Tax Matters

How amazing! In the midst of the Republican primary circus, the American people are actually trying to debate tax policy.  The problem with such debates is that they either drown in the complexities of any tax code or they are reduced to slogans and simplisms.

There are a couple of mid-range ideas that have occupied me over the years that might be worth sharing. They are activated by the discussion about taxes on “earned” and “unearned” income. Behind them is a long history stretching (as usual) back to Aristotle if not the Hebrew prophets.

First, we have to unmask these terms and return ourselves to the shape of the original discourse. “Earned” income is based on one’s labor. “Unearned” income is based on capital (including land, machinery, and money). The question is, how should the operations of government, which exists to serve the common good, be financed?

Should taxes be based on labor or capital or, in some proportion, on both? The balance in this country has fluctuated widely, from equal taxation (Reagan administration) to the present apportionment, with tax on labor reaching a high of 30% to 35% and tax on capital at 15%.

The terms of our present debate arose with the Industrial Revolution of the 18th and 19th century, though its roots are very old. A “labor theory of value,” held by Adam Smith as well as, in its more political form, John Locke, argued that the value of things, including our right to “possess” them, was based on the labor we put into them. This could be expanded to include our intellectual labor as well as the work of our bodies. This is the basis for patent law.

From this perspective one could argue that the government should not take “the fruits of our labors” to finance its work for the common good. At the most, looking to Biblical precedent, it should take only one-tenth.

“Capital” consists of the means of production. In the form of a factory, for instance, it creates value beyond the individual capacity of the workers within it. From the labor theorists’ point of view, it was a “social value” arising from the social coordination of the workers in the factory. To tax this value would be to return social value to the community that is supposed to benefit from the work of the government.

The alternative, advanced by Marxists, was to “socialize” the means of production so that the workers controlled the means of production, eliminating the need for government and taxes altogether. Needless to say, this approach is now in Marx’s dustbin of history. (See earlier poem, “Dust”?)

There is yet a third basis of “created value,” and that is the value that arises in people’s exchange of goods. In the marketplace, the value of a good or service is set by demand and supply. The value attached to these goods and services is in turn usually rooted in some social or cultural valuation, as with a Picasso painting, which is worth neither the labor Picasso put into it or the overall expenses of his studio.

This, too, could be seen as a kind of social value and would be taxed when it clearly exceeds the labor and capital value of the piece, whether it be a unit of stock or a work of art. This is where “transaction taxes” come in, especially in finance markets.

What’s the upshot of this foray into the terms of our argument? In thinking about tax matters we need to ask how a value is being created to see whether it arises from social origins or from individual effort or from exchange value.

To the degree it is purely individual, one could argue that the value should be taxed very lightly, remembering that even Robinson Crusoe landed on his island with socially produced goods (not to mention the help of Friday).

On the other hand, the more that society has put into enabling a value to arise, as with capital and exchanges, governments have a legitimate right to receive back a larger share of that value to advance the common good that produced it. This would turn our present policy on its head.

This, at least, is one way to think about the controversy that will probably rage around us this year. I think it cuts across the political divides and may be one reason it is such a volatile issue this time around.

Economists, both dismal and optimistic, have worried this matter for centuries, so if it’s giving you a headache, you’re in good company. No wonder some of us end up in poetry.

3 thoughts on “Tax Matters”

  1. An adjoining question is the extent to which tax policy might be used to influence the spread of wealth in a society.My presupposition is that great and increasing inequality of wealth tends to destabilize a society. Tax policy from 1950 to about 1980 tended to spread wealth more evenly, especially increasing the middle class. Since then, frequent adjustments of tax policy have tended to favor the rich. That tends to increase concerns for property and safety, which increases law enforcement, judicial courts, and ever larger prison populations for longer terms. It reflects, in our own American way, the society of Charles Dicken’s novels in England. There are always the arguments that greater wealth on the part of the rich promotes greater investment that promotes prosperity on the part of all. This is an argument for which I have not seen adequate proof; it seems more of a theory or wish (or simply a smoke screen). It is similar with the “trickle down” theory.

  2. Ah, Tim, now we open the door to wider expanses! On the one hand, in fact, we are “taxing” nature heavily, indeed brutally, with our use and abuse of it (her?) as a “resource.” What we need to do is tax our use and occupancy of it (yes, “property taxes,”) so that we can then work to restore the earth (tikkun olam). Thus, carbon taxes, pollution taxes, etc., are ways to restore natural balance. They are restorative taxes more than simply taxes to maintain the social bonds that are the usual purpose of government. More to reflect on here, of course. Thanks!

  3. And how should we evaluate the “products” of nature–water, trees, other natural resources, etc.–that are not man-made, but essential for human value and human production. Are these taxable? And for whose benefit?

    Tim Bachmeyer (the conservationist)

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