Political leaders talk as if the money Americans keep (that which is not paid in taxes) belongs to the government and that our keeping money they could tax is an actual cost to them. This kind of distorted thinking has led us into the fiscal irresponsibility that threatens to destroy our country.
It is, of course, fair to say that there are many exemptions that, if eliminated, could bring in more tax revenue. But Congress prefers a tax code of convoluted exemptions and tax breaks that they create and sustain to keep various interest groups coming to their offices. Taxpayers love breaks such as the homeowners’ exemption that allows taxpayers who itemize to deduct their mortgage interest. Although paying less in taxes is in general a good thing, all such exemptions confuse the process; contribute to an impossibly intricate tax code; and keep lawyers, accountants, and tax prep software companies prospering. The amount we spend on tax preparation in terms of actual cost and time wasted compared to a simplified tax code is worth billions.
The most extreme example of the fallacious notion that government has a right to its citizens’ money is the idea is that the cost to the government of not taxing the disposable income of all Americans at 100 percent is $11.5 trillion (as if we’d bother working if we faced a 100 percent tax rate). Economist Arthur Laffer noted that the government might collect little in taxes if the tax rates were either very low or very high, because in the latter case Americans would adjust their income according to tax incentives. Government officials unfortunately tend not to think in terms of incentives but of rules and therefore assume, contrary to Laffer’s findings, that higher tax rates always bring in more revenue.
Taken to its conclusion, this thinking leads tragically to socialism. If we think the government is the best source of compassion for the needy and the engine of economic growth, then it makes sense to set taxes at high rates so the government can do all good things for the people. One small faction that I read about in an Ohio paper wants Uncle Sam to hire all unemployed people and then print the money to pay them. This childish scheme is really a variation of the more respectable idea that tax cuts “cost” the government in the same way that spending on defense or healthcare does.
The foolishness of the concept can be illustrated by analogy with a church. Imagine a congregation of 100 families with a budget that reflected an estimated tithe on $65,000 average family income. Using government thinking, the church budget could be $650,000 (10 percent of 100 x $65,000), even if the actual offerings to the church were only $300,000. This is based on the fairly reasonable idea that the people owe their church 10 percent of their income.
Here’s how government budget thinking might work in that church.
Budget: $650,000. Expenses: charitable relief for church members: $350,000 (54 percent), staff: $150,000 (22 percent), building expenses: $50,000 (8 percent), ministry expenses: $50,000 (8 percent); debt retirement: $50,000 (8 percent).
What is that $350,000 for "charitable" relief for church members? That is the part of the tithe that the members should have given to the church, but did not. Rather than ignore it, the church would reckon it as both income and expense even though not a single dollar changed hands. Government thinking sees any foregone revenue as an expense so that the largest item in this budget is the (fictional) $350,000 expense as if the church spent that money on its own parishioners.
As it stands, the federal government appears to be incapable of balancing income and spending. Right now it is collecting about 16 percent of GDP in taxes and spending well above 20 percent, creating an immense government borrowing gap. Many politicians’ proposed solution is to demand that the existing tax regime be repealed in favor of higher rates; we can’t “afford” the lower rates, they argue. In an economic downturn, however, raising taxes is a surefire way to suppress recovery.
Addressing the spending side of the budget equation is politically painful, no doubt, but it is unavoidable. America faces difficult challenges as we try to grow out of the recession. Having the government think soberly about its tax income and budget expenses would be a good start.