You Are How You Are Taxed (So Pay Attention)

The Modern Survival Guide #46

This is the Modern Survival Guide, a guidebook I’m writing for things I think people need to know about living in the modern world. The views expressed here are mine, and mine alone. And frankly, having read the title, I’m pretty sure that a lot of you are going to be upset about them, because I have opinions on taxes. Specifically, I think we have to have them. Even more specifically, I think we should be reasonably happy to pay them… most of the time.

And 3… 2… 1… hate mail.

Ok, now that those of you who wanted to flame me have done so, let me just say that there are reasons why I believe this. I think we need to have some pooled resources to do big things in society. I think we should fund the government at an efficient level. I don’t think private donations are acceptable. I think there are both proper and improper levels of taxes. And I don’t think any of that means I’m a communist or a tyrant in the making.

Oh yeah, exciting stuff here. Hang on to your hats, folks. The sheer volume of entertainment rising off the screen might blow them off. But please keep reading anyway, because this is important.¹

How we use taxes has a lot to do with who we are as a nation and how well our society works. I also think that people fall for a lot of very bad logic and aggrieved commentary when it comes to taxes, which affects our collective ability to think about them sensibly. And I think that this directly impacts you, and me, and everybody, so it behooves us as survivors of the modern world to understand both why and how we are taxed. With that in mind, I’m going to talk about the idealized reasons why you should be taxed, explain what I think defines a proper tax level, and explain what I think defines an improper tax level.

I recommend an energy drink at this point in the article.

Why We Should Pay Taxes

Pooled Resources

One of the things that I don’t think a lot of people realize is how cheap it actually is to solve a lot of problems in life if you spread the cost out over enough people. This is one of the reasons why we have governments in the first place, so it’s good to know.

Let’s take a common example: roads. We all use them; this is a classic public good. It’s hard to get good numbers on how much it costs to build a road (because there is no such thing as an “average” road), but for the sake of simplicity let’s say it takes $3 million dollars to build a mile of a small (2–4 lane) highway. That shouldn’t be too far off base. To build a brand new 100 mile stretch of road would therefore cost $300 million dollars.

That’s a lot of money for anyone to pay — more than the vast majority of people will ever see over their entire lifetimes — but it illustrates a principle: individuals do not build nations. It takes a group effort. And if you spread that kind of cost over even a comparatively small group, it becomes much less daunting. For example, my home state, North Carolina, has a relatively small population of about 10 million people. If each of them pays $30, the road is fully funded. If you get paid twice a month, and you spread that cost out over a year, that means each person only contributes about 29 cents per paycheck.

This is the power of pooled resources: you can do big things for comparatively small individual contributions. That lets us do big things (like build a road, or a water treatment facility, or a battalion of tanks) without breaking anyone’s personal bank.

It also means that we don’t have to wait for a profit motive to exist before we do big things. The profit motive is a wonderful tool, but it is not magic and it does not meet all needs — it just meets profitable needs. A pool of public resources means we can do big things for the good of all the public, not just those who can pay for it.

The US is a powerful, prosperous nation because we do big things, have big infrastructure projects, and spend money to raise standards and create public goods for society as a whole.² Therefore we are a powerful, prosperous nation partly because we pay taxes. Never let anyone tell you otherwise. But by the same token the national character is very much set by how we spend our taxes — so pay attention to where they’re going!

Funding the Government

Now, having a common pool of resources to do big things in society is one thing. Funding the government is something else entirely. Sometimes funding the government is the same as doing big things; sometimes funding the government is just about keeping society running; and sometimes funding the government means supporting policies that you might personally disagree with. Whatever you think about government funding, though, it is usually the case that funding it is better than not funding it, and we use taxes for that.

This is twisty logic, so stay with me for a moment here.

Let’s start with a premise: The US is a representative democracy, and our representatives pass laws on our behalf that we are obliged to obey. That’s why we elect them. Right? Eh, close enough.

Second premise: The US government’s various executive arms enforce and execute the law. That’s their job, right? Again, eh, close enough for government work.

