Taxation @ MindSay

Liberty is incompatible with taxation.
 This despite that famous saying by Oliver Wendell Holmes
 that "Taxation is the price we pay for civilization."
In fact, taxation is a most uncivilized way of obtaining funds,
given that it boils down to nothing less than extortion.


Just think of it: You go to work for some company and are told
you will receive a certain wage but actually receive but
a fraction of what you have been offered.

 Why? Because a substantial portion is sent not to you,
 who earned it, but to other people. Why? Because if
 it isn't sent to them, they will declare the company
 criminal and sic the police on it.



So, the company is coerced to take part of your earnings
and divert it to those who have this power to make them do so.
 If this isn't exactly like what the Mafia does when it engages
 in extortion I don't know what is. Yes, some of the funds
 extorted will be used for purposes that may actually benefit
you and some who are extorted don't protest. But maybe
 that's true about whom the Mafia extorts, as well. And it
doesn't matter because what is wrong with extortion isn't
what the money is used for but how it is obtained, namely, coercively.

Often it is Robin Hood who is held up as the role model for
justifying taxation: Didn't he "steal" from the rich to "give"
to the poor? Well, not, not really.



In the original version of the legend, Robin Hood did just the opposite:
He stole from those who stole from the poor and returned the loot
to the rightful owners. In those days the upper classes, from the king
 to all his cronies, routinely engaged in extortion. They disguised this,
however, with the phony claim that everything belongs to the king
 and his cronies.

Yes, monarchs and those who rationalized monarchy spun this fantasy
and managed to sell it to the people that they where the rightful owners
 "of the realm," that they had a "divine right" to rule us. This way when
 the bulk of the country went to work on the farm or wherever, they
had to pay "rent" to the monarch and his cronies.



Of course, if I live in your apartment, I pay you rent. It's your
 apartment, after all, so you have it coming to you.
But what if you got your apartment by conquest, by
 robbing a bunch of people of what belongs to them?

That is mostly how the monarchs got to rule the realm, by conquest
. By all rights it is the folks who were working in the realm--
on the land and elsewhere--who actually owned that realm,
the monarchs being the phony, pretend owners, nothing better.
 But since they managed to bamboozle a great many powerless
 folks into believing that they did own the realm, the "rent" had to be paid.



Since, however, the American Revolution put the lie to this
 monarchical ruse, the institution of taxation could not be
 passed off as some kind of legitimate rent taking.
That major political change showed once and for
all that monarchs were sophisticated thugs who
ran roughshod over the rest of the people, who
violated their basic natural rights all over the place,
by robbing and conscripting them.



Yet, because of the idea that we do need
 to have our rights protected by some means
 that involve costs, taxation remained a feature
 of the society that followed the change from
monarchy to constitutional republicanism.



Not a lot of taxation, mind you, because it seemed
 pretty clear to the Founders that taxation is in
fact extortion. But they didn't see some other,
 legitimate, morally acceptable way of collecting
the funds needed to pay government for its service
of securing our rights. Yet, they might have.



There are other ways governments could be paid
 for their service of securing our rights that couldn't
exist without legal protection.
 Contract fees, not taxation, could solve the problem.



But this alternative, legitimate method wasn't in the cards
 following the revolution, so taxation remained, albeit in
a rather modest form. In time, however, it got out of hand.



After all, if the Mafia just took a tiny fraction of income
 from its victims, most would probably put up with it
all rather than to resist. But when the amount moves
on to 25 to 70 %, it turns into big time extortion.
And that is how we stand now where taxation
has become big time extortion.



Some respond to this by noting that in other
countries taxation is much higher. Sure, because
 they are even farther from having lived up to
the spirit and letter of the revolution that America
experienced; namely, removing power from
government and returning it to where it belongs,
the individual citizens. After all, it is America
 that is the leader of the free world, with a lot
of other countries, including most of those in
Western Europe, way behind.

 At least that is how it was supposed to happen.



Instead, however, the American Revolution was
betrayed and the U.S.A. has undergone a reactionary
period in which it reverted, substantially, to the policies
 of earlier systems of government. This Europeanization
 of America is a shame, a damned shame. And it needs
 to be identified as such before it has any chance
of being arrested.



The first step is to acknowledge, unapologetically, that
the institution of taxation is not a civilized but a barbaric
 method to fund anything, because it amounts to nothing
 less than outright extortion, a gross violation of human liberty.

Who Should Pay for Highways

 

A form of neglected argument exists which could be used to successfully put an end to many social controversies. It is argument by analogy. This form of argument can also be used to display the unfairness of policies and the inconsistency of social and economic policies.

