Sunday, July 20, 2008

Where are the progressive taxes?

Taxes target not "income" - as they purport to - but economic activity. The government could not fund its $3 trillion budget even with a 100% tax on the top 10% of earners.

Instead, the bulk of economic activity occurs in small transactions in which taxes are built-in (sales tax, tarrifs, gas tax, etc.) To spread out its burden, government must draw the majority of its revenue from these small economic transactions.

The tax rules reflect this reality. IRS Pub. 525 defines income from babysitting as taxable income - when was the last time a rich person was making bank off of babysitting? Barter transactions are taxable - exchanging yard sale items with your neighbor is taxable. Of course, yard sale cash proceeds are taxable income - you know that's how Rockefeller got rich, right? He invested in the yard sale market and he soon became a global yard sale tycoon. Forgiven debt is taxable income - if I loan you $100, then forgive the repayment, you must pay taxes on that $100. Gifts, even small ones, are taxable.

Every time money changes hands, it is taxed - but not all money exchange is "income." Retailers escape this because they can pay taxes on what they say is the profit only. But if you are poor and open up a home bazaar, the government is going to treat all incoming cash as income unless you go get (pay for) a business license and file the appropriate tax forms (hire a tax consultant) and so on and so forth. Of course, no poor person can afford to do all that. How many poor people don't engage in trade that would help them improve themselves because of the onerous regulations and taxation?

Craigslist has enabled many poor people to circumvent this. I predict that you will soon hear calls for taxation and regulation of online transactions. The media has already begun demonizing Craigslist. We can't have poor people trying to better themselves, that would put the lie to the inherent superiority of the Ivy League class!

Of course, we realize that part of the reason our tax code is so complex is exactly to create special loopholes for those with enough money to lobby Congress on tax rules. If you earn $50 million a year, you can (profitably) employ tax lawyers, tax consultants and tax lobbyists to make sure you avoid taxes by whatever means possible.

Which leads to the problem of capital mobility. If you are wealthy, you can afford to maintain residence in one tax-advantageous country while operating businesses in other countries. You can afford to create off-shore corporations to shelter your wealth and move it from one place to another in anticipation of new changes in off-shore tax rules. The one-world government pscyhos see this as an argument for world government. I see it as an exposure of the lie that our system has ever been progressive. The rich write the rules, so you're never going to get rules written that tax the rich more than the poor.

Since taxation ultimately targets economic activity, it creates what economists call "deadweight loss." Basically, deadweight loss can be defined as "all the production and consumption that would have occurred at the higher price producers could have charged absent the tax and the lower price consumers could have paid absent the tax but didn't."

Let's say apples are selling at 69 cents per pound. Government decides we need a new Produce Safety Tax to ensure our apples are delivered safe and clean. The tax is 6 cents per pound. Afterwards, the price of apples goes up by 3 cents to 72 cents per pound. In this (idealized) scenario, the market splits the tax evenly between consumeres and producers. In any case, it's clear to see how the tax distorts the market. The effect of the tax is to reduce the price of apples by 3 cents for producers to 66 cents per pound and increase the price of apples for consumers by 3 cents to 72 cents per pound. The overall effect of the tax is to depress economic activity, since producers will only produce the amount of apples that they would have produced at 66 cents per pound (which is some amount less than they were producing at 69 cents per pound) and consumers will consume less apples at 72 cents per pound than they would have at 69 cents per pound. Deadweight loss is, of course, regressive - the decrease in economic activity affects the poor far more than it does the wealthy. A product tax is like a dual price control from hell that simultaneously holds down prices for producers (the opposite of what price ceilings are usually employed for) and increases prices for consumers (the opposite of what price floors are usually used for).

Tariffs are an obvious example of taxing the poor and giving to the rich. The argument put forward for tariffs is to protect local jobs but this is not the purpose at all. The purpose of tariffs is to protect local wealthy business owners who can't compete with overseas producers. As Steven Landsburg says it in a Fox news intereview (paraphrase), "the way to see that cheap overseas goods are good for us is to imagine they were sending us free stuff instead of cheap stuff. It's very hard to argue that that would be bad for us." If you introduce tariffs back into the picture, it becomes obvious what the government is really doing: a tariff on imports of free goods would serve the sole purpose of subsidizing the local business owners who produce the free good being shipped here.

Inflation is perhaps the most pervasive and insidious form of taxation of the poor. Inflation is a legalized counterfeiting operation which has the effect of draining wealth from everyone who is far removed from the source, the banking industry, and transferring it to those who are near the source - big industry, wealthy businessmen, and even ordinary homeowners.

Social Security is another obviously regressive tax. It is not even paid above a certain income ceiling. Since older people tend to be better off in their golden years than they were when they were young and since most payers of Social Security are younger than most collectors of Social Security, the entire system is really nothing more than a gigantic Ponzi scheme that transfers wealth from those who don't yet have it (the young) to those who do or, at least, ought to (the old). Medicare and Medicaid are the same thing.

So, while we're squabbling over which tax brackets have what percentage tax rates, the government is employing a full arsenal of regressive taxation instruments to transfer wealth from those who aren't part of the political hob-nobbing process (the poor) to those who are (the rich). We should be ashamed of ourselves. We engage in old-world aristocracy and then have the gall to call it "progressive" - it's not progressive, it's just doublespeak.

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