Third premise: The US government is following the democratic system by enforcing and executing the law as decided by the representatives of the people and the elected President. BIG debate point here for the Electoral College and gerrymandering, but again, eh, close enough.

Conclusion: Therefore, the US government is doing, and can only do, things that the majority of the country wants it to do… even if they’re not quite sure why they want it to do those things because their representatives made the choice for them. Still, you get what you vote for.

Given that the government in this country exists to execute the will of the majority (and, theoretically, protect the rights of the minority), it is therefore in the interests of majority (and the minority) to pay their taxes. Otherwise you’re actively hindering the very things you voted for, or preventing the government from protecting you from the majority. Therefore not funding the government is pretty much the least democratic thing you can do.

Government Efficiency

From another perspective, let’s consider this from a project efficiency viewpoint. The easiest way to ensure that a project fails is to under-fund it. Government deals with funding cuts by delaying or deferring projects when they are under-funded, but nothing just stops, because the government is still obligated to follow and execute the law. If the law says “build a bridge,” and the tax revenue is not enough to build the bridge in one year, it gets built in two years. But it always wastes money to extend deadlines like this.

Therefore, from a cost efficiency standpoint, it ought to be in everyone’s interests to at least fund the government at efficient levels. Otherwise you end up spending more money than necessary over the long term as the projects drag on and on. Not funding the government appropriately doesn’t make sense from the standpoint of fiscal responsibility. This is counter-intuitive, but it’s true, and politicians tend to gloss over it.

Donations Are Not Good Enough

OK, fine, let’s say we all accept the arguments so far. It’s a good idea to have a common pool of resources, it’s a good idea to fund the government, and it’s a good idea to do so at levels that allow it to efficiently complete its mandates. Why can’t we just donate money? Why does it have to be so coercive? Isn’t that a violation of our freedom? People are smart and rationally self-interested,³ right? Surely they’ll make the correct choice if we just ask them to donate to the common good!

(Dear reader, your author had to step away from the computer for a minute so that he could stop laughing and wipe the tears from his eyes. He’s slowly returning to normal and should be back momentarily.)

Short answer, no, you should never trust your neighbor or the man at the bar to make the right choice for national policy. That’s actually our whole philosophy around representative democracy in the first place (there’s a reason we didn’t try direct democracy). There are at least six reasons why.

The first is that no one has complete information, because that’s not possible. Men and women are not gods, and lack the quality of omniscience. So asking people to donate to the common good necessarily means that they are only donating to things that they know about. If their knowledge doesn’t extend to critical areas, or if they just don’t know how much things cost, or if they can’t figure out whether their contribution will make a difference, that can and will affect the generosity of their donation.

The second is that everyone is self-interested to some extent. Therefore, while most people will give to the common good (after all, charities do get funding) they are unlikely to give as much as is necessary, and they are highly likely to not give at all at some point. We’ve all had that moment where we look at our paycheck and have a cursing fit when we see how much is coming out of it in taxes. Let us not forget that there is a constant disconnect between what we want the government to do and the level of funding we want to give the government. Everyone wants something for nothing, and collective action dilemmas are common in voluntary donation schemes.

The third reason is that everyone is biased. Therefore if a political party gains power that is not supported by a particular person, that person is unlikely to want to contribute to the government while that party is in power. If you think that’s a damn good idea, just remember that this would apply to your political party too. In practice it would mean that we would effectively halve the potential of government funding, which is a waste of resources, a waste of potential, a danger to national security, and a violation of our democratic rules (i.e., majority rule).

The fourth is that reliance on private donations would put the government in competition with private charities and every other “optional” purchase. And again, if that seems like a damn good idea just remember that there are different consequences for not funding the government and not funding, say, the March of Dimes (which is no slight on them, they do great work — seriously, click the link and donate to the March of Dimes). There are things we expect government to do, and they have to be funded to do those things and maintain a stable society. Not the least of these is the army. One of the major reasons we have a central federal government at all is that the Articles of Confederation proved insufficient to maintain a military force.