 

Consider, for instance, the following truths.

 

Telephone companies provide a product and a service to people. This service requires an infrastructure which the companies themselves must build and maintain.

 

The railroads also provide a service that requires an infrastructure, and the railroad companies themselves must build and maintain it.

 

Cable and satellite television both require infrastructures, and the companies providing these services must build and maintain their infrastructures.

 

So, in general, most services that require infrastructures, and the companies that provide these services are also responsible for providing and maintaining their infrastructures.

 

There is one major exception; however, and except for citing historical accident, there is no reason for its being an exception. That one exception is the motor vehicle transportation service. This industry provides products and services that require an extensive infrastructure; yet they are not responsible for either building nor maintaining it. Why should that be?

 

Here we have an entire industry that is not just subsidized by the public but entirely dependent upon the public’s provision and maintenance of the infrastructure without which this industry could not exist.

 

When one thinks about it, this is very strange, completely illogical, and an immense burden of the public. Yet no one questions it. Do our heads go empty when it comes to cars?

©2005 John Kozy, Jr.

Does Taxation Favorable to Business Inhibit Prosperity?

The Tax Foundation is a research organization based in Washington, DC whose mission “is to educate taxpayers about tax policy and the total tax burden borne by Americans at all levels of government.” It was founded, in 1937, when “a small group of business executives gathered in New York City to discuss how they could monitor fiscal activities at all levels of government and convey the information to the general public. They decided to launch an organization which, through research and analysis, could inform and educate Americans using objective, reliable data on government finance. . . . In its six decades, the Tax Foundation has earned a reputation for its independence in gathering data and publishing information on the public sector in an objective, unbiased fashion. [Quoted from the Foundation’s Web Page]”

 

There is, of course, good reason to view this statement as mere self-promotion, because if anyone reads the commentaries posted on the foundation’s web site, s/he will come away with a clear sense of a rightish inclination. Furthermore, the posted biography of its director says that Mr. Hodge “was Director of Tax and Budget Policy at Citizens for a Sound Economy.  . . .  spent ten years at The Heritage Foundation, . . . [and] helped found the Heartland Institute”—none of which has a reputation for objectivity.

 

Mr. Hodge also is not a highly trained economist, having earned merely a bachelor's degree in political economy from the University of Illinois at Chicago. Since the foundation does not post biographies of its staff, the extent of their educations and political inclinations is difficult to determine except by inference from the commentaries they have written that are mentioned above.

 

The foundation also claims that it provides “Americans with a better understanding of their tax system and the effects of tax policy.” Whether it provides Americans with a better understanding of their tax system depends, I suppose, on how many Americans read its publications. But at least one of its publications fails entirely to expose the effects of the tax systems it analyzes.

 

Recently I came across a reference to the foundation’s State Business Tax Climate Index that aroused my curiosity, so I visited the web site (www.taxfoundation.org) and downloaded the study. After reading it, I was surprised that the study contained no mention of the effects of business-friendly tax policies on the economies of the states that enacted them. So I decided to see how such policies correlate with per-capita income by state.

 

Although the study I downloaded was for the year 2004, it fortunately also contained the rankings for 2003, the latest year for which I could find per-capita income data. I took the 2003 data and did a comparison using Microsoft Excel, and the result was shocking. Not only do the data not support the view that business-friendly tax policies improve the economic well-being of the citizens of the states that adopt such policies, it seems to contradict that view. The graph shows that, generally speaking, the states with the least friendly business tax policies enjoyed the highest per-capita incomes and that the states with the most friendly business tax policies had the lowest per-capita incomes. Thus graphs of the rankings have an inverse relationship to the graph of per-capita income. (If you would like to see the Excel document with the data and graphs, let me know, and I will e-mail it to you.)

 

After making this discovery, I sent the foundation the following e-message:

 

[I read your study, “Study Reveals Which States Have Business-Friendly Tax Climates, Which Don't,” and immediately wondered how these rankings compare to each state’s economic prosperity. Law makers at state and local levels imply with their words and actions that business friendly tax climates contribute to an area’s prosperity. That has always seemed to me to be dubious, since I am of the opinion that “business follows the money,” as the aphorism goes, and by money I mean consumer purchasing power.

In justification of this belief, I have always cited examples from the Gold Rush. Businesses flocked to discovery sites, no incentives were required to get them to do that, and they left when the gold ran out.

 

So, since my 2005 almanac contains only 2003 state by state per capita income figures, I took your 2003 ratings and compared them to per capita income by state. The result was revealing, since the relationship was inverse rather than direct. Can one then draw the conclusion that business friendly taxation actually inhibits prosperity? If so, somebody should tell all of America’s law makers about it.

