Preserving Democracy. Elgin L Hushbeck

by shifting the burden of taxes away from the majority and onto an ever smaller minority.

      This was done to avoid the charge of “tax cuts for the rich.” Yet the reason this charge is effective is because of the very progressive nature of the income tax system. If the rich pay the majority of the taxes, then any effective tax cut will be a tax cut for the rich. As a result, any tax cut is attacked with complaints of how many government programs could be funded with the money ‘given’ to the rich by the tax cuts, and how the rich are not paying their ‘fair share.’

      There are numerous problems with such claims. For one, just who ‘the rich’ are is rarely specified. This is because it is much more effective to leave this term vague. For example if the rich are the top 25 percent of income earners, then as we saw in Table 3.1 ‘rich’ starts at $55,225. I would guess that few if any who make this income level think of themselves as rich. Even if we limited this charge to only those with the highest incomes, there are still some problems.

      For example, one IRS study reported on the top 400 income tax returns for the years 1992-2000. One of the interesting findings was that most of the people were not on this list very long. Of the 400 people in any given year, only about half could expect to be on the list the following year. Only 21 people were on the list for all nine years, while 1,679 people fell in to this category only once. Thus people who do really well in one year are treated by the IRS as if they have been rich all of their life, and will remain rich for the rest of their life.

      This points out another problem with the concept of ‘rich’ when it comes to income taxes. This is because when we think of the rich, we normally think of people who have lots of money. But having money and earning money are not quite the same things. After all, would we really consider someone who works very hard one year and as a result with salary, overtime and bonuses, etc, earns $100,000, to be as ‘rich’ as someone who does not work, but has millions of dollars invested, such that they earn $100,000 from these investments? Probably not; but to the IRS, they are both equally ‘rich.’

      In fact, from the IRS’s point of view, the person who works hard to earn $100,000 may be ‘richer’ than the person who has millions of dollars. This is because what is important to the IRS is not just income, but taxable income. A multi-millionaire with all their money invested in tax-free bonds, while they may have considerable income, may have little or no taxable income and thus may pay little in taxes.

      In any event, the real problem is that this tax-the-rich rhetoric feeds into exactly the problem with democracy stated by Plato that was mentioned earlier in this chapter. Again Plato said that the leader, in order to gain favor, would “deprive the rich of their estates and distribute them among the people.”³⁶ This also goes to the heart of Tytler’s statement that,

      the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.³⁷

      The European Example

      Thus, based on the long-term trend that has existed for the last 100 years, we are heading for disaster. The ever increasing tax burden will continue to burden the economy until it can no longer maintain economic growth, at which point we will enter into an economic decline. Once this happens, the only way to correct the problem would be to reduce the tax burden, but given the increasingly progressive nature of the tax system and the growing dependence on government programs this will be extremely difficult, if not impossible for as the economy declines, the need for these very services will increase. As such the system will collapse into chaos.

      To get some idea of the problems that will face the government at this time, one only has to look at Europe. Most of the countries in Europe have very large welfare states, and the correspondingly high taxes to support them. The burden on the economies in many countries of Europe is so high that they are increasingly falling behind. Jean-Philippe Cotis, chief economist at the Organization for European Cooperation and Development, based in Paris, warned in early 2006 that,

      At current trends, with demographics the way they are, the average U.S. citizen will be twice as rich as a Frenchman or a German in 20 years.³⁸

      When politicians have attempted even modest reforms to address the growing stagnation, the results have frequently been thousands taking to the streets in protests and in some cases riots. For example, in March 2006, the French Government tried to address the growing problem of unemployment among younger workers that had reached a rate of 24 percent. The problem was that, given the very high cost of benefits and the difficulty in firing problem workers under French law, employers were very reluctant to hire younger workers with little or no track record. ³⁹

      The solution by the government was to allow employers to fire a younger worker without cause any time during their first two years. This would take away the risk of hiring a younger worker that was making employers so reluctant to hire them, and thereby reduce the high unemployment rate for that age group. As one news story described the result in their opening paragraph,

      PARIS – French students and unions insisted Sunday they will go ahead with a one-day national strike and more street protests unless the government withdraws a youth labor law that has sparked violent demonstrations and shut down universities.⁴⁰

      In other European countries, attempts at any sort of economic reform to reduce the burden stifling their economies is met with strong resistance. In 2004, an estimated 495,000 people turned out in Berlin, Cologne and Stuttgart to oppose economic reforms proposed by German Chancellor Gerhard Schröder.⁴¹ The German protests were part of a much larger series of protests across Europe as people resisted their governments’ attempt to reduce the burdens that were stifling their economies.⁴² At the very time the changes are most needed, public pressure by those who have come to depend on the services and protection of government can make the necessary changes extremely difficult, if not impossible to carry out. It is possible Europe might have already passed the point of no return.

      What Can Be Done

      How can this be avoided? The best way to fix the system is to restore the checks and balances and this can only be done through some sort of tax simplification. As we have seen, the current system is so complicated that it is very difficult for people to know what they actually pay, and impossible to know how the taxes they pay relate to government spending.

      For most people, taxes are one of their largest if not the largest expense. Yet, unlike their other expenses, few really know how much they have to pay in taxes. Frankly many people, and probably most, do not even know how much they pay just in income tax. They only know how much their refund was. But their refund is only a measure of how much they overpaid during the year, not how much they paid. Thus many see tax time as a time when they get money, not a time when they have to pay.

      There are many proposals, such as replacing the current progressive income tax system with a flat tax, where everyone pays the same rate after personal deductions. This would retain some of the progressive nature of the tax code, so that those who earned more would still pay more. The key, however, would be that everyone would pay the same rate.

      To keep the math simple let’s say there was a 15 percent flat tax rate with a personal deduction of $10,000. A person who made $35,000 would first subtract the personal deduction of $10,000 leaving $25,000 in taxable income. At a 15 percent rate this would result in a tax of $3,750. On the other hand, if a family of three made the same amount of income, they would have a personal deduction of 3 x $10,000 or $30,000. This would leave a taxable income of $5,000, with a resulting tax of $750. If a single person made $100,000 they would do the same. They would subtract their personal deduction of $10,000 leaving $90,000 in taxable income for which the tax would be $13,500. So even with a flat tax you would maintain the principle that those who make more pay more.

      Yet since the rate is the same, any increase in tax rates would affect all, or at least all of those with incomes that were above the amount allowed for personal deductions. Government could still increase the progressive nature of the tax system by increasing the personal deduction, but even here all would have the same deduction. In the current system, not only do the rates go up as you make