Daily Archives: 19 October 2011

Taxes, or Whose Money Is It?

Posted on by
Reply

Herman Cain advertises his tax proposal as being revenue neutral—it would raise as much tax revenue, in a static sense, as does the current tax program that his 9-9-9 plan would replace.  Arthur Laffer, writing in The Wall Street Journal, agrees with this.  “Mr. Cain’s 9-9-9 plan was designed to be what economists call ‘static revenue neutral,’ which means that if people didn’t change what they do under his plan, total tax revenues would be the same as they are under our current tax code,” Laffer writes.  Other attempts to change the tax code have been advertised as good at least in part because the changes would have been “revenue neutral:” the amount of revenue collected by the government after the change would have been the same as the amount collected before the change.

But this begs a number of important questions.  Why must tax code changes—or even wholesale replacement of our Federal tax code—be revenue neutral?  What goal is supported by this neutrality?  One goal is continued government spending and borrowing at current levels.  Is this a legitimate goal?

These questions hinge on two other sets of questions that must be answered before these can be usefully satisfied.  The first of those sets of questions is this:  “Whose money is it: whose money is being taxed, and whose money is the collected tax?”

After those questions have been answered, a second set can be addressed: “What is the purpose of government?  Given a government, what is the purpose of its spending?”

With the answers to these, the answer to the question of the utility, if not the necessity, of tax change neutrality becomes clear.  Herewith, then, I begin a short series of posts on the question of taxation.  In this post, I’ll explore that first set of questions, questions that center on whose money it is.  In a subsequent post, I’ll look into that second set of questions, concerning the nature of government and government spending.  In a third post, I’ll answer the question of tax revenue neutrality.

Whose money is it that’s being taxed?  John Locke, Jean-Jacques Rousseau, et al., asserted that all men, despite beginning in a state of lawless nature, had inherent in their existence certain properties, beginning with a property in their minds and bodies, meaning these were their own to control and no one else’s.  From this property, men also had a property in whatever in their environment they might manipulate for their own good or that of their fellows, as well as the results of that manipulation—they owned, for instance, the wheat they grew and the land on which they grew it, or the metals they mined and the land from which they mined it, or the shelters they built and the land on which they built them, or the ideas they had for better ways of doing these things.  No one else had any right to these things.  From this, these men owned whatever they might obtain from an exchange of their property for that of another.  A man who exchanged some of his wheat for some of another’s metal owned outright and exclusively that metal he obtained, and he gave up all claim to the wheat which he exchanged: that other man now had an exclusive property in that wheat.

And so it goes from a barter economy to a money economy.  The goods we obtain in exchange for money become our exclusive property, the money we pay for those goods becomes the seller’s exclusive property, and vice versa.  Our social compact’s principles statement acknowledges as much:

[All men] are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

John Adams, as I’ve written elsewhere, explained “Happiness:”

All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.

By the suite of our endowment and by our agreement in our American social compact, then, all property we gain from the sweat of our labor or the work of our mind is our exclusively owned private property.  All property we gain by exchange of our property for that of another’s, including money, is our exclusively owned private property.  Thus, the answer to our first question—whose money is being taxed—is straightforward: it’s our money.  It is not the government’s money that it is collecting; it is our money that we allocate to government.

This brings us to the question on the other side of this…coin.  Whose money is it after it’s been taxed and collected?

The answer to this is a resounding “it depends.”  It depends critically on the nature of a government and of the social compact that created that government—indeed, on whether such a compact exists at all.  There are three fundamental conditions here.  One condition consists of a polity in which there is no social compact: government exists because the men who populate it rose to the pinnacle of power by wile or by superior strength.  They govern because they can, not because the governed consent in any meaningful way to the governance.  In such a polity, the money, once collected as tax, is government property, if only because the government is strong enough to enforce its claim with blood.

In a second fundamental condition, a social compact exists, and its terms essentially cede all power and control to the government created by that compact.  It’s important to understand at this point that a social compact, even in a polity such as this one, is an agreement among the members of the compact; it is in no way an agreement between the compact’s members and their government.  This is straightforward: men first exist without a government, thus they can only agree among themselves; there is no government at this early stage with which to agree.  Any cessation of power to the government they create can only be by agreement of the collection of men among themselves.  Having ceded power to their government, though, the question of ownership of money collected as taxes becomes clear: that money belongs to the government.  When a polity cedes all power over itself to its government, it necessarily cedes (or tries to cede—see Locke and a Creator’s endowment—but functionally, trying to cede and ceding have the same result over the lifetime of the men involved) power over—ownership of—private property, including tax collections, to government.  Money, having been collected as taxes, then, is government’s money in this case.  (Of course, this condition implies that ownership of the money before it’s taxed also falls to government, but we’re considering here post-collected ownership.)

