Hoofbeats

… of a Hobby Horse

I have a few hobby horses, as readers who stick with this blog will learn.  On occasion, I get them out of the barn, where they live a pampered life, and ride them around for a while.  Today – a partly sunny, 50-ish winter day in southern California — looks like a fine day for a ride.

The income tax, and American income tax policy, is the nag we are taking out today.

Another of Commentary’s excellent bloggers, Jennifer Rubin, brought to our attention yesterday the hard fact that, some way, somehow, the debt being enthusiastically assumed by our federal government over the last few months will have to be paid for.

She cites analyses that the $787 billion package finally approved by Congress on Friday will grow to $3 trillion with its implementation.  I note that this $3T is in addition to the $10.71T total of US debt instruments as of 5 February 2009.  It is also in addition to the total $59.1T in US government liabilities, including the projected, mandatory entitlement spending on Social Security and Medicare that makes up over 90% of that $59.1 trillion.

The $10.71T current debt figure works out to about $37,700 per person as of 5 February.  As of December 2008, the total US government liability of $59.1T worked out to $516,348 per household (or, if we assume a household of four people, $129,087 per person).  USA Today helpfully points out (at the $59.1T link above) that the average private indebtedness of the American household, for mortgages, car loans, and consumer borrowing, is $112,000, of which the vast majority represents mortgage balances.

And here, blog friends, I am not going to say what you think I am.  We can all bemoan this undeniably bad situation, and rail against borrowing and indebtedness.  But the root of our problem here, the reason we have it, and the reason it will not – cannot – go away, is that the inflow to the US Treasury comes from taxing income on a percentage basis.

Consider this fact:  at Jennifer Rubin’s blog post, she discusses two possibilities for redressing the increase in US government debt by the $3T it will cost to implement Obama’s debt spending package.  One possibility is “raising taxes.”  The other is “cutting benefits.”  These are, in fact, the only terms in which government debt, and deficit spending, are ever discussed.  Ms. Rubin is far from alone here; our national dialogue conceives only of generically increasing the percentages by which we tax incomes, or generically cutting benefits (or at least not allowing them to grow with inflation).

Nowhere do we ever discuss the process known to every small borrower as that of paying the loan off.

Think about it.  The 28% of your income you may pay to the federal government in income tax (above and beyond the 13% to Social Security and Medicare) bears no relation whatsoever to the amount the government plans to spend, or to the retirement of government debt.  There is no fiscal connection at all, from the standpoint of decisionmaking at either end of the process.  You are not taxed at x percentage because the government plans to spend y amount, or owes z.  You are taxed at x percentage because your income is i – wholly apart from what government owes or plans to spend.

The selection of the percentage “x” to apply to your income bracket is the result, not of fiscal calculation, but of political ideology and legislative compromise.  The very concept of taxing incomes by percentages, instead of taxing them to pay for government expenditures, is an ideological political one.  The premise is that everyone owes a portion of his private income to the government – independent of government’s plans to spend it.  In this concept, government has a prior right to a certain percentage of your income; even, in theory, if government does not have specific plans to use all of the monetary amount.

This is the underlying idea behind the percentage-based income tax:  one that was hotly debated in America a century ago, before the 16^th Amendment was passed, but that almost no one today even realizes is in operation.  This premise effectively divorces your tax obligation from the government’s plans for programs and spending.  The government does not have to explain to you a tax bill that goes up because government is spending more this year.  It simply takes 28% of your adjusted income, regardless of what it is spending.

This bill of divorcement between the basis for taxation and government spending occurred well before the political disciples of Keynes began experimenting with running big, exciting national deficits.  Its effect on the people’s perception of their tax obligations was amplified immeasurably by the modern marvel of payroll withholding, which for many people obscures their understanding of how much the government exercises a prior right to, every pay period.  How many of us have had the experience, perhaps in our 30s or 40s, of toting up our federal tax bill and entitlement contributions (Social Security and Medicare), and realizing that we could make another whole mortgage payment with that amount?  Yet too often, in our 20s, we paid no attention to this area of our accounting statements from our employers.

Federal spending and government debt accumulation have been separated from tax inflows, in a fiscal sense, for decades.  Most states are now demonstrating the effects of the same dynamic, with growing debt and alarming projections for the future.  We spend for political purposes, and tax ourselves for other political purposes, and at no point do we allow one political course to be modified by the other.