 

Having discovered this tidbit, I then decided to run the same data against the data in your second chart. Here is a summary of my results (keeping in mind that your data were for 2004 while my per capita income data were for 2003):

Unemployment Insurance Index	to	per capita income	direct but not synchronous
Fiscal Balance Index	to	per capita income	direct but not synchronous
Overall Rank	to	per capita income	inverse
Individual Income Tax Index	to	per capita income	inverse
Corporate Income Tax Index	to	per capita income	inverse
Sales & Gross Receipts Tax Index	to	per capita income	inverse

 

This indicates to me that there is no relationship between tax policy of any kind and prosperity measured in terms of per capita income. So I wonder why you haven’t told the world about this?

 

Surely, someone in your organization must have had the same curiosity that I had. If not, you guys are in deep trouble.

 

So tell me, what’s going on?]

 

When a week went by without a reply, I sent another e-message:

 

[I'm surprised that no one from your organization has replied to this message which I sent last week. After all, the results I describe, at least by implication, impugn your organization's integrity, and I would imagine that you would want to defend yourselves. But perhaps you realize that there is no defense and your silence is an admission of fault. It can certainly be construed as that, can't it?]

 

No one at the foundation has ever replied.

 

So what conclusions can be drawn? Well, the fact that the foundation has not seen fit to show the relationship of the rankings to per-capita income implies that the data on income was deliberately excluded because it serves as a counterexample to the foundation’s position. And thus, this omission makes a mockery of the foundation’s claim to being objective and unbiased.

 

So this data convinces me that the Tax Foundation is not only not unbiased and objective, it even fails in its mission to convey truthful information on taxes and their effects to the American public. And in that sense, the foundation is neither a research nor an educational foundation. It is merely a fraud issuing propaganda under the guise of a research and educational entity.

 

That the relationship between tax policy and per-capita income is in general inverse is an important fact that needs to be publicized. The American people need to know it, and they need to make it known to their lawmakers too.

© 2005 John Kozy, Jr.

The Myth of Business-Friendly Taxes

 

The analysis of taxation that Adam Smith presents in Book V, Chapter II, Part II of the Wealth of Nations has a number of interesting implications which if recognized have never been made widely known.

 

Smith begins like this: “The private revenue of individuals . . . arises ultimately from three different sources; Rent, Profit, and Wages. Every tax must finally be paid from some one or other of these. . . .” He then states four general principles which he claims should apply to all systems of taxation. They are these:

 

 “I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to . . . the revenue which they respectively enjoy under the protection of the state.”

“II. The tax which each individual is bound to pay ought to be certain, and not arbitrary.”

“III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to convenient for the contributor to pay it.”

And “IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings to the public treasury . . . .” And in relation to this maxim, Smith adds that a tax should not be levied in a way that requires “a great number of officers, whose salaries may eat up the greater part of the produce of the tax. . . .”

 

The first implication of Smith’s maxims is that the personal income tax and the sales tax violate the fourth maxim.

 

Smith then goes on to discuss the taxes that can properly be levied on each of the three types of revenue, but it is his analysis of the tax on wages that we find the most interesting implication, which unfortunately, Smith never carries to its logical conclusion. He writes, “A direct tax upon the wages of labor . . . though the laborer might perhaps pay it out of his hand, could not properly be said to be even advanced by him. . . . In all such cases, not only the tax, but something more than the tax, would in reality be advanced by the person who immediately employed him.”

 

From this it clearly follows that the wage earner really never pays the tax on wages; that that tax is paid by his employer.

 

Take the personal income tax as an example. Say a person is said to receive a wage of $60,000 yearly and the tax on this income is levied at 20%. The tax would be $12,000, and the person’s real income would be merely $48,000. Now if the employer withholds the $12,000 from the employee’s pay and sends it directly to the government, it is difficult to justify anyone’s claim that the employee has been paid $60,000, since the $12,000 that is withheld from his pay is no more his than is the salary of the employer’s CEO. In truth, the employee’s income is merely $48,000. The $12,000 is a tax on the employer levied on the wages he pays that goes directly to the government.

 

So, the fact that currently the tax is attributed to the wage earner is merely a book keeping gimmick. For if the employee’s wage was stated correctly as $48,000 and he had no tax to pay on it, his income would be exactly the same as it is under the current system. And if the government levied a direct tax of 25% on the wages paid by employers, the government’s take would again be exactly the same as it is under the current system. Absolutely nothing monetarily would change.

 

If that were done, the IRS could be eliminated along with yearly personal tax filings, and the result would be that the tax rate levied on employers could be reduced, since without having to fund the IRS, the government would need less revenue. Furthermore, it would reduce the employer’s paper work and yield considerable sayings, for instead of having to make tax calculations on each individual employee, the tax could be calculated in one simple operation.

 

But there are further implications of Smith’s analysis that even he failed to see.

 

If we ask, as Smith did in relation to wages, where the money paid in taxes comes from in relation to rents and profits, we find this: Rents are paid to landlords by tenants, and any tax the landlord pays on rents is really supplied by the tenant. So just as employees really pay no taxes, neither do landlords. But who are tenants? Well they are either landlords themselves, businesses or investors in businesses, and wage earners. Now since neither wage-earners nor landlords really supply the monies collected as taxes, only businesses and investors in businesses do. So although businesses are always looking for ways to avoid taxes, their search is futile. For no matter who conveys the tax to the government, it ultimately has been paid by business, since even the incomes of investors come from the businesses they have invested in.

 

But the analysis can be carried even further.

 

Taxes on commodities, commodity transactions (sales), and even the property tax are derivative. Nominally they are paid by consumers and homeowners. But consumers and homeowners break down into landlords, businesses or investors in businesses, and wage earners just as landlords are shown to break down above. So although it doesn’t appear to be so, businesses ultimately pay all of these taxes too. All that business does is transfer the sums needed to pay these taxes to wage earners and investors who then transfer these taxes to the government. This practice is not only cumbersome and inefficient, it is deceptive, since it makes it appear that both investors and wage earners are getting a lot more in return for their investments and labor than they actually are.

 

How much simpler and more efficient the whole matter would be if businesses were taxed directly, rather than in these indirect ways, and all of these other tax schemes were eliminated!

 

But perhaps asking legislators to do things in the simplest and most efficient way is more than they could ever handle. It would make their jobs too easy. Legislators, apparently, have an innate drive for complexity. Not only is the tax code so complex that even the people charged with enforcing it don’t always know what it says, and ther legislation, too, is more often than not so complex that legislators have to vote without ever having read the bills. One hardly has to point out how absurd all of this is. How can good government ever be the product of such a system?

©2005 John Kozy, Jr.

The Foolish Property Tax

 

Tax critics often complain about the regressiveness of sales taxes, but no scheme of taxation is immune from that complaint, since any tax can be made regressive by altering the rate structure and providing exemptions to select groups. I have never heard any tax critic take on property tax, however, and I wonder why. It is, after all, the most unjust tax of all, and its unjustness has been known at least since the eighteenth century.

 

In Book V, Chapter II, Part II of the Wealth of Nations, Adam Smith provides an analysis of taxation. He claims that taxation should only be applied to sources of income, and he cites only three of these: rents, profits, and wages. The property tax, is of course, not a tax on any of these. As a matter of fact, it is difficult to determine exactly what is being taxed by it.

 

Oh, it seems clear enough. One is taxed on the current market value of the property. But the current market value is neither a source of income nor even an asset. If you own a one-hundred thousand dollar house but have a mortgage whose payoff is eighty thousand dollars, you have only a twenty-thousand dollar asset. So when the homeowner is taxed on the current market value, he is being taxed for the mortgage holder’s asset as well as his own. And that certainly is unfair.

 

But assets, if not invested, are not income producing anyhow, and given Smith’s analysis of taxation, they should not be taxed at all. And if a homestead is to be taxed, he claims it should only be taxed in relation to the rent that could be derived from it if it were rented. He writes, “The rent of houses might easily be ascertained with sufficient accuracy, by a policy . . . which would be necessary for ascertaining the ordinary rent of land. Houses not inhabited ought to pay no tax. A tax upon them would fall altogether upon the proprietor, who would thus be taxed for a subject which afforded him neither convenience nor revenue. Houses inhabited by the proprietor ought to be rated, not according to the expense which they might have cost in building, but according to the rent which an equitable arbitration might judge them likely to bring, if leased to a tenant.” In other words, Smith wants to tax property as though it were income producing.

 

But a homeowner living in a mortgaged property would thus be able to deduct from the estimated rent the costs associated with maintaining the property, including the mortgage payment, just as any other landlord would. But that would reduce the state’s income derived from property taxes to such an extent that they would hardly be worth collecting.

 

So why haven’t both economists and tax critics taken on the property tax? It is not only unjust, it flies in the face of good economic theory. Since the Wealth of Nations is the economic bible of free enterprise economics, I can only conclude that our free-enterprise economists are hypocrites, and that our tax critics have their heads in the sand.

©2005 John Kozy, Jr.