Thursday, January 26, 2012

If You Want 'Smaller Government', Use The Threat of Higher Taxes on Everyone To Get There

It is a truism in business, conservative circles and general human common knowledge that if you want more of something to be used, give it away 'for free' and voila!....more of it will in fact be consumed.

How 'self-evident' is that? We are surprised that was not put in the Declaration of Independence or the US Constitution.

Many conservatives won't go to Ben & Jerry's any longer because of their liberal views and donations to liberal causes.

Except when they give away free ice cream cones all day long in April each year, that is. Then they line up like every other person who wants what?  A great ice cream cone that tastes even better when it is given away for 'free'.

So why don't conservative small government advocates use the same logic when it comes to trying to reduce the size of government they say they want to do so badly?

'If you want more government, we are going to support raising taxes on everyone, not just a select few such as the rich or the importers or the consumers of carbon, etc. etc. etc.'

The converse would be true as well: 'If you want less government, we will tax everyone less by a proportionate amount.

Right? Isn't that what is supposed to be done in a society where everyone has an equal vote in the matter? Shouldn't everyone also have an equal amount of 'skin in the game' in terms of exposure to paying for all the services government provides, including when these programs are increased in cost?

We think that over the past 50 years in America, the inherent tension between paying for the government we all seem to want has been completely decoupled and broken.  The more that politicians such as President Obama seek to play the 'class warfare' card in this high-stakes game of poker, the more dissolved we become as a nation in terms of having a collective stake in the game, i.e. paying taxes for our collective good.

As a result, we seem to believe as a society that all we have to do is pass new laws which increase the cost of our government and 'someone else will pay for it'.

Who the hell is that supposed to be?

Does 1 person get more protection from our wonderful national defense military and homeland security teams than any other person? Nope.

Does one class of citizens, such as the top 1% of income-earners, get more than 1% of the total protection offered by the same defense teams?  Nope. Rich people and poor people were slaughtered on an equal opportunity basis when those planes slammed into the Twin Towers and the Pentagon on 9/11.

We are either all protected or not protected at all.  That is the way it goes in a democratic republic supposedly.

For just one example of what happens when 'someone else pays for it', consider the current 'third party payor' system in the otherwise truly wondrous health care system in America.

Medicare is at least 50% paid for by 'other' younger taxpayers; Medicaid is totally supported by other people who pay taxes; and employer-paid health care plans are paid 'by my boss and company who pay 50-75% of my health care premium each month'.

We will all go get multiple opinions from different doctors if we don't like the first one we get when we are feeling bad and want to feel better, won't we? As long as we don't have to pay for the full cost of any of the visits or procedures or drugs, we will get as much of it as we possibly can even if the malady is minor or not life-threatening.

That is just standard human nature, isn't it? Nothing insidious about that fact. It is just the plain honest truth.

In ancient Greece, the Athenians did not have the benefit of a beneficent Federal Reserve to print up money or just 'make it up out of thin air' whenever they had to raise an army and navy and pay soldiers and hoplites to go to war to protect their freedom and interests around the known world at the time as they did in the 30-year Peloponnesian War from 431-403 BC.

Guess what they had to do?  They had to raise money the old-fashioned way: from their own pockets, in chunks of gold, silver or talents and put it in the hands of the Athenian treasury so the state could pay the costs of war.

How did they do that? They held humongous town meetings out in the open square to discuss the advantages of going to war versus not going to war. As in 'becoming slaves' to the Spartans or Persians or suffering outright annihilation.

Once they decided to go to war, they had to decide how to pay for the soldiers, hoplites, boats and armaments to win the war. So they assessed 'taxes' on every citizen in some fashion or another.

They also usually voted to conscript every able-bodied man to go to war as well. Not many draft-dodgers back then we don't think.  It was a total battle for survival and every person knew it.

Talk about a 'participatory democracy'!

But think of how difficult it must have been to make these collective decisions.  If you had to pay higher taxes immediately to support a war, hypothetically speaking, of course, in Iraq, let's say, in 2003 AND you had to go to battle as long as you were an able-bodied man, would we have taken that momentous step as a nation?

No, of course not! But as long as 'someone else' was paying for it and 'I' didn't have to actually join the military and go fight the Iraqis for real, then 'that is OK by us!'

The Greeks 'participated' in every major decision by voting for services to be rendered by the government (entitlements, defense, road construction); they 'participated' by paying for those services with their taxes and the men were told to take up arms and go to war to defend their freedom.

