The Purpose of Taxes

I was thinking tonight at dinner about my dream from a couple of weeks ago. The dream where I was the governor of Georgia. What would I do as governor? Well, to start with, a governor can't do much. The governor doesn't make laws. The governor does have nice platform on a state level and even occasionally on the national level - especially if your last name happens to be Schwarzenegger - to force the agenda that he wants to see. This started me thinking about my agenda.

My first priority is tax reform. There are 2 elements to the current tax system. There's the amount of money that the government collects from us all and then generally turns around and spends and there's the processes that we as taxpayers have to go through to feel reasonably safe that we've paid the government what we legally owe and aren't going to be subject to any sort of an audit. I think any reasonable person would agree that the amount of money that the government spends is certainly something that can be curbed. That's not going to be easy to do, though. People are accustomed to certain programs and expenditures being available and there would be a lot of resistance , even if only very vocal resistance by a few people who were affected by program X. Because of that, I think the process would be the easiest thing to change.

I think you'd be had pressed to find any reasonable person that believes that the current tax process is a good idea. I'm personally a big fan of at least the basic premise of FairTax (read my review of The FairTax Book or buy your own copy). I think implementing something similar at a state level would not only be a great thing for the state but would also be a great thing in that it would be another example that the federal government could draw upon to prove the concept. I say another example because there are numerous states that do something that is in some respects very similar. The largest and most notable are Florida and Texas. Neither state has a state income tax and instead collects the majority of its revenues through sales and other taxes. I digress, though.

The best thing in my mind about a program similar to FairTax is that it removes the temptation from taxation. Taxation is a temptation for politicians, I believe. In my last post I talked about the different temptations that politicians undoubtedly face. Taxation may be the largest. Originally I think taxation was pure. The earliest revenues were used for building a federal infrastructure with legislative buildings and courthouses and beginning to assemble what is today the greatest national defense that the world has ever known. Some of our tax revenues still go to reasonable causes but so much doesn't anymore.

Today there are two main reasons that tax laws are passed. I don't remember if this came from The FairTax Book or another source or if I happened to assemble this. Regardless of the source, I've long believed this to be the case. The main reasons tax laws are passed today are to influence behavior and to buy votes. Think about that for a few minutes. Think of the different tax laws that you're familiar with. Homeowner's deduction. You save money on your taxes if you own a home. It's meant to encourage home ownership. Investerwords.com says, "The deduction is intended to encourage renters to become homeowners, under the belief that home ownership encourages upstanding citizenship and reduces crime." How about another one. Your 401k. 401kFocus.com says, "In order to encourage savings, the government created special tax advantages for 401k participants." Non-profit deductions are meant to encourage giving to charitable organizations. Student loans and interest deductibility are meant to encourage education. Get the picture? The government gives you a small financial reward for doing what it wants you to do.

The second reason, buying votes, is a little bit harder to get your arms around. Lets start with a relatively easy one: prescription drug coverage for seniors. This is not about whether it's a good idea or whether or not some seniors could use help paying for prescription drugs. God knows if my grandmother were still alive and needed help paying for prescription drugs I'd be working a second job now instead of writing this blog entry to help her pay for them. But take a step back for a second and remember - this is not about whether or not prescription drug coverage for seniors is a good idea. This is about whether or not it's an attempt by the government to buy votes. Now lets think this through. The basic way this program works is that a smaller amount of money is taken from every tax payer (roughly 280 million Americans that should be paying taxes) and redistributed to a much smaller number of seniors that are eligible for prescription drug coverage (less than 12 million enrolled as of 1/1/2006). If the government takes $50 each year from each person, most people aren't going to miss $50 over the course of a year. Especially not when it's automatically withheld from your paycheck and there's no clear easy way to see how much you paid or understand where it's going. That's another story, though. That $50 from 280 million people turns into almost $100 every month for 12 million seniors seeking prescription drug coverage. That extra $100 makes 12 million people very happy and therefore very eager to vote for you. 12 million people may or may not sound like a big number when you're talking about buying votes but the last 3 Presidential elections combined were decided by less than 12 million votes! 12 million is a HUGE number of votes.

Vote buying happens in other ways as well. The entire aspect of a progressive tax is meant to buy votes. The tax system that we have is called a progressive system. The more money you make - the higher the tax rate you pay. Your rate, in addition to the amount of taxes you pay, gets progressively higher. Think about it. The higher the annual income level, the fewer people who make it. More people make at least $10/hour than $15. More people make at least $15 than make at least $20. More people make at least $50 than make $100. The higher the income level of the people you raise taxes on the fewer people you affect. And raising taxes on fewer people gives you more money to spend on more people.

A concept like FairTax removes a politician from these temptations and as I've described previously, these have to be some very strong temptations. Any effort to reform and cleanup government would have to start with something like this. Remove from the equation not just all the headaches associated with the current process but also the temptations that the process places upon the politicians. Don't tempt them to influence your behavior or buy your vote.