Politics

Taxes are supposed to serve the common good. Americans turned them into punishment.

Illustrated | iStock

byNoah MillmanOctober 28, 2021October 28, 2021Share on FacebookShare on TwitterShare via Email

Why do we have to pay taxes, anyway?

I remember when my son first asked me that question. He’d received his first paycheck and saw a chunk of money had been withheld. Immediately, the budding little Republican started to gripe about the government taking his hard-earned pay. So I did what any parent would and explained that taxes are how we pay for various common goods, from roads and bridges to police and fire departments to hospitals and schools. These are things for everyone’s benefit, I said, and that everyone should have access to, so we need to pay for them together. That’s taxes.

But Americans don’t tend to talk about taxes in those terms anymore. Instead, we increasingly talk about taxes in punitive language, not as the way we pay for things we believe should be available for all, but as the way we punish those whom, in one sense or another, we see as having seceded from that common good. I worry that shift makes setting tax policy more contentious and complicated than it already would be.

Consider congressional Democrats’ new proposal for a wealth tax to pay for their long-debated reconciliation bill.

As it happens, I think there are strong theoretical reasons to support taxing wealth, particularly as compared to taxing income. Where income is (ideally) the reward for work and/or productive investment, wealth is passive; it produces no social benefit unless it is deployed to that end. And unlike capital gains taxes — which favor that very passivity with their incentive to invest in unproductive shelters and hold on to appreciated assets — a wealth tax could make the market more liquid. If it encouraged investors to take more risk and be more innovative to out-earn the tax bite, it could also make the economy more productive. Finally, much of the infrastructure of the state is designed to protect property rights, which directly benefits the wealthy proportionate to their wealth. So it’s only fair to tax their wealth proportionately, too.

There are, however, some strong practical arguments on the other side of the ledger. For one thing, valuing assets can be a very cumbersome process. Before he became president, for example, Donald Trump used to boast of being worth over $10 billion, based on the valuation he imputed to his own brand, while critical observers questioned whether he was a billionaire at all. How would the IRS value the Trump Organization in a world where that valuation was the primary determinant of Trump’s tax bill? And how could that determination ever avoid being heavily litigated and even politicized?

Nor would a wealth tax necessarily increase liquidity; it might do the opposite, driving money out of easy-to-value public markets and toward illiquid, private assets. That would mean a less transparent economy with less opportunity for ordinary investors to participate in its gains. All told, wealth taxes often generate far less revenue than projected, and the return relative to the dead weight cost of collection is particularly low. (This is among the reasons most European countries that used to impose wealth taxes largely eliminated them in recent decades.)

Those are strong arguments against relying on such a tax to fund social welfare, which ought to rely on a firm and dependable revenue base. But I don’t think the popularity of wealth taxes, or their utility to the Democrats, hinges fundamentally on questions of efficiency or theoretical legitimacy. The big attraction is political viability, and wealth taxes are viable in part because of this punitive mindset about taxes. The extreme disparities of wealth that characterize American society today have convinced many that the wealthy have seceded from the realm of the common good. More than an effort to raise revenue, then, the political point of a wealth tax is that such secession will not stand. Whether it’s effective or not, it communicates that point.

That’s not a perspective unique to the Democrats, though. It’s also the point being made by Republicans’ growing interest in punishing political enemies with taxes. The 2017 tax bill, for instance, limited deductions for state and local taxes that are disproportionately used by wealthy individuals in Democratic states and imposed new levies on university endowments. More recently, Ohio Republican senate candidate J.D. Vance and Fox News host Tucker Carlson have suggested taxing left-wing foundations.

There are arguments to be made for these taxes — an endowment is arguably just another form of concentrated wealth, after all — but the obvious intent is less promoting the general welfare than punishing those whose vision of that welfare isn’t Republican. Needless to say, Democrats have been eager to reverse all these GOP tax increases, though that arguably means defending the interests of the wealthy.

Ironically, the United States already depends more on the one wealth tax that we do assess — local property taxes — than most developed countries. (We depend more on income taxes as well.) Our overall tax burden is still substantially lower, however, because we don’t have a Value-Added Tax (VAT), which taxes consumption rather than wealth or income. VATs are extremely efficient and broad-based, which is why they’re a mainstay for most countries with a generous welfare state — but they’re also fundamentally regressive, because wealthy people consume a smaller percentage of their income than do the poor or middle class. VATs bring in a lot of revenue, but they don’t do so by targeting other people; instead, they target everyone.

And that’s the rub. If we think of taxes primarily in terms of who else can be made to pay, it makes it difficult for us to even discuss anything like the VAT, and the common good suffers as a result. The general welfare is something to which we all have to contribute. If we want at least 12 weeks of paid parental leave, for example — as nearly all our competitors do — we all should want to pay for it with a tax code that combines fairness, progressivity, and efficiency.

We can have fierce partisan and ideological arguments about the optimal mix of those goals. But that argument will be far more public-spirited, and yield more for the common good, if can we go back to understanding taxes as something we all pay to benefit the many instead of punishing the few.

Source:

theweek.com

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