Dr. Curtiss is Executive Secretary of the Foundation for Economic Education.
Tax experts long have theorized about the raising of money for various units and functions of government.
Should taxes be for revenue only, or as a means of social control, or both?
Should taxes be levied on citizens equally, or should "ability to pay" be a major consideration?
Where practicable, should the "benefit principle" be followed? That is, if government performs a service for specific individuals and not for all, should those who directly benefit be charged for the service? For example, should highway users be required to pay for them through specific taxes on motor fuels and motor vehicles and direct tolls? And, if such taxes are intended for highway use, are safeguards against diversion desirable?
How pay for government schools at all levels? Studies show the tremendous economic advantages of high school and college education. Most parents urgently want education for their children. Should the cost of government schooling be charged on a "benefit" basis, either to the parents, or against the enhanced future earnings of the students?
In the early days of our country, tariffs were an important source of revenue for the Federal government. And there was much debate among tax theorists as to the revenue-raising versus the protectionist and discriminatory aspects of tariffs. But "tariffs for revenue only" becomes an academic issue when the national government requires one quarter or more of people’s earnings.
Seeking the ideal taxation formula is of course praiseworthy, but conditions of the search have changed! The taxation experts of 100 years ago were talking about nine cents out of each personal income dollar. Today, nearly 40 cents of every dollar of personal income goes to support national, state, and local units of government. This calls forth new theories of taxation. Collecting the billions of dollars now spent by various units of government is no longer a question of "soaking the rich" but of how to extract 40 cents of each personal income dollar without stirring up a taxpayer revolt.
Taxation has become a tool of monetary and fiscal management. The experts speak of "fine-tuning" the economy so that employment will be high and productivity will expand.
There doubtless are those who look upon taxation as a means of redistributing wealth, in the belief that some have too much income and some too little. The progressive income tax is an expression of this belief, as are current discussions of a guaranteed annual income for all.
So, in view of the growing tax burden and the increasing use of taxes as a tool for social and fiscal control, let us further review the new theories and modern problems of taxation.
The tendency of taxpayers to revolt against high taxes causes tax collectors to try to hide the tax burden so that the taxpayer will hardly be aware of what is happening to him. If this process takes place at a time of rapid growth in the economy, levels of living may rise at the same time that taxes are increasing. Without an understanding of what might have been, people can truthfully proclaim: "We never had it so good!"
An effective method of hiding taxes is the withholding of Federal, state, and local income taxes by employers from the wages of employees. Most workers are inclined to think only of their take-home pay and give little thought to the tax they are paying.
The social security tax not only is hidden through withholding, as is the income tax, but is otherwise disguised as well. If he thinks of it at all, the employee is likely to consider only his share of the tax, not realizing that the employer pays an equal amount on his behalf. Further, many who pay in the name of social security view it not as a tax but as saving for their old age.
A real estate tax is rarely thought of as a hidden tax, but when I asked a neighbor how much his school taxes were, he replied: "I haven’t the slightest idea; I pay them monthly along with my mortgage, interest, and insurance bill."
Perhaps the most cleverly hidden tax is inflation. When the national government fails to cover its expenditures through taxes, it must borrow the difference, either from individuals or the central bank. If the latter, a multiple of that debt is likely to be added to the money supply, which is inflation. Inflation usually is accompanied by rising prices and erosion of the purchasing power of the dollar. Since 1939, the dollar has lost about half of its purchasing power. This is a tax upon savings, as truly a tax as any of the many other ways of raising revenue. From a political standpoint it has the advantage of being hidden. Also, it is possible to make people believe that the cause of inflation is the raising of prices by greedy businessmen or of wages by labor unions.
Taxes are hidden in other ways, too. Many are incorporated in the prices of things we buy and we rarely realize that a tax has been added. Taxes on liquor, cigarettes, automobiles, and gasoline are examples.
With compulsory taxes absorbing so high a proportion of income, it may appear paradoxical to speak of voluntary taxes. But what is a government lottery, if not a voluntary tax? Certainly, a person may avoid the tax by not participating in the lottery.
The state of New York spends millions of dollars each year to try to prevent illegal gambling. One might conclude that the lawmakers believe gambling is an evil which should be suppressed. But no; we find the state permitting and even encouraging certain types of gambling. Bingo is permitted under certain conditions and betting at race tracks where the state gets a heavy "cut" is encouraged. And now, the state-wide lottery to raise money for "education"! The state felt it needed more general revenue than it could raise through its many tax sources. So, why not try a "voluntary" tax like a lottery, and call it "education"? This might remove the onus for some who think gambling is a little bit evil and who do not realize that this is just another way of swelling the general revenues of the state.
