Taxes as Punishment

There is a perverse belief circulating in America.  It is a belief that has undermined all great societies of the past, and may yet be responsible for destroying the wealth and future of all Americans. Yet it is a belief that is being fed every day by media, financial elites, and politicians.  It is the belief that taxes are a punishment, a penalty for success.

The latest version of this mania is a bill introduced by Marco Rubio (R-Florida), to exempt the honoraria given to US Olympic medal winners by the U.S. Olympic Committee from income taxes.  In an op-ed in USA TODAY, Rubio argues that “our tax code is riddled with provisions that punish success” and that “we need to reform our tax code to encourage risk-taking and success, rather than penalize it with higher taxes.”  Rubio says that making athletes pay normal income taxes at ordinary rates (the same you or I pay on our earned income) on the $25,000 honorarium they receive for a gold medal means that “their athletic excellence [is being] punished.”

Really?  Should President Obama be exempt from income taxes on the $400,000 salary he earns, because having succeeded in one of the great goals of the finest Americans, becoming President, having him pay taxes on his Presidential salary is “punishing him for success?”  Should Joseph Stiglitz or Paul Krugman get retroactive tax exemptions for their Nobel Prizes in Economics, because the risks they took to do path-breaking research should be rewarded and not penalized by taxing their prizes?   Should World Series winning-athletes be rewarded not only with multi-million dollar contacts and endorsements and fame, but also be exempted from paying income taxes on their world-series winnings so that we do not “punish” their “athletic excellence?”

Success requires effort.  Success brings rewards.  Rewards bring income – and income brings taxes.  If we interrupt this simple sequence and say—“No, if you really succeed, we will exempt you from the normal social obligation of paying taxes” – then we really do turn taxes into a system of rewards and punishments, not a patriotic social obligation to share the burdens of defending America and building our future.

But the punishments then really fall on the average person, who is punished for being ordinary.  Let us not argue about whether government spending is good or bad.  Almost everyone agrees that some government spending is necessary.  Let us say, for sake of argument, that we will limit all federal government spending to defense of our nation and nothing more (a bill that already comes to just over $1 trillion per year, with $711 billion spent on annual defense expenditures and $323 billion on interest on the national debt, which was run up mainly to pay for the wars in Iraq and Afghanistan).  This expenditure benefits all Americans.  So the only question is how to pay for it.  Should everyone pay equally?   Fine, we can move toward a flat tax that places the same rate on everyone.  Or if you prefer, we can ask those who have been the most successful to pay a bit higher rate.  But if we say that people who are really successful at something – athletics, business, arts, scholarship – should get an exemption for some of their income, then the only way to pay the government’s bills is to shift the cost of that exemption to everyone else.   You have to punish the average taxpayer by increasing their tax bills to pay essential government costs if the really successful pay less.  Is that fair?

What are taxes? They are the costs that we bear for goods and services that are provided by government.  We can certainly argue about what goods and services government should provide – only national defense?   Old-age pensions?  Medical care for the poor and elderly?  Basic scientific and medical research?  Disaster relief?  Support for education?  Support for farmers?  Subsidies to oil and gas producers?  Ensuring the safety of drugs and food additives?  Ensuring that air and water remain clean?  The list goes on and needs attention to be sure.  But that is a wholly separate question from how we pay for whatever government goods and services we choose to have.

Payment of taxes has always been a problem for governments, going back to the earliest days of Greece and Rome and beyond.  No one likes paying taxes.  So the only way societies survived and paid for governments’ necessary tasks of keeping order and administering justice and defending their country was to make paying taxes a patriotic duty.  The classical republics of Greece and Rome even made paying taxes a special responsibility of the elites and a mark of honor.  In many countries only those who owned property or various forms of visible wealth paid income or wealth taxes.   Conversely, if people come to view paying taxes as a punishment, a penalty for success, they will seek to avoid them.  If taxes are seen as an unfair penalty on earnings, the line between tax avoidance and tax evasion gets blurred.  As tax avoidance becomes expected, even honorable, a society moves toward becoming like Greece today – a society where taxes are disdained and thus where government falls into bankruptcy and undermines the whole society.

Americans should remember that our country was founded on the very principle of opposing tax privileges for the wealthy.  In the late 1700s, Britain was a wealthy and established kingdom, and America a young and emerging nation without any great concentration of wealth.  Yet the British did not like paying taxes to defray the costs of the wars they had fought throughout the eighteenth century against other European countries.  So they decided to shift some of the burden of those costs to their American colonies by imposing various taxes on their trans-Atlantic subjects.  The result was the American Revolution.

A few years later, the French government found itself in a similar fix.  The wealthy aristocrats of France, and many of the more successful want-to-be-noble bureaucrats and landowners, enjoyed exemption from the main property tax.  They argued that they were too distinguished, and had done too many services to the country already by their work, to be sullied by paying taxes like mere commoners.  The French government eventually ran out of money, and its bankruptcy marked the beginning of the French Revolution.

We are a long way from seeing another Revolution in America.  But we are certainly in a state of confusion, as politicians and pundits are proclaiming that it should be part of the American ideal that the very successful need to be “free” of the “penalty” of taxes, and thus that the burden of paying for government should be shifted to everyone else, the ordinary workers.  That is exactly what the aristocrats of France and Britain argued, and what the American Republic was founded to change.

