Opus : Finale’ A Discussion On Taxation

“Taxation is in fact the most difficult function of government – and that against which their citizens are most apt to be refractory” Thomas Jefferson

First, I apologize for taking so long to get back to this. But….I needed to work on some leads/songs (it’s not really work), get a new singer up to speed (hope this one stays around, it would be a first), deal with temporarily replacing my office manager (medical leave) and of course Valentines (the other business). Oh yeah, get some tax stuff done: W2’s, fed and state reports, blah, blah, blah.

Well Jeff Beck is playing Going Down, next is Situation on a compilation CD I made so…
I left off with Mr. Avi-Yonah stating:

A society is a community with a shared culture and shared interests that transcend the interests of its individual members and extend back to its historical roots and forward into its future. Thus, it is necessary to look for affirmative reasons for taxing the rich that are rooted in a broader social and historical understanding of the vital function of taxation in maintaining such a community over time.

He list 3 common “excuses” shall we say, for answering the “why”.

A: That is where the money is. A presentation is made of the inequality numbers which I have taken every opportunity to put in front of the AB reader and then states:

While these facts demonstrate the potential for large redistributive gains by increasing taxes at the very top of the income distribution, they also illustrate the importance of the rich to the economy and thus the potential cost of taxing them. Thus, any argument for taxing the rich must depend on more than mere income or wealth distribution numbers.

I could take issue with the first sentence, but I agree, we have to depend on something more than “that’s where the money is”. Although, considering our nations debt and who has benefited from such, it makes a very strong number 2 at least if not a co-number one for the present.

B. “I Took All of It from Them”

Another argument for taxing the rich can be summarized in department store mogul Edward Filene’s explanation of why he approved of the income tax: “Why shouldn’t the American people take half my money from me? I took all of it from them.”

Getting beyond the simplicity of Edward Filene’s argument, Mr. Avi-Yonah presents this as a case of partnership between the individual’s contribution and the government’s contribution thus, taxation is the government receiving it’s share. Government also can do with it’s share as it want including giving it to others. The problems he sees with this are:

First, since it is as focused on individual taxpayers as optimal tax theory, individual taxpayers can object that the partnership does not apply to them. Second, even if one accepts the partnership model, it is still unclear that it justifies progressive taxation of the rich rather than mere proportionate taxation.

I don’t think he captures the error of the argument correctly here. Being that we are the government, we are all in a partnership. That one would argue the partnership does not apply is purely selfish want verses civic understanding and rightly should not be a serious consideration of argument. But as he notes, that still does not get us past the issue of progression over proportion.

C: “Money is the measuring rod of power.”
Mr. Avi-Yonah note it is a quote of Howard Hughes. He develops the argument that the rich go beyond acquiring money for consumption needs and wants and thus pursue wealth for it’s own sake.

Wealth confers power beyond its consumption value.74 This power is economic, social, and political. The economic power of the rich derives primarily from their ability to use their wealth to invest in enterprises that employ thousands of people and can dominate large sectors of the economy. The social element derives from the knowledge other people have of the potential ability of the rich to use their wealth to acquire goods and to contribute to charities, which leads them to court such acquisitions and contributions even without such consumption taking place. Finally, the political power of the rich stems not just from their actual donations or their ability to finance runs for political office, but, more importantly, from politicians knowing that they have the excess funds to donate.

The problem as he views it is:

As the eminent public finance economist Richard Musgrave has stated, a consumption tax is deficient because it “ assumes that consumption, current or future, is the only benefit that income provides. This overlooks the benefits derived from the accumulation and holding of wealth, whether in terms of security, power, or social standing.”

If this analysis is true, what does it imply for taxing the rich? From an optimal tax perspective, arguing that the rich derive added utility from their wealth that is not available to people for whom (because of their lesser means) money only has consumption value is an argument against taxing the rich. That is because any redistribution in the optimal tax model derives from its assumption of the declining marginal utility of money, and the “ riches mean power” model militates against this assumption.

A fine Catch 22.

I have stated that we have to ask: When is enough, enough? I ask this from a reference of consumption. Beyond that, the utility of further acquisition is no longer a need of material wants. It is a need of intangible wants. Considering my post on the World Bank’s finding that true wealth is from intangibles, a reason for progressive taxation has to address the intangible such as power.

