The Case for Tax and Spend

Stephen H. Unger
October 6, 2008

No No No—I don't mean that I love to pay taxes. Rather, I am going to explain here why you should love to pay taxes! Just kidding!

Over the past three decades, "tax" has achieved the status of a dirty word. A pledge to reduce taxes has become an essential election plank. This is a principal reason for the erosion of our basic infrastructure. Taxes are an essential factor in developing and maintaining a civilized society. They are the means whereby the costs of civilization are allocated among the citizenry. So, while it is reasonable to oppose particular tax structures on the grounds that they are unfair in distributing the load, it makes no sense to oppose all taxes, or to fight to lower total tax revenue to the point where the public welfare is significantly damaged. Let's look first at just what it is that taxes finance. One category consists of services to the population at large.

What Tax Dollars Pay For ?

An agency whose mission is to safeguard public health, for example by ensuring that food products are not contaminated, serves the population at large, rather than identifiable individuals. The same is true for the criminal justice system, which includes police, prosecutors, public defenders, judges, prisons, etc. Other obvious constituents of this group are the military, and administrative expenses of all three branches of government at all levels. Yet another group of activities in this category are standards setting (NIST), gathering and dissemination of economic data (population, expenditures, etc.), the funding of basic scientific research, and funding of the arts.

There seems to be no reasonable way to fund such activities other than by taxes. We could, of course, argue about what kind of taxes should be levied and exactly who should pay them and under what circumstances. More about this later.

Some services might be considered as being rendered to individuals. These would include the construction, operation and maintenance of streets, roads, bridges. Particular individuals use such facilities to different degrees. This is even more true of schools, libraries, parks, and recreational centers. One could imagine paying the costs with user fees. Current technology makes this possible. Would this be a good idea?

Such an approach might be justified where it is desirable to discourage over-use of some facility. For example, charging motorists for use of particular streets, bridges, etc. during rush hours is a reasonable way to control congestion. On the other hand, charging tuition at elementary schools is a bad idea, because we do not want to reduce attendance, and because we do not want to make quality of education dependent on ability to pay. The same is true for libraries, parks, and recreational centers. The costs and wasted time involved in collecting user fees is another argument against that approach.

Reducing Inequality

An entirely different, and probably the most controversial, use of taxes is to reduce inequality of income and wealth among the population. Such inequality has been increasing in recent years [1, 2]. One indicator is that compensation for corporate CEOs is currently, on average, over 400 times that of median compensation for other corporate employees. This compares with a ratio of about 40 in 1980 [3, 4].

One justification for reducing such inequality is that a good case can be made that, where some individuals can pay the complete cost of a presidential election campaign out of petty cash, we do not have a truly democratic system. Allowing unlimited accumulation of family wealth from generation to generation is a path toward a growing gulf between commoners and a hereditary aristocracy, not what one usually thinks of as a feature of a democratic society.

A justice-based argument is that, since the basis for income and wealth in the modern world is mainly the material and intellectual infrastructure produced by the work of countless people over many centuries, allowing a small number of people to benefit enormously more than everybody else is hard to justify. This is true even for those who have personally made significant contributions, and is even more obvious with respect to those whose wealth was inherited, or obtained via devious means.

It is not a case of choosing between the extremes of unlimited and absolutely equal income and wealth. One could, for example, take an intermediate position, for example, that everybody should have at least enough income to be able to live decently, and that nobody should have more than, say, twenty times that amount.

Reducing gross inequality was one of the motivations for the graduated income tax and for inheritance taxes. (It is interesting that Adam Smith wrote that it was reasonable for wealthy people to be taxed at a rate more than proportional to their income [5].) Both the graduated income tax and the inheritance tax have been watered down considerably in recent years. The tax on the highest income bracket, which exceeded 90% for many years, is now 35%. The inheritance tax has been slashed and is in danger of being phased out altogether.

Opponents of efforts to curb super-high income and wealth argue that we should not reduce the incentives of such people as top rated corporate executives, movie stars, and big league ball players. I do not find this very persuasive. I doubt that, if their annual after-tax incomes fell from say, ten million dollars to a half million dollars, that pitchers would start missing the corners, or that actors would forget their cues, or that company presidents would lose track of the bottom line. There is no evidence that the 90% income tax brackets of the forties and fifties caused top performers in any field to slacken their efforts. Nor was there a noticeable performance surge when tax rates fell.

Using Taxes to Discourage Certain Activities

Yet another use of taxes is to influence behavior. Heavy taxes on tobacco in order to discourage smoking is a good example. In Europe, gasoline is very heavily taxed in order to reduce petroleum imports and to encourage the use of more efficient vehicles. The idea of taxing companies for the emission of various air pollutants is also under serious consideration. This is trickier than outright bans in several ways. One is that people may work out schemes for circumventing the taxes without changing their behavior. Another is that governments may become so dependent on the resulting revenues that they may act in other ways to encourage the continuation of the presumably undesirable activities. A third problem is that the strength of the deterrent varies with the deterees' ability to pay.

It is important to understand that taxation is a complex matter. The effect of the graduated income tax depends on a lot of details beyond simply the bracket rates. Fixed and itemized deductions can modify the effects substantially. Exploitation of various features of the tax regulations makes it possible for many people with extremely high incomes to pay very little in income taxes. This tax avoidance, including use of tax havens, is in addition to illegal tax evasion.

Furthermore, the overall tax structure includes other elements such as state income taxes, sales taxes, and real estate taxes. These are generally, tho they need not be, of a regressive nature, in that they tend to fall more heavily on less affluent people.

Why The Need For Huge Fortunes?

No doubt there are people who desire great wealth in order to satisfy urgent needs to live lives of great luxury, jetting around the world in their own aircraft from one lavish resort or estate to another. Some regard making money as a great game that they play for the thrill of it. But most people striving to accumulate a lot of money have more mundane reasons. One is fear of some catastrophic illness (or accident) in the family that could entail open-ended medical and other expenses. The possibility of job loss, perhaps coupled with some general economic crisis, drastically curtailing income, is another fear. The staggering cost of higher (or even lower) education for their children is yet another incentive for desiring great wealth. Such concerns may stimulate bitter resentment of high taxes that make it harder to accumulate the wealth that could mean security.

Now suppose that medical treatment and education at all levels were free, that adequate retirement pensions were assured, and that there were reliable guarantees of job security—or adequate unemployment insurance? This would make striving for great wealth a lot less important. Such conditions prevail today in the Nordic countries. Furthermore, in all these countries, public infrastructure (water supplies, roads, bridges, public transit, etc.) is in very good condition. The price paid is in high taxes of all kinds. Note that these are all democratic countries in which civil liberties are well respected. Private businesses operate freely.

The bottom line is that, apart from theorizing, we have a real-world demonstration that life with high taxes can be less stressful and more pleasant—if the tax laws are well structured and fairly administered, and if the money collected is spent wisely.


  1. David Cay Johnston, "Report Says That the Rich Are Getting Richer Faster, Much Faster", New York Times, December 15, 2007
  2. CBS, "Rich/Poor Income Gap Widening To Chasm", CBS News, May 3, 2008
  3. Scott DeCarlo, "Executive Pay: Big Paychecks", Forbes, May 3, 2007
  4. Jeanne Sahadi, "CEO pay: Sky high gets even higher", CNN/Money, August 30, 2005
  5. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776, see v2.71.

Comments can be sent to me at unger(at)cs(dot)columbia(dot)edu

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