else didn’t do anything to earn it.

    So, yea, our Republic is lost.

  10. Chester Draws Says:

    There is no problem cutting taxes, the problem is that the US won’t cut expenditure.

    Sure, they say they will. But when push comes to actual shove, they won’t.

    The Right will only look at things like social programs, and then spends the savings on more “defence”. The Left will only look at … not very much.

    If you want to actually cut tax you need to get the two sides together and accept that conservative favourites will have to be chopped back alongside social programs. So that ain’t gonna happen.

    It’s no good being “low tax” conservatives and being unwilling to see your favourite areas get the chop. Lead the way — volunteer to cut defence (especially NSA, NASA, CIA and your ridiculously large Navy) and all those pork-barrel industrial and farm subsidies before suggesting the Left has to lose its favourites. Then people might actually think you are serious about low tax.

    Otherwise it’s just partisan waffle.

  11. T Says:

    This problem/discussion of an “equitab;e” income tax is mired in a rheotric common to most political discussions; when someone is arguing percentages look carefully at the actual numbeers—when one is arguing numbers look carefully at the percentages.

    With a flat tax of say 10% a person making $50,000 p

  12. T Says:

    sorry—

    . . . a person making $50,000 pays $5,000 and has $45,000 remaining; a person making $5,000,000, however, pays $500,000 and still has $4,500,000.

    Well, that’s way too much money (remember as Obama said, “At some point you’ve made enough money.”). This goes to “Igotbupkis”‘s comment above that even the original idea of the income tax was to gouge the rich. Remember that the origin of the income tax was part and parcel of prohibition which eliminated the government income fromt he taxation fo alcohol—another progressive failure.

    The fact that such a rational appears in AEI is sadly evidence to how succesful the Gramscian marrch has been in marbelizing progressive theory in even our “conservative institutions.

  13. AesopFan Says:

    “Vice is a monster of so frightful mien
    As to be hated needs but to be seen;
    Yet seen too oft, familiar with her face,
    We first endure, then pity, then embrace.”

    ― Alexander Pope

    Hayek: You can never have just a little socialism.

    Taxes should pay for the few necessary functions of government. Give the pols more money, and everything becomes necessary for them to handle.

  14. AesopFan Says:

    Looks like AEI has indeed defected to the Left.

    “Our smaller, more progressive tax system has emerged as a compromise between the two parties. Republicans would probably prefer a smaller and less progressive fiscal system. That approach would promote economic growth by imposing smaller penalties on earning income, saving, and investing, but it would also reduce redistribution and harm those with lower incomes. Democrats would probably prefer a larger and more progressive tax system with larger benefit payments. That approach would reduce income inequality, but it would also impede economic growth. Neither of these extreme combinations is likely to be politically feasible.”

    The point about increasing economic growth is that you then have MORE INCOME TO TAX and thus to “spread around” whereas impeding growth with higher taxes inevitably produces less. Less harm is done to the poor under the former system than by all the redistributionisms, which (in most of the studies I have seen touted) have resulted, in total, in more harm than in less.

    Are the “Conservative” think tanks no longer hiring unbiased economists?

    And please note the burden of our “too small” tax system:
    “At the same time, our tax system is smaller than in other countries. Federal, state, and local taxes in the United States amount to 25.4 percent of GDP, compared to the OECD average of 34.2 percent.”

    One-quarter of the rewards of enterprise, productivity, and just showing up for work in the morning – goes into the pockets of not just the “deserving poor” but also the cronies of the politicians, the bureaucrats at all levels engaged in taking in your money and passing it around, and the people who vote to take it from you in the first place (in the guise of campaign contributions from other people who got the money from the government in some fashion).

    Government is the ultimate money laundering organization.
    What a racket.

  15. Richard Aubrey Says:

    Don’t overlook pandering to envy.

  16. Sorta Blogless Sunday Pinup » Pirate's Cove Says:

    […] Neo Neocon covers the purpose of the income tax […]

  17. Brian E Says:

    According to google, AEI is neo-conservative.
    What is the neo-conservative philosophy on taxes?

    The only thing that neo-conservatism is associated with is a hawkish foreign policy and exporting democracy as a solution, which sounds good philosophically, but hasn’t worked out recently in practice.

  18. Brian E Says:

    (I pushed the send button- doggone tablets)

    If the original income tax was only levied on the rich to make up for revenue lost by lower tariffs– this looks like the root of redistribution and globalism.
    Who was president at the time?

    A national sales tax makes a lot of sense– and it’s defended in my deeply blue state that has resisted efforts to institute an income tax even though the left denigrates the sales tax as regressive. The problem with a sales tax is that items can be taxed multiple times.

    A VAT, which would be added at time of manufacture would prevent that, though it makes goods seem expensive. Didn’t Cruz support a VAT?

  19. Brian E Says:

    A sales tax does make everyone painfully aware of the cost of government though, which is a good thing and probably why the income tax hasn’t gained traction here, even though like the original income tax, it would only be levied on the “rich”.

    And the argument that the rich still pay a higher net dollar amount of tax because they buy more and more expensive things.

  20. J.J. Says:

    All taxes are destructive of economic activity. However, the government needs money to operate. The Constitution of the United States called only for the government to conduct defense, courts, and interstate commerce. Now the spending includes a plethora of other activities that are unconstitutional, but are accepted as being “extra-constitutional.”