We have lost sight of that direct connection between taxation and spending in America. Completely.

Returning to the tension between taxes and spending at the federal government level just might be the constraining factor that Alexander Hamilton referred to when he said that a consumption tax contains within itself a self-limiting limit on the size of government. (see Hamiltonian Federalists)*

So why not bring back that aspect of the Greek system to the modern American democratic republic in the 21st century to a new political party should it ever emerge?

It would look something like this: 'If Congress votes for more government spending, taxes will rise on EVERY US taxpayer in order to pay for it, not just the rich. That would include prescription drug benefits; going to war, homeland security, and building a 'Bridge to Somewhere' in Moosehide, Montana.'

Right now, 50% of the American taxpaying public have zero threat of their federal income taxes ever going up to pay for any increase in federal government spending for any purpose. Both political parties never tell any of these citizens to pay even $1 in federal income taxes to pay for anything above what they pay for Social Security and Medicare benefits in payroll taxes.

Most people don't even think of SS and Medicare FICA taxes as being 'taxes' anyway. They think they are actually making 'defined contributions' to their own private retirement and health savings plan in some way that 'just has to be' like what they do in the private sector.

They are sadly 'mistaken' and deliberately misled on that score.

So what do they care about how Congress spends money on anything outside of SS and Medicare?  They could care less if Congress wants to build a 'Bridge to Nowhere' or a 'Tunnel to Somewhere' or go to war in Zimbabwe or put money into a Solyndra-like green energy project that goes under.

We think the moment every US citizen feels they have a stake in paying for any new federal program as in new taxes to be imposed on them, the historic political tension between taxes and spending will return to the process and once again put a damper on rampant, unchecked spending.

Even the threat of a $1 tax hike per head on everyone would reintroduce the balance between taxation and the size and scope of our federal government. And the harder it is for a politician to raise taxes on everyone to pay for more government, the harder it will be for them to keep increasing the size and cost of government at warp speed like we have been doing for the past decade or more.

*'It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue.'- Alexander Hamilton
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  1. Not coincidentally, this is one of the main arguments for a flat tax, and primarily why I want such.

    It's not enough, of course, in this era of unchecked deficit spending, since the government would just continue to ignore revenue limits and/or raise the flat tax percentage, but it would be a good start. Combined with my other thoughts/plans of capping the tax rate in the Constitution and automatically cutting spending to match actual revenue (starting with all government employee salary and benefits), though, I think you could have a very workable plan for both keeping spending in check, and ensuring that all people felt vested in Washington's spending decisions and policies.

    That, as a system, would be a huge improvement over the mess we have now.

  2. agree...a flat tax or something else would be better than this.

    I am for a pure consumption tax on every transaction to replace everything...income, corporate, estate, excise, death taxes...all of them.

    You want to buy a $10 million home? Boom! 20% consumption tax payable at closing, 20% of the entire purchase.

    it tickles me to hear some people say: 'Well, rich people never spend all of their money! So this is unfair to the non-rich below them'

    Have they ever heard of Mike Tyson or M.C. Hammer, just to name 2 superstars who earned hundreds of millions of dollars....and wasted it all on mansions, Bentleys, jewelry and exotic pet animals?

    They might were going to lose it all anyway....but at LEAST the government would have gotten their 20% of the consumption spree when it was in their heyday....

  3. Actually, if I were crafting a national tax system, I would not favor a consumption tax. While it does match what people might think "should" be taxed, it wouldn't work very well in the longer term. It allows too much wealth accumulation by the few people who are able and/or choose to do so, at the long-term expense of everyone else. While that might be ethically optimal, I don't think it's very practical.

    What I would do:

    Have a flat, percentage-based tax on income from all sources, Constitutionally capped at ~15%. In addition, there would be a flat 1% tax on all net assets at the end of each year. For transition, both of these together could be an overriding limit, rather than a specified tax policy; that is, Congress could still set whatever tax policy they want, but these (additively) are the maximum anyone would pay in federal taxation of any type per year. In the longer term and/or if I were starting from scratch, they would be the simple, fixed tax policy. Note that, in the unlikely case that it mattered, Congress could impose less taxes; the limits would be maximums, not requirements. This, plus automatic predetermined spending reductions to match revenue, is my opinion of what would work best to both fund government, ensure fairness, and keep government size under control.

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