I just wanted to jot down some of the ways that I've noticed the US government cooks its books. I'm sure other governments have their own variations on these themes and, taken together, these methods represent a certain "state of the art" in taxation.
The central problem of taxation is that it is plainly and simply morally and legally unjustifiable. If you could challenge your government's taxation somewhere other than your government's courts, your government would be unable to produce a coherent moral or legal justification for why you must pay the taxes it levies on you.
The result of this problem is that governments must live in constant fear of a beast that lies dormant in the popular consciousness... the tax revolt. I think most people, at least in the West, are fairly well indoctrinated into believing that there exists some valid legal and moral reason for why they must pay taxes. The vast majority of those who are disgruntled with taxation and actively seek to avoid it see themselves as bad and selfish in this regard, much like a gambler who selfishly gambles his children's college money. In other words, the vast majority of tax resisters or would-be tax resisters still acquiesces to the popular indoctrination that there must exist a moral and legal justification for why they must pay taxes... they are simply hedonistic and allow their selfish impulse to override their higher moral understanding.
Governments have gotten a lot better at taxing. In the West, rioting in the streets is almost never seen as a result of tax measures (the UK tax riots in the 1990's were an unusual exception). Here are some of the tricks that our owners use to keep us busily humming away furnishing their tables.
- Debasement/inflation. This trick hardly needs explanation. Reducing the value of a legal tender money taxes holders of money stocks and wage earners whose occupation is not funded by the Prince's purchases. Modern inflation is funded through an insidious mixture outright money printing (Federal Reserve bond purchases) and private purchases of bonds. Of course, inflation is heavily regressive, as the Austrians have explained (wealth is transferred from later users of new money to the early users).
- Transaction taxation. Taxes originate in tribute. Tribute is just an extortionate demand - "Pay $X or ." When you're just collecting tribute from kings or chiefs, this is fairly straightforward since you only have to deal with a handful of people. But when you start trying to implement direct taxation, it gets a lot more complicated. If you literally implement a "everyone must pay $X or die" rule, you end up having to kill of a significant portion of your productive population... as a result, next year's haul will be a lot smaller. The problem is essentially a game of chicken. Everybody is trying to pretend they don't have the money and you (the taxer) are trying to collect the money you know they have but are trying to hide from you.
Transaction taxation makes it a lot easier to judge just how much each person can pay. You basically offer your subjects a choice: refrain from productive economic activity or pay me X% of anything that you receive. Since transactions always involve at least two parties, you have leverage with which to squeeze people and ensure honesty. Only if both people keep quiet can a transaction go unreported. So, all you have to do to ensure honesty is put everyone on the horns of the Prisoner's Dilemma - if one person doesn't report their transaction and you do, you get a reward (maybe reduced taxation).
Of course, taxing transactions has no better moral justification than direct seizure of property under the tribute system did. It just works better for the government's revenuers. Almost all forms of modern taxation are transaction taxation.
- Income tax - This tax is inherently regressive... progressive scales don't help. Those who have nothing to sell but their labor... the poor... are hardest hit by income taxation. It's always possible to cook the numbers and turn investment income into losses or break-evens through perfectly legal means. The only antidote is discretionary taxing power (something that the US used to largely refrain from but we are pretty much there, now). Discretionary taxing power gives the revenue-collection bureaucracy the power to interpret intent and assess fines and punishments on the basis of attempts to avoid the intent of the rules, even if none of the rules were actually broken.
But this sort of legal tax-evasion is only possible for those with enough accrued capital to engage in investment. The average person has naught to sell but his time, skills and talents and no accounting trickery can help him. He will pay taxes on all his labor.
- Withholding tax - This divides your annual tax burden by at least 24 (two paychecks per month), for low earners who are more likely to receive weekly paychecks, the division factor is 50. As any credit-based sales industry knows, dividing a large sum into little payments makes buyers far more likely to say "yes." In the case of taxes, it makes the serfs much less likely to revolt. Income taxes in the United States are nominally progressive but this is just a diversion to keep the masses busy talking about inconsequential details while the real heavy-lifting is done by all the other regressive taxes.
