By now it is clear to everyone who has spent significant time studying the law, not just to those on the political right, that we have far far too much government in the United States. Every area of law from taxes to finance to property to contracts and consumer protection is so comically overcomplicated that it has become quite impossible for the average person to even know what the laws are, much less if a particular action of his will break them. Even trained lawyers are now legally helpless outside their chosen areas of expertise. This is the phenomenon explored by Harvey A. Silverglate in his Book Three Felonies a Day in which he discusses how the average person breaks important laws all the time without even knowing it. To enforce this dizzying myriad of laws federal enforcement bureaucracies have proliferated seemingly without end until in the year 2020 our government ran a deficit of 3.1 trillion dollars. This is spending on top of the already colossal total government tax revenue of 3.71 trillion dollars. This absurd extravagance has continued for some years now to the point where the national debt is now more than 28 trillion dollars.
To provide a sense of the scale of this accumulated expenditure, U.S. gross domestic product, that is to say the total value of everything produced in the United States in a year, is less than 21 trillion dollars. To make the effect of this debt on the country quantitative, if we were to use a reasonable historically representative interest rate of 6% the U.S. government with its 3.71 trillion of revenue could support a maximum debt of 61.8 trillion dollars. That’s the amount of debt with a historically common interest rate that the U.S. government could just pay the interest on if it spent money on literally nothing else. In other words we have accumulated enough debt to permanently wipe out 45.3% of our government’s fiscal resources. The even more concerning problem is that out of that 28 trillion, roughly 18 trillion has been added in just the last two presidencies (those of Obama and Trump). Another two presidents like that and we’ll have a national debt of 46 trillion, or sufficient debt to permanently eliminate 74.4% of our government’s fiscal resources. If we had a third president with the same spending propensities we’d be at 55 trillion or sufficient debt to consume 88.9% of our government’s fiscal resources with interest payments in perpetuity. Default seems likely after this hypothetical third president. If not, a fourth president would exceed the debt on which interest could be paid.
Since, while Trump added the same amount to the debt as Obama and did it in half the time, Biden seems to be on track to exceed Trump’s borrowing pace by a similar or larger proportion (he’s already added 1.9 trillion to the debt with his last stimulus bill and is planning to spend more than another two trillion on his ‘infrastructure plan’) before his first year is out, this problem does not seem to be one that is going to go away soon. Just avoiding default based on current spending patterns is going to be hard enough and none of this takes into account the structural problems of the current U.S. government like unfunded entitlement promises that the federal treasury has made. All of this leads inexorably to the conclusion that while reducing the size and power of government to something vaguely reasonable would be a nice goal, just reducing it to something plausibly sustainable is a far more realistic one, and our odds of even accomplishing that may well be significantly less than even.
For this reason it is clear that we’re going to have to be paying a lot in taxes while we try to derail this one way train to bankruptcy. While it may be nice to dream of the constitutionally limited government of old funded by a few tariffs and in time of war maybe a poll tax or two, we are going to need to be willing to part with significantly more resources than those taxes would extract just to keep things running while we fight to break out of the downward spiral. Under these bleak fiscal conditions, and unless we want to abandon the United States entirely, we need to pick our poison and consider which of the potentially confiscatory and severely intrusive modern taxes like VAT and income levies is the least destructive of the bunch.
To consider what the destructive effect of different taxes is we must first to what economic activity the tax will be applied. To list economics activities exhaustively and state a few tautologies: people produce wealth, they consume wealth, and if there is any left over it is invested in the creation of future wealth. We get richer when more wealth is produced and less is consumed. We get poorer when the opposite happens. Being richer is better than being poorer because accumulated capital helps us produce more wealth more easily in the future. Taxes compel the payment of some wealth to the government at one of these stages or another.
The most familiar of the modern taxes is the income tax. The income tax compels payment upon the creation of wealth of some fraction of the wealth produced to the government. This tax was originally introduced in the United States during the civil war when government expenditures for war fighting purposes became too massive to be born by simple tariffs or poll taxes. Because people want to make money, and at any rate need something to live on, the income tax extracts resources from people even if the tax is very burdensome because it is only with significant sacrifice that people avoid or reduce their payment of this tax. For this reason it raised more money than a tariff which can never be raised beyond the point at which domestic substitutes become cheaper than the foreign product under tariff since at that point people will simply cease buying the foreign product and therefore paying the tax.
Income taxes come in various shapes and sizes. Some are flat i.e. the same proportion of every dollar produced is taken by the government, some are imposed only on certain kinds of income, such as the capital gains tax or the tax on Foreign Derived Intangible Income, some are progressive i.e. later dollars are taxes more heavily than the first dollars produced in any given year by any given taxpayer, some are imposed once on a given amount produced, some are imposed multiple times on one dollar of income (for instance when it is earned by a corporation and again, sometimes at a different rate when it is distributed to the corporation’s shareholders), and some income taxes are imposed at different times such as is the case with a tax-deferred IRA. Our current federal income tax is a progressive income tax with multiple unique types of income to which different rates apply and with some types of income taxed once and some types of income taxed multiple times.
The second in order of familiarity of the modern taxes is the wealth tax. Wealth taxes are taxes which tax a certain proportion of a taxpayer’s accumulated wealth from the taxpayers and give it to the government. Many progressive agitators have long advocated for an official or complete wealth tax i.e. a tax assessed as a percentage of all of the taxpayer’s real and personal property every year, but other forms of wealth taxation have already been implemented in the U.S. The most familiar of these is a property tax which is a wealth tax assessed on real property only and the estate tax. The estate tax might not seem like a wealth tax at first, but it is a percentage of total wealth of the taxpayer that must be paid to the government. It’s just a very high wealth tax that has a reporting period of only once per generation and doesn’t apply to the first few million dollars of said wealth. The more astute reader may perceive that the estate tax isn’t triggered only by amount of wealth but also by how often the wealth is transmitted at death, but this is actually not so since 1) all transfers even gifts during life are subject to the same tax rate (with a $10,000 yearly exclusion which might be why most haven’t heard of this) and something called the ‘generation skipping transfer tax’ imposes more taxes if the wealth is transmitted less frequently by death.
As illustrated above, wealth taxes vary by type of wealth taxed, timing of the tax, and also, like income taxes, the application of different rates to different amounts of wealth or ‘progressivity’ of the tax.
The least familiar of the modern taxes, though the one that many readers might have the most day-to-day experience with, is the consumption tax. Consumption taxes are a percentage of wealth consumed by the