The third fundamental condition is our American social compact: we’ve assigned a short, explicit list of powers to a government which we have created through our compact, and that government, also by the design of our compact, is entirely subordinate to us and it serves at our pleasure.  One of the things we explicitly have not ceded to our government is a thing that we explicitly retain for ourselves (that principles statement again, and additionally, our government’s blueprint, the Constitution): our exclusive ownership in our own properties.  Among the places in our blueprint this is spelled out are Article I, Sections 8 and 9, and our Bill of Rights.  Thus, our money, which is ours before we allocate it to government as taxes, remains ours and not government’s after it’s been collected as taxes.  This is true through another pathway: by the terms of our blueprint, our government is permitted to spend money only on specific things; it cannot legally (not just may not, it can not, legally) spend that money for any purpose it pleases.  I’ve been saying we allocate money to government, rather than we pay tax money to government, on purpose.  We allocate money, in the form of taxes, for the specific purposes we’ve authorized the government and for no other.  That we retain ownership of our money after a tax allocation is true through yet another path: our government exists as our common representative.  Thus, things we allocate to our government, like our money, we are only allocating to ourselves.

Whose money is it after it’s been collected as taxes?  It’s ours.  We’ve only allowed our government to use it for a bit.

Bailouts and Accountability

Posted on by
Reply

Der Spiegel Online reports that the EU is getting close to an agreement to expand the ability of the EU to continue bailing out Greece (and by extension, the rest of the PIGS of Europe).  This expansion of capacity is shaping up to be in the range of €1-€2 trillion ($1.4-$2.8 trillion).  The expansion is intended to work like insurance; it’s a 20%-30% “first loss guarantee:” European taxpayers, via the European Financial Stability Facility (EFSF), will guarantee up to a 20% or 30% loss incurred by the lenders—ensuring that those not involved in the investment at all will suffer the first 20%-30% loss before the investors lose a penny.

This comes against a backdrop of negotiations over how much of a loss those private lenders should be “required” to take compared to the degree of loss the guarantors should take, keeping in mind that ultimately, the guarantors are the taxpayers of the citizens of the EU member nations—the citizens whose tax monies ultimately fund those central banks.  The present agreement concerning the size of the “haircut” is that private lenders should expect losses of 21% of their investment, and the good citizens of the member nations should absorb the rest of any losses.  Berlin and Paris are currently dickering over whether that “haircut” should be raised all the way to 50% before the taxpayers pick up the rest of the bill.

Europe thinks, by propping up a bankrupt Greece, it’s learning from the United States’ handling of the Lehman Brothers failure during the beginnings of the Panic of 2008.  Our government’s decision was to allow a failing institution to fail, and the EU observes all that followed from that collapse.  But as other analysts have shown, that’s the wrong lesson.  The right lesson is from our government’s prior handling of a failing Bear Stearns and the decision not to let that failing institution fail.  This disastrous error created an expectation that no institution would be allowed to fail; these entities—including Lehman—can take, with impunity, severe, unhandled risks because failure from those risks will be made good by government—by taxpayers wholly unrelated to those institutions’ bets.  And we see this in the EU today: the other PIGS of Europe now expect bailouts, also; they expect to be inured against the results of their own failures.  And further, those losses, under the current régime, are not even to be paid by the taxpayers of the failing country, but by taxpayers wholly unrelated, by taxpayers of other sovereign nations, taxpayers whose hard work and personal and governmental responsibility have gained sound economies.

But who, in the end, will pay for a Greek default?  Under all of the plans currently under consideration, the citizens of fiscally responsible polities, of nations which took care of their revenues, look forward to being rewarded for their responsibility by being forced to give up their weal and transfer it to profligate spendthrifts and early retirers who, as a society, refused to take care of their own funds.  Why are the private investors, who invested private money, not expected to get barbered to the extent a free market demands?  Why must the taxpayer get his head shaved, as well, to bail out the private entities (and government banks) which made such poor investment decisions (and made such ill-considered “guarantees” of these poor investments)?

Once again, who is it that the politicians of the EU expect must pay for Greek failure to perform?  A fiscally responsibly Germany or Finland, whose hard-working and frugal citizens have developed a measure of personal and national wealth through their own efforts?  Slovakia, who move Heaven and Earth to get their fiscal house in order so they could join the EU, and whose per capita income remains about two-thirds that of wastrel Greece?  The United States (through the IMF and/or directly) with our own exploding deficits and debt?

Here is an indication of the level of integrity and responsibility that is being bailed out:

Greek citizens have deposited an estimated €200 billion in Swiss accounts, with a significant portion of that sum thought to be unreported.

And tax evasion is a national pastime for Greeks.

A question that must be asked, but which no one seems willing to ask—least of all the German government: For how long must Germany be held to war reparations (here is another demand for continuing reparations as an excuse for bailouts)?

More broadly than that, though, where is the accountability if losses are to be “guaranteed?”  Where is the risk control in a market where no one loses?  What moral hazard is being created?  Here is one outcome of that hazard: “there has been concern that EU governments would have to step in to recapitalize their banks at an immense cost to taxpayers.”  Practically, what inflation is being created for the “guaranteeing” economies when the failing economies are not allowed to go bankrupt and so to begin their recovery?

The cost of letting Greece default and then recover cleanly will be very high.  But the cost of attempting to prop up the failed Greek economy, and then Italy’s, will be far higher, especially after those economies collapse into default anyway.  And we can anticipate adding to the list Spain and Portugal.

Update: Here is another example of the integrity of the people being bailed out (sorry about the lead-in ad).  Slides 1 and 8 are instructive.

Another update:  Corrected, in the first paragraph an erroneous currency conversion from trillions of Euros into billions of dollars.  Trillions are now still trillions.

Another update: Corrected the “first loss” explanation.