Thus the reason for progressive taxation via some history as presented by Mr. Avi-Yonah:

The American Revolution likewise was founded on the conception that while people have natural, Lockean liberal rights to their property, undue concentrations of private power and wealth should be discouraged.81 This view found its expression in the republican creed of civic humanism, which emphasized public virtue as a balance to private rights. A virtuous republic, the Framers believed, was to be free from concentrations of economic power that characterized England in the eighteenth century.82 Therefore, from the beginning of the Republic, federal and state legislators used taxation to restrict privilege and to “ affirm communal responsibilities, deepen citizenship, and demonstrate the fiscal virtues of a republican citizenry.”

The idea of progressive taxation is part and parcel to achieving the ideals set out in our constitution in that our constitution is a formulation for assuring a disbursement of power. Though I wonder if in this “virtuous republic” we are finding the mantra of the Republican’s intrusion into one’s personal life, be it as usual a bastardized use by them.

There is a political lesson presented in the history of how we got our income tax that I was not aware of:

There was another agenda at play as well in the early years of the federal income tax: the desire to use progressive taxation as a way to “ stave off more radical calls for industrial democracy.” 97 This explains why even some high-income Republican groups supported the Sixteenth Amendment.98 Andrew Mellon, Secretary of the Treasury in the 1920s and one of the wealthiest Americans, “ believed that keeping tax schedules graduated (albeit flatter) would mitigate radical demands for restructuring the capitalist system.” 9

Interesting. It was a time when those with the economic power were actually feeling threatened of a greater loss. This is a very important aspect of the debate that I don’t believe the citizenry appreciates. Perhaps if the citizenry knew that in the past they were able to instill the fear of greater loss, today the message of change would take on a more definitive tone than just “hope”.

Mr. Avi-Yonah summarized the need to be concerned with the inequality of income/wealth:

There are three arguments why extreme concentrations of wealth are undemocratic.
The first two are obvious: In the American system of government, great wealth can buy political favors (often at minuscule expenditures) and finance runs for office (at somewhat greater but still quite limited costs).114 The third is more subtle—that vast inequality of wealth is socially destructive because it degrades relationships among people (cultural, social, and political) and eventually undermines the sense of community on which a democratic polity must rest.115 This argument is particularly true in a country like the United States, which is not bound together by ties of ethnicity, culture, or language.116

…that extreme concentrations of power resulting from extreme concentrations of wealth in the hands of private individuals who are unaccountable to the majority is an unhealthy phenomenon in a democracy. Such private individuals exercise degrees of power and influence that run counter to the ability of the government of the people to govern the country in accordance with the people’s wishes, as expressed in democratic elections.

As to where the responsibility belongs for presenting this argument:

As Slemrod writes,

The approach of mainstream modern public finance economics to these issues has been to accept, for the sake of argument, the right of government to redistribute income through the tax system (and other means); to sidestep the ethical arguments about assessing the value of a more equal distribution of economic outcomes; and toinstead investigate the implications of various value judgments for the design of the tax system.126

Such an attitude to distributive issues may be fine for public finance economists, although it did not characterize the economics profession before the 1950s and still does not characterize some of it today.127 But it does not excuse the abdication of equity in favor of efficiency by most legal tax academics, especially in some of the elite law schools…It is time for legal tax academics to redress the balance.

As a professional, I can understand the argument to separate the two issues via 2 professions. The concept of a profession is that it is specialized. As a thinking person and a citizen, the public discussion should not allow the issue of efficiency to dominate one profession’s focus while the issue of equity dominates another profession. We have to assure both equity and efficiency are discussed and decided upon in order to stay true to the preamble of the Constitution and minimize Thomas Jefferson’s observation of the citizens response.

Part 1 is here.

Update:
In response to Dmerek question regarding what Thomas Jefferson thought:

“I approved from the first moment of… the power of taxation [in the new Constitution]. I thought at first that [it] might have been limited. A little reflection soon convinced me it ought not to be.” –Thomas Jefferson to Francis Hopkinson, 1789. ME 7:300

Being that President Jefferson believed in the will of the people and the people passed the 16th amendment, the issue becomes a question of how much for what expenditures and not whether we can tax.
There is much more on what President Jefferson had to say.

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