One can certainly argue that those who are successful should not pay more than others – and it would be reasonable to pursue a flat tax rate, without exemptions, on all income above a certain minimum level, including capital gains and corporate income (after all, if corporations are people too, as Mitt Romney argues, they should pay income tax at the same rate as everyone else).  But it makes absolutely no sense in a republic devoted to equality before the law to have the very successful pay less in taxes than ordinary workers.

Yet that is in fact where we are.  Contrary to Rubio’s assertion, the US tax code is riddled with provisions that give tax exemptions or exceptional write-offs to the most successful.  The lower rate of taxes on capital gains (most of which go to the richest), the benefits of mortgage-deduction relief, the exemption from social security tax on all income over $110,000 per year, not to mention various subsidies for oil and gas producers, farmers, and other special interests, all provide the vast majority of tax benefits to the richest members of society.  They have become tax aristocrats – people whose success enables them to pay lower taxes than others.

We have nominated a person for President, Mitt Romney, who is a poster child for the tax aristocracy.  Despite an income of hundreds of millions of dollars, Romney has paid a Federal income tax rate of only 15% in recent years, about half the rate paid by millions of ordinary households with incomes a thousandth that of Romney’s.  And that is only from the tax returns he has released – those he refuses to release may show an even more embarrassing lack of civic virtue in regard to paying his fair share of taxes on income.  Whether Romney obtained this rate by pushing the limits of tax law is beside the point – he defends his low rate of tax payment as something desirable, and even admirable, rather than as an evasion of responsibility for paying his fair share toward the government we all have and shifting that burden to others.  If we elect as President a champion of the principle that those who are more successful deserve lower tax rates, we are heading toward the morals of the foppish French nobility and turning away from the principles on which this country was founded.

Paying taxes is a duty – in more patriotic times, such as war, it was even regarded as a virtue – not a penalty for success.  Of course, I am not talking about extreme measures, such as the 75% marginal rate on top earners being considered in France.  Rather, I am talking about the need for everyone to pay the same prevailing rates on their income, regardless of who they are or how they earned their wealth.  That is a basic principle of democracy and legal equality.

How has America turned away from that principle?  The same way that great societies in the past fell away from that principle – by giving in to the greed and selfishness of their elites.  In olden days there was truth to the principle that nobles served society by their actions.  In fact, aside from serving in the army, they also provided local courts and justice, paid for local public works and disaster relief, and even provided law enforcement and supported religious foundations.  In return, they were given the rights to collect local fees and not pay taxes themselves.  In effect, they were the local government.  But as societies grew more sophisticated, and central governments and bureaucracies took on more of those functions, the justification for nobles’ tax exemptions faded.  But did they give them up?  No, they clung to them more fiercely than ever, defending those exemptions as their ‘liberties’ that had been earned by their (or their ancestors) hard efforts and success.  But as the great French social analyst Alexis de Tocqueville observed, by the 18th century the aristocracy was no longer valued but resented by ordinary Frenchmen, who saw no point to the privileges and exemptions that the aristocrats still claimed but did nothing to deserve.

A similar process of elite preening and demands took place in other societies that grew richer over time.  When a society is mostly rural and agricultural, most wealth is in land, and building new fortunes takes great effort.  So people who want to become rich turned to trade or manufacturing and created what economists called new stores of capital – factories, housing, offices, ships, ports, and financial assets (stocks and bonds).  As societies build up large stocks of capital, it becomes easier to make money by holding and manipulating these assets and collecting rents than to start new businesses and create capital from scratch.   More and more income for elites comes from holding and manipulating existing financial and capital assets than from building up new ones.  Naturally, elites want to hold on to the easy gains from rents, and so they lobby government to give special treatment to financial assets and gains, arguing that society’s wealth (that is, their wealth) will disappear unless they get the special treatment they demand.   When they succeed in getting such special treatment, that reinforces the attraction of seeking easy wealth through dealing in financial assets, and so directs more talent and energy into financial dealing rather than manufacturing and creating lasting sources of new wealth.

The result is the slow erosion of a society’s real wealth-creation capacity, while wealth and economic privilege grow ever more concentrated in the hands of the elites.  This process undermined the dominant global position of the Dutch in the early18th century, the French in the late 18th century, British in the 19th century, and threatens to do the same to America in the 21st century.

It is perfectly reasonable to argue that government does too much, spends too much, and taxes too much.  But it is invidious, unpatriotic, and repeats the claims of past buried aristocracies to claim that taxes are a punishment for success, and that who have the most wealth should benefit from lower tax rates or exemptions that do not apply to ordinary workers.

If Mr. Rubio really wants to use taxpayer money to reward our Olympic athletes for their success, he should sponsor a bill that uses federal money to provide cash prizes to our medal-winners – that is, if he thinks that is a responsible use of government funds.  But to use our Olympic athletes as a prop to argue for a system of tax-exemptions that favors the most successful at the expense of the average American worker is shameful, and profoundly un-American.

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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2 Responses to Taxes as Punishment

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