    When the government began over-seeing farms, parks, and publicly owed lands they instituted the Departments of Agriculture and Interior. It has been all downhill from there. Every time the Feds decide they need to get involved in some new activity, it means they need more money. Thus they are now spending an amount every year that is 20% ($3.75 trillion) of GDP ($17.95 trillion) Were the government still doing only what they are limited to by the constitution that amount would be 4-5% of GDP – mostly on the military. (And what a military it would be!)

    The corporate income tax is a joke because it can be so easily avoided by most corporations and because it is not paid by the corporations but by their customers. Drop the corporate income tax to 5% of profits and eliminate 90% of deductions. That would require the companies to keep honest books, and would be a terrific incentive to stay in the U.S. (Jobs, jobs, jobs!)

    The personal income tax is a mess, but, IMO, is less destructive of economic activity than the Federal Sales Tax, often referred to as the “Fair Tax,” would be. The personal income tax needs to be simplified (three rates) and made less difficult to calculate. (Tax return on a postcard.) The top 20% (taxable income of $139,000 and above) of tax payers now pay 84% of the taxes and that seems about right to me. The bottom 30% pay no taxes. In fact they often get refunds even when they paid no tax. That is one source of income redistribution.

    The main source of redistribution of income is through Welfare, Supplemental Security Income (SSI), Medicaid, the Food Stamp Program, the Emergency Food Assistance Program, HUD Public Housing assistance program, Medicare Prescription Drug Program, and other less well known programs. In the last eight years all those programs have expanded. As economic activity has remained stagnant. and more people are becoming poor every year. These programs are arguably not helpful in the long run to the poor. It appears that the tendency is to become trapped in the poverty mentality and easy living on the dole.

    Social Security and Medicare were set up to be self-funding through contributions (FICA taxes) by the eventual users. The programs now don’t take in enough to fund the expenditures so income and other tax receipts are being used to pay those bills. So, unfortunately, they are now part of the overall financial/tax discussion.

    The best anti-poverty program is one that promotes robust economic activity. Low taxes, reasonable regulation, private property rights enforced by courts, and sound money encourage economic activity. Smaller, more efficient government at the federal, state, county, and city levels is also helpful to economic activity because it leaves more money in the pockets of the citizens.

    There will always be people, who through no fault of their own (Mental illness, disability, bad choices, etc.), will need assistance from society. That assistance works best when it comes from local government, churches, and local private charities. Every able-bodied citizen should understand that their primary duty as a citizen is to be self-supporting if at all possible.

    Will we ever get that “old time religion” on taxes and government? It looks very doubtful. But I can’t let go of the hope that some day enough people will see the light for it to happen.

  21. sdferr Says:

    “Social Security and Medicare were set up to be self-funding through contributions (FICA taxes) by the eventual users”

    Eh, um, sort of, but not precisely: Ida May Fuller

  22. sdferr Says:

    George and Ira, as interpreted by Bolcom and Morris: I’ll Build a Stairway to Paradise

  23. J.J. Says:

    sdferr, Many people who got on the rolls in the early years collected more than they paid in, but because life expectancy was quite a bit lower and there were many young people paying in, it was expected to work. I’m sure you know what went wrong. People started living longer. Fewer young people paying in as compared to those retiring. It became entrenched as an untouchable item that could not be altered to make it solvent. And much more. Good intentions. Bad results.

  24. sdferr Says:

    Is not the mere occasion written into the Social Security law (fully intentionally, I have to believe) that anyone (not restricted to those who were merely the happenstance early beneficiaries) might “get out” more than they ever “put in” a nearly perfect model of an injustice on its face? “These” win the lottery! “These others”, well, let’s just say pobrecitos, get screwed.

    At the very least, the idea of a potential to future trouble on these grounds had to be understood, and therefore, one presumes, dealt with in crafting the law.

  25. J.J. Says:

    sdferr: “At the very least, the idea of a potential to future trouble on these grounds had to be understood, and therefore, one presumes, dealt with in crafting the law.”

    The idea was to cushion old age for those who were unlucky enough to arrive there without a pot to piss in. It was never meant to be fair. It has never been fair. Like life, it isn’t fair.

    The idea that all citizens contributed (and it is mandatory if you legally work for wages in this country) was meant to make it more palatable that it wasn’t fair. Unlike welfare, it is not a direct transfer of tax money to people who never contributed a dime.

    It has been suggested several times that the program should be privatized so that each person has their own account. That way, you would only get out what you put in. But that idea has been dismissed because it isn’t FAIR. 🙂

    It was a bad idea, but was enacted at the end of the Depression when many elderly people were in bad economic straits. A better idea would have been a temporary SSI, which would have helped those people out but would end when better times returned.

    The program has changed in line with the leftward drift of the country. The addition of disability benefits in the 1950s was a bad move that turned part of the program into a welfare benefit, as few people on SS disability have paid into it for enough years to fund the benefit, and the benefit lasts for much longer than the old age benefit. I don’t defend SS, (especially SS disability) only distinguish it from those programs in which there is absolutely no payment into it by those who receive the benefits.
    The same with Medicare, which, like EMTALA, was a bad idea. Are these programs going to be cancelled? Yes, when they go broke. And that isn’t too far in the future.

  26. Frog Says:

    Social Security was a fraud going out the gate. Life expectancy for a white boy born at its beginning was 64 years, about ten years lower for black males. Eligibility began at age 65.

  27. Ymarsakar Says:

    If FDR hadn’t lied, he wouldn’t have got so much political power over 4 terms. Same goes for modern pols like Clinton or Trum.

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