Fifth, coercive taxation has been the governmental model for the last five thousand years because of the necessity for a steady stream of resources. Charities have a problem that is relevant here: their funding and resourcing tends to come in fits and starts. This is not an efficient way to get resources, and does not easily enable forward planning. This was a big reason why it was hard for some ancient states to maintain standing armies, too. It’s also why the Red Cross has to have a funding drive after major disasters (i.e., when it’s all over but for the screaming and the cleanup). You can’t forward-plan without an idea of your future resources, and forward planning is very much a survival trait for a nation.

And sixth, people (present company excepted, of course) can be very, very dumb. You know this. I know this. Tommy Lee Jones knows this. Don’t act like you don’t know this. Sometimes people actually cannot be trusted to act in their own interests. I know, I know, I’m an elitist bastard for saying so, but be honest… you said the same thing to Aunt May last Thanksgiving. You know you did. And as a result, sometimes we have to do coercive things, like enforce laws or collect taxes, to keep society from crumbling from the sheer mind-numbing ignorance, pettiness, and tribalism of the common man.

In short, private donations are not enough because we have to fund the government, at the level of funding required, when it is required, without that funding going to other entities, and without people violating the democratic rule because they don’t agree with current policies and/or just don’t want to give. That leaves us with coercive taxation. Remember: the great advantage of a democracy is that you have representation so that you have some say in what you are taxed for. America’s ancestors fought a war over that; don’t take it for granted.

I recommend another energy drink at this point in the article. Seriously, just power through like another four or five minutes.

The Proper Tax Level

Ok, tax philosophy 101 is closed. Are you relieved? I’m relieved. Let’s move on to survival issues. There are proper tax levels and there are improper tax levels. It’s important to know which are which, because this is one of the things that determines whether your society succeeds or crumbles.

A proper tax level (1) funds the government, (2) enables collective action, and (3) doesn’t impoverish the citizenry. Everything about this is open for interpretation. Seriously. Go check it out. Nothing in the Constitution limits how much you can be taxed. I know, I know, the Libertarians think differently, but they are legally incorrect.

This rubric is vague because it has to be. What does it take to fund the government? And what is “enough” collective action? And what does it mean to impoverish or otherwise economically limit the citizenry, given that any level of taxation is inherently economically limiting?

These are all good questions, and they don’t have easy or consistent answers. My best advice is therefore as follows:

• Understand that a proper tax level is something that changes over time. No tax level is ever appropriate for all situations. Sometimes you have to tax different things, or different groups, more than others or less than others.
• Understand that a proper tax level is rational, and addresses the needs of particular situations and demands. Taxes should not be impacted too much by promises of a future state. The future is always in flux, but the bills are here now.
• Understand that a proper tax level is directly proportional to the degree of action that the voting majority wants the various arms of the government to take. The more we want the government to do, the more taxes we should expect to pay.
• Understand that a proper tax level identifies where the money is in society, and places taxes there. You can’t squeeze blood from a stone, and there’s not a lot of sense in taxing poor people or economically disadvantaged sectors too much.
• Understand that a proper tax level is relatively simple to understand. Simplicity is the twin of accessibility when it comes to legal structures, and it’s good for people to understand the law — it makes following it (and altering it) so much easier.

Improper Tax Levels

Here’s the sticky part, the part that actually affects our survival in the modern world: our current system does not have a proper tax level. Instead, it is beset by the problems of improper tax levels, which are as follows:

• Improper tax levels are static and non-sensitive to emerging needs. Static tax levels are only good for paying for what the government used to need. Much like militaries fall into the fallacy of fighting the last war, a static tax level pays for what the government used to do.
• Improper tax levels are ideological, and not based in accounting or real funding demands. Ideology is a fine thing, but money is money, and an ideologically-based tax usually leads to insufficient revenue.
• Improper tax levels are disproportionate, and place undue burdens on people who don’t have much to contribute, or provide direct benefits to rich people at the expense of poor people. Disproportionate taxation tends to lead to revenue problems and/or social problems.⁴
• Improper tax levels are stupidly complicated, and require excessively large amounts of time to sort out. Complicated taxes are a drag on business and personal accounting, and as such represent an efficiency bottleneck in society, both because they take longer to do and because they increase the odds of people exploiting (or creating) loopholes.