- Payroll tax - The payroll tax in the United States is one of the most perniciously regressive taxes. Basically, the purpose of the payroll tax is to permit the government to reduce the effect your "standard deduction" has on your taxable income. The payroll tax is calculated without a standard deduction. You pay payroll on all the taxable portion of your income which, for the poorer, is closer to 100% of their paycheck... and for the wealthier, is negligible. But it's for when your old and sick and the government, of course, deeply cares about you and wants to make sure you're taken care of when you're old and sick.
Combined with the withholding tax - dividing your annual tax burden by as much 50 - your effective tax burden is made to appear far, far smaller than it really is. Of course, this is all purely psychological but, in politics, perception is everything.
- Tax farming - The Roman empire is famed, and was feared, for its privatized tax collection scheme known as tax farming. Basically, a tax farmer bought the rights to collect taxes for a certain district... but he had to pay the full tax no matter what he collected. Tax entrepreneurs - called publicani - earned huge profits on the difference between what they had agreed to pay Rome and what they collected from their hapless victims. Of course, if you didn't pay Rome in full, your fate was far worse than owing Al Capone. Goodbye lap of luxury, hello Roman galley ship (rowing ships as a prison-slave under the whip to your early death).
In the US (and, I assume, all other Western countries) we have a modern variation on tax-farming... the corporate payroll. Corporate calculates your tax withholdings for the IRS and - each and every paycheck - dutifully sends in your taxes to the IRS. The costs and complexities of collecting the tax have been outsourced onto private industry. This in exchange for the cartel-like regulatory protections which the government now provides to "legitimate" businesses. Basically, this is how it works. Any business of any size (say 20+ employees) will not risk going awry of the IRS. So, they interpret the tax code as conservatively as possible and ensure that your taxes are sent in on each and every paycheck. You will almost certainly overpay each year unless you file your W-4 with creative exemption numbers (technically illegal, I believe, but a common practice). The government relies on this network of dutiful tax farmers, aka corporations - to ensure the masses are calmly, quietly and regularly paying their dues. In exchange, the government provides lavish tax incentives to the corporate class who are essentially a part of the political class. In my view, they're in the same public-private-partnership class that the Roman publicani were.
- Layered taxation - You pay taxes at State and Federal (and, in some locations, Local) levels. These layered taxes, added together, pinch pretty badly. But opposing any one of them, politically, makes you seem like a miser. "What, you oppose paying three dollars a day to your local city government to police the streets, fight fires, feed starving homeless people and make books available to one and all??? You Scrooge, you!"
- Duties, tariffs, wholesale, retail taxes. These tax the supply chain for consumer goods, essentially "hiding" the tax from the consumer. Even a retail tax, which is right there, is a hidden tax once you buy more than one item at a time... who keeps track of how much taxes they're paying on which items??
- VAT taxes. This is European but is on its way to the US, judging by the new 1099 rules (any transaction over $600 must be reported to the IRS). Essentially, you can think of it this way, every business is required to send in all its receipts to the government to "prove" its actual outlays. This closes all "loopholes" which businesses have access to by being able to assess the value of their own inventory or non-monetary costs (such as capital depreciation).
- Legal monopolies and cartels. The inflated profits earned from these enterprises (which must, in turn, pay their master to whom they owe their very existence) are a tax in and of themselves. Phone companies (now, cell phone companies), car companies, electric companies, road-construction companies... basically, all the big-box producers of goods and services who enjoy legal and regulatory privileges as a result of their "scale." These companies are essentially pseudo-governmental agencies and their fees constitute a significant source of government revenues.
- Economic imperialism. This is more with respect to the US but other countries do it, too. Basically, you use "free-trade" agreements to force smaller countries to buy your "cheaper" products. This goes hand-in-hand with the tax-farming nature of corporations since modern, corporate tax-farming centralizes revenues in the producers, not the consumers. The more things being produced here, the more tax revenues there are to siphon.
Inflation-exportation is also part of economic imperialism. "Use our fiat currency as the 'reserve' for your fiat currency... or else." Keeping major commodities - like oil - denominated in your currency also helps force up demand for that currency, giving additional headroom for expansion of the supply of that currency (money printing).
Who ever said the Pentagon's budget is a waste???
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