On the Paying of Taxes

Another tax day has come and gone, leaving us to argue once again about whether taxes are too high or too low, too progressive or too regressive, and so forth.

I confess to having no real preferences on the matter of taxation in itself. But a few notes:

There's been back and forth, with this latest from The Weekly Standard a good synopsis, on whether enough Americans pay taxes.

For my own part, with annual income of just under $20,000 a year, I pay about 5% in payroll and income taxes for all levels of government. I am in the 30th percentile of the income distribution at this time. Figure another 6% tax on consumption, and remembering how much I save, I figure my total tax bill, including sales, is in the vicinity of 10%. That strikes me as about right for where I am. If there are people out there close to me paying less, I'd be really irritated at them.

Second, we have a pretty good idea that there is, surprise, an inverse relation between tax price and government services. That's the fancy way of saying when you don't pay much for government services you tend to want more of them. Much the same way that when ice-cream is half-off I buy twice as much. As a result, an easy way to get people to shrink the size of government is to raise their taxes until the price is equal to the cost of providing.

But we don't do that for the entirely good reason that its a really bad idea to pay up front for services you'll be using for a really long time. It's like paying cash for a new car when they're offering 5-years, 0% APR. As a result, our fiscal system encourages us to keep taxes down and spread the cost of most government services across many years. The technical word for this is income smoothing. We will be a lot happier in the future if we pay cash now, but we'll also be a lot less happy now. So by paying some in the future and some now, we maintain constant happiness.

If I've understood correctly (not guaranteed on this issue), we've rather overdone it, for some reason. Many culprits suggested -I have no opinion. So now, we're facing down the possibility that we're going to be really unhappy in the future because we've sanded down our happiness so much in the future that its actually less than the present. This means we should be paying more now than later.

The problem is, every attempt to this point to get us to pay more now coincides with us spending more now too. This was Greg Mankiw's basic complaint with the ACA Healthcare reform -even if it was a good idea, it was burning up all the easy ways to pay more now in order to spend more now. His analogy was a bankrupt person taking a vacation to the Carribean because, after it was over, he wouldn't be any further in the red than when he left.

For this reason, I'm not positive raising taxes is a good idea. We could easily eat up our excess capacity, not rebalance the income books, and thus end up being worse off than we are.

To this end, I begin to think the only real option is to metaphorically cut up the credit cards, accept that we're overpaying in the present as the price of not shearing the future too close again.

But the problem here is that we can't actually pay off the credit cards, which means we'll need to use some form of financing just to get back to solvency, and so long as that's an option, then the politics will allow us to increase spending as we increase taxes, putting us in a worse way.

There's also a lot of stuff -roads, tanks, aircraft carriers -that really should be financed because we use them multiple years. The reason, as has been explained to me, that we don't simply create a Federal Capital Budget, however, is that if we did so, we'd have so many budgets to reconcile, we'd never pass them all (last count: 13 House budgets, 13 Senate budgets, a budget resolution, and reconciliation and a whole bunch else -adding the Capital Budget would double those numbers).

So, our problem is that, because we underpaid in the past, we demanded too much government. The too much government has put us in a position where if we raise taxes, we raise spending. It has also required us to use debt financing just to get back on top of things, but we can't do that safely because government is too big and too complicated to restrict properly.

I think in the end, someone is going to have to take a bullet (maybe a bipartisan commission). We're going to have to cut services and raise taxes. But you'll understand if, in the current environment, I wait for the service cuts first.