Tax Economics: What You Should Know and Why You Should Care
Taxes impact each of us. Each of us differently. Tax is the polite term for paying for rendered services and tax authorities seek ways to extract the most from its citizens without causing a revolt. Nearly all armed uprisings include a measure of taxation, its perceived fairness, and the use of the “proceeds” as an underpinning. Taxes, their policy and collection metrics, encourage behaviors. Not all behaviors are honorable.
This posting (and any future ones) is not designed to be a full treatise on tax policies as there are library shelves filled already. The intent of these words is to remind some and inform others as to the true nature of taxation and how common misconceptions are pervasive and cloud the public conversation.
Here are some fundamental principles too frequently omitted in conversations:
- All taxes are Income Taxes: Do not confuse the calculation to derive the amount of tax or the method of collection. It requires “income” somewhere along the system to earn enough money to settle an obligation regardless of method.
- Example: Sales tax is a calculation based upon consumption. In order to consume someone needed to earn an income. Income may be self-earned (as in wages); earned by others (inheritance); granted by the State (public assistance); retirement earnings (pensions, social security, etc.); investment income (rents, dividends, interest, or capital gains); etc. Ultimately, there was always “income” earned prior to having the ability to pay. Same with Property Tax, Excise Taxes, Utility Taxes, Estate Taxes, and any other type of government-imposed fee, conscription, taking the collection, or required payment.
- Only People Pay Taxes: It is simple to confuse the check writer with the ultimate responsible party. Only people are able to pay any form of tax. Corporations (businesses of any type) are agents for their owners. Corporations are paying a tax essentially that are undistributed earnings of their owners. When corporations are required to make payments one of three things occurs: Wages are lowered as there is less cash flow available; prices are increased as more cash flow is required (this relates to the increasing minimum wage conundrum of wage-push inflation – likely another posting); or dividends to shareholders are reduced. Regardless of the corporate reaction to writing tax payment checks, only people (employees, consumers, or owners) are ultimately impacted.
- Only People that Pay Tax are Eligible for a Tax Rate Reduction: Whenever a revised tax program is announced, there is a public outcry that the “rich” are benefiting more than the poor. Likely true. Why? Because the wealthy pay the taxes so the poor pay little or none.
- We likely do not have a “tax revenue” problem. We have a “spending” problem. Our tax revenues rise each year. The problem is we spend more than we bring in. Spending feels good to politicians and recipients. Government reallocates wealth from one group to another. The ultimate recipient of government payments is always people (remember we only have people here).
- Taxes modify people’s behaviors: Want to encourage electric cars? Provide a $7,000 tax credit that reduces the consumers’ initial cost of purchase. Of course, there are “policy” reasons for the benefits of electric power over fossil fuels, but that doesn’t modify the statement. Governments use tax incentives to motivate behavior. Think about the mortgage interest deduction. Why do taxpayers subsidize housing? Renters receive no similar benefit, yet homeowners receive an effective 30-40% reduction of their payments because of a determined public interest.
All citizens should be mindful of their tax obligations. Both direct (income direct) and indirect (sales, corporate, etc.). One of the differences between conservative-minded people (economic ones that is) and liberal-minded people (economic ones again) is who is a better arbiter of allocating earned income. Government (in the form of taxes and payments) or people (in the form of choosing where to spend)?
We are a complex society. We have many strengths, and we have several weaknesses. Economic tax literacy is a general weakness. Too many of our citizens have a false sense of understanding of who pays tax, what is required to pay a tax, and who benefits from tax policies.
Meanwhile, ponder the above and we’ll revisit some of these themes again in the upcoming weeks and months.
Until then……Think About It.
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