There is something bad about every tax. The problem, to use a catch phrase among my friends, is that “somebody has to clean the darned bathroom.”
(That is an inside joke. Friends once attended college with a gregarious pre-seminary major. Always ready for basketball or other fun, he was engaged to a cheerful, pious and markedly deferential co-ed. Years later, the friends hunted in South Dakota where their chum pastored a rural church. When they phoned asking him to join their hunt, he quickly agreed. But in the background, his no-longer-deferential spouse shrieked, “Oh yeah? And who is going to clean the darned bathroom?” [Actually, she used a more colorful phrase. But you get the idea.])
That is the common dilemma of daily life. We all want to do fun things – like hunt pheasants or pay less tax. But someone inevitably has to clean the darned bathroom.
Every tax is bad in some way. Tax wages and you discourage working. Tax interest or dividends and you discourage saving and investment.
Real-estate taxes place a heavy burden on retirees with nice homes but low income. Sales or value-added taxes hit the poor hardest, since they consume more of their income than the rich.
Estates taxes deter saving for one’s offspring. Moreover, they have high costs in resources relative to revenue produced.
Taxes on personal property – beds, tools, stoves, TVs – were common in most states from the colonial era to the 1960s. These involved steep administrative costs and motivated economically wasteful behavior – sell the steers today even though they are not fully fattened, because the tax assessor is coming next week.
Tax motor fuels and you increase the price of products transported over roads. You also impose a harsh burden on poor people working where there is no public transport.
Tax corporations, and the cost largely passes to consumers in the price of goods or services. Tax imports and consumer prices rise. Tax payrolls and there are fewer jobs.
Progressive income taxes make the rich pay more for government than the poor – something not true for gas or bread. Some see terrible injustice.
We could go on and on. Every tax involves some inefficiency, unfairness or perverse incentive. But somebody has to clean the darned bathroom.
For our society to be productive, we need goods or services that markets alone won’t generate – national defense, police and fire protection, roads, education, basic research, administration of justice and public health. We meet more of society’s needs with available resources if government acts to provide things like national parks and environmental protection.
Moreover, since we ran deficits in the past, we have a contractual commitment to pay interest on a still-growing national debt.
Overall, the bathroom that needs to be cleaned is a pretty big one.
Some on the left and right fantasize that the cleanup job is a snap. The left fantasizes that taxes pose no disincentives to economic activity. Boost taxes on corporations and the wealthiest few percent of people. Everything will be hunky dory.
The right has two dreams. First, that most government spending is frivolous waste that could be eliminated without slowing output or harming anyone but parasitic politicians and bureaucrats. Second, if we cut tax rates enough, the economy will grow enormously. Tax revenues will rise, eliminating any deficit.
Reality is more complicated. Consider government revenues from all sources except “social insurance and retirement receipts” – mostly FICA taxes. Take all government spending except for Social Security and Medicare. We spend roughly $1.8 trillion and raise $1.5 trillion. Borrowing funds 20 percent of spending.
Go one step further. Subtract federal interest payments and defense outlays. The remaining discretionary outlays total about $1 trillion. It is hard to close a $300 billion gap with cuts in that amount.
Yes, cotton price supports could go, along with those for wheat and corn. Drop public radio and TV or arts and humanities grants. Don’t subsidize energy-efficient windows for affluent economists in old houses. America prospered before we had student loans and grants, so ax them. Close wildlife refuges that few give a rip about. Ag technology, is mature so abolish extension agents and research farms. Stop aid to Israel or Colombia, they can sort out their own problems. But it remains exceedingly hard to close the gap.
The extreme left says cut defense spending – we should all sing Kumbaya around the campfire. The extreme right says get rid of Social Security, veteran’s pensions and all other income transfers. Government is the problem: cut it to the libertarian minimum of defense, public safety and courts.
Most citizens reject those extremes. If you are one of them, be prepared when anyone touts wonderful new government programs that the rich will pay for, or describes wonderful tax cuts that will pay for themselves. Ask them, “Oh yeah? And who is going to clean the darned bathroom?”
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.