Improper tax levels in our current system are a problem because they inevitably result in poor government funding. This is easily identified by multiple consecutive years of government deficits, and accompanying debt. Government debt is not a good thing if it’s growing over the long term; it means, much like personal debt, that you’re paying a certain amount of interest, which grows over time and is effectively dead money.

Government debt is a drag on the nation’s future. Quite literally, it means that society suffers an opportunity cost until it is paid off — in other words, the money that goes to pay the debt can’t go to pay for a road, or a hospital, or a tank battalion. And because compounding interest is one of the most powerful forces in the universe, that opportunity cost gets worse fast.

This is a serious threat to your survival as a member of a prosperous nation. Yes, you. Yes, seriously.

Consequences of Improper Taxation

Unless you are going to die in the next ten years, the US national debt is a massive problem. Current estimates indicate that by 2028, the interest payments alone on the national debt will be more than $900 billion dollars. That’s “billion” with a “b” and an “illion.” For the sake of comparison, the federal budget for 2018 was $4.094 trillion. This means that, if we assume the budget holds steady we could say that a quarter of our taxes will go to pay the interest on the national debt in the next ten years — never mind the principal!

Ladies and gents, this is unsustainable. It means that we will lose funding for programs that in all likelihood you or your people would have used. Like, oh I don’t know, Medicare. Or the National Park Service. Or about half the military. And this isn’t open for dispute, because math doesn’t give a shit about your ideology; compound interest and the exponential function will get you in the end regardless.

And this, ladies and gentlemen, is why we have a fight every year over the national debt. The takeaway here is simple: we can either cut government programs until we’re solvent, which means we’ll lose almost everything the government does, or we can raise taxes. Those are the only two options; the debate is simply over how we will implement them. Taking no action will simply lead us to runaway debt.

The end state of runaway government debt is eventual national bankruptcy. We saw a lot of that during the last recession.⁵ It wasn’t pretty. So unless you want to end up like Venezuela, you need to understand what taxes are for, choose the representatives who will advance a tax policy that meets proper tax levels, and pay your taxes. Because to do otherwise is to literally undermine the foundation of our society, culture, and national sovereignty.

The United States is more than just a government; it’s an ideal, an example, and a people who exemplify these things. But the United States cannot, by definition, survive without a functional government. So pay attention to taxes; they’re not fun, and they don’t always go where you want them to, but they are necessary for your long-term survival in this nation. Otherwise we’ll need to have an article on your long-term survival in the post-United States.

¹Look, sometimes boring things are important. If you don’t believe me, read through your iTunes user agreement sometime to learn how Apple actually reserves the right to remove your access to every song you buy. Seriously. It’s under the intellectual property section.

²And before anyone gets started with the “private industry does most of that,” line, let me just say — you’re right. But you may not know exactly how MUCH publicly-funded grant money and co-sponsoring goes on to make that happen. Sufficed to say, a lot.

³“Rational Self-Interest” is a phrase that gets bandied around a lot in political science, economics, and sociology, and it basically means that everyone looks out for their own interests as best they understand them.

⁴Someone might ask, “Well, what about the rich people? Isn’t it unfairly disproportionate if taxes target them more than the poor?” No. No it’s not. They are the people who benefit most from society. They are the people who make the laws, have the influence, and tip the balance scales wherever they go. They can pony up a bit more to pay for all that privilege, and if they whine about it remember that they’re whining while dressed in a suit that costs more than your mortgage. (Editor’s note: in case you hadn’t realized it, Allen is a proponent of progressive taxation. There, the cards are on the table.)

⁵Just like in your personal life, if revenue drops and your debts remain the same, you go bankrupt if you were just barely scraping by on your payments.