Regardless of how one may appraise the moral aspects of gambling, there seems little doubt that a state lottery operates as a regressive tax, taking heavily from the poor, even though voluntarily. Historically, governments that have resorted to lotteries have had in common a tendency toward decadence. The state lottery feeds the idea of "something-for-nothing" already far advanced in this country. From the standpoint of the lawmakers, it is a "last resort," desperation effort to fill the coffers of a profligate state.
Diverted Taxes and Highways to the Moon
Taxes sometimes are levied for an alleged purpose and diverted to another. The gasoline tax often brings this comment: "I wouldn’t mind paying the gas tax if I could be sure the money was spent to improve highways."
The diversion of taxes collected from highway users has brought sufficient protest that 28 states have adopted antidiversion amendments to their constitutions. But, in most instances, such antidiversion measures have little effect on the over-all pattern of government spending.
True, in some states, more revenue is raised from highway users than the total spent on highways. For example, in New Jersey where there was no state income tax, more than 40 per cent of all state revenue in 1966 was from motor vehicle, fuel, and license taxes; and about 40 per cent of that was used for nonhighway purposes. In contrast, some states spend more on highways than they collect in highway taxes. For the country as a whole, disbursements for highways by all units of government are about equal to the receipts from highway taxes by all units of government.
One may be certain that tax income from lotteries in New York and New Hampshire will be watched like a hawk to see that it is not diverted from educational purposes. But this fear will be unfounded; the huge amounts budgeted for education will more than absorb all such lottery funds. Whether the lotteries will make available additional funds for education or simply release general funds for other purposes would be difficult to determine.
The point is that when 40 per cent of personal income is taken for taxes, the diversion argument is hardly important. Ways will be sought to raise this money as painlessly as possible. Motorists apparently will tolerate a tax equal to half the price of their gasoline. Liquor and cigarette users will submit to a very heavy tax on those products, no matter to what purpose such funds are diverted. How would government finance an excursion to the moon except by diversion?
Are social security funds diverted? It all depends upon one’s point of view. In the early days, when social security taxes collected far exceeded benefit payments, was there diversion? If one assumes that social security taxes are intended for the general welfare, then there is, of course, no diversion. If future benefits are considered a contractual obligation, then past and current social security taxes fall far short of needs, and diversion is a term without meaning.
From an administrative standpoint, with governments involved in so many activities and at such tremendous cost, it becomes practically meaningless to try to earmark funds at their source for specific expenditures. The attempt is made in the Postal Service, but with what success? Deficit after deficit! People will say: "Let those who want mail service pay for it," or "Let those who want to go to the moon pay for it," or "Let those who want to fight in Vietnam pay for it." But do they really mean they’re ready to vote the government out of that particular business and leave it to competitive private enterprise?
In many instances, special taxing districts are set up to provide specific services such as schools, fire protection, police protection, water, or sewerage. Diversion of such special district taxes for other purposes is reduced to a minimum under such arrangements, though such districts often require extra funds from other tax sources.
Not many years ago, public elementary and secondary schools were financed almost entirely from local real estate taxes. But the trend has been increasingly toward state and Federal aid for the financing of more and more elaborate schools and school programs.
So, we see that tax policy is more complicated than it once was. What one’s theory of taxation finally amounts to is his theory of government, because taxing is an integral part of the governmental process. And there are really but two basic and fundamentally opposed theories of government. One theory, the one upon which the United States of America was launched, held that government ought to defend the peaceful individual and his property.
The alternative theory of government, increasingly popular among Americans, would plunder the property of individuals for the supposed benefit of others. This is socialism. And the tax policy of socialism is to confiscate all private property.
The use of tax policy for social control — for leveling wealth — is not a new development. The U.S. official who said recently he would take property from those who had more than they need and give it to those who don’t have enough was merely expressing the major tenet of socialism.
More important than taxation theories is the question of the proper function of government.’ Rather than debate whether 10 per cent should be added to income taxes or raised through further inflationary deficits, a more basic question should be raised: Will this money be used to finance a proper function of government?
Even though there will be minor differences in details, a clear understanding of the proper place of government in an advanced free and open society will largely eliminate the need for complicated taxation theory. With government reduced to reasonable size, the financing of it becomes relatively simple.
¹ For a discussion of the proper function of government see Government: An Ideal Concept, by Leonard E. Read. Foundation for Economic Education, Inc.