Imagine if you ran your own finances this way.  Suppose you decide, for political reasons that are fully satisfactory to you, that $200 a month out of your $3500-per-month net income is quite enough to pay against a car loan.  Perhaps the only deal you can make for a car, and a loan to get it off the lot and into your driveway, entails a monthly payment of $400 a month for six years.  As a private individual, you have one of three courses:  either do not buy the car; accept the $400 payment, even though it goes against your own preferences; or buy it on the basis of a $400 payment, pay only the $200 that seems right to you, and end up having it repossessed.

The obviousness of fiscal responsibility is blinding to the private individual, who does not have the government’s fourth option of agreeing to the $400 payment, paying only $200, keeping the car, and bringing both the car dealer and the lender into the legislative chamber to be publicly raked over the coals for their irresponsibility in making a bad deal.

We can also imagine the even-more-intrusive situation of the government deciding that $200 per month is the politically correct amount for access to private vehicle transportation.  Even if the costs of the industry – carmakers, car dealers – make $400 a month the break-even point for minimal “vehicle-age,” government decrees that what people shall pay is $200.  (This mental exercise should include the likelihood that a substantial portion of the industry’s costs is mandated by government regulation.)  There may well be an elaborate scheme by which lower-income ratepayers receive rebates, and in effect pay nothing.  But no one is excused from participating in the government-mandated vehicle transportation scheme.  Some fiscal argument is probably made that it will pay for itself, and wealthier ratepayers will almost certainly be charged an additional premium, to offset the cost for the poorer ones.  We can easily imagine that compliance by the industry will only be possible until the inadequate remuneration – the $200 versus $400 – finally makes operation no longer viable.  At which point there will be vehicle shortages, most probably a robust black market, a heavy trade in bribes, and further pretexts for show trials in Congress of the industry’s remaining managers, so that they can be excoriated for their poor management and bad deal-making.

The root of our helplessness before government’s fiscal incontinence is the percentage-basis income tax.  It operates on the same principle as the government-mandated $200 per month from individuals to secure private vehicle transportation.  It is an arbitrary figure set for political purposes, not fiscal ones; and it causes us to think in terms of participating in an endless cycle of remittance and benefit, rather than in terms of paying off a loan and owning something, or paying off a loan and being free and clear, financially, and ready to improve our condition with greater investment or saving.

We have agreed, instead of being taxed to pay for government, to be taxed, a priori, on an ideological political basis, regardless of what government spends or borrows.  As long as we think in terms of “making the rich pay a higher percentage of their income to the government,” or even of “cutting welfare benefits that are wildly beyond any contribution ever made by the beneficiaries,” we will never get our government finances under control.  Even in the halcyon Reagan years, it was obvious that inducing more income from taxes, through tax cuts, and cutting wasteful government programs, had no political power to balance government books.  Americans still thought – and still think today – of government fiscal practices in abstract, impersonal terms.  This mindset is the most useful one possible for constituency-tending by politicians, with tax dollars.

Only if we ever resume thinking about paying the debt off – tailoring our tax burden to our outstanding debt and current spending, and tailoring our spending and debt to the tax burden the people are willing to take on – will we get spendthrift government under control.  Although such a measure is highly unlikely, the most effective means of changing our thinking about taxes and spending would be to make government remittances a monthly bill, like the electric bill or the car loan, and require every working American to face, each month, the amount his government is deciding to spend.

If Americans thought in terms of retiring $37,700 each of current government debt, perhaps on the timeline of a 30-year mortgage, it would seem burdensome but feasible.  We would, of course, have to keep current government operations going, as well as paying off the $10.71T debt.  This would be sure to keep our existing monthly tax remittances at at least their current level.  We would become snarling tigers about all proposals for new expenditures, since they would only add to our monthly bills to the federal government.  We would refuse to fund anything but what we considered our highest priorities:  national defense, roads, dams, reservoirs.  As we looked at those $129,000 per person obligations for the Social Security and Medicare benefits of all the people walking around today, and compared that amount with our private savings and investment portfolios and home equity, we would be galvanized, as by nothing else, to begin privatizing our entitlement programs, and get out from under that ever-growing $59.1T.

But we will never have this clarity as long as we think of federal taxation in terms of the government having a prior claim to a percentage of our incomes.

OK, the horse has had a good gallop.  Time to head back to the barn for a rub-down and some well-earned cereal.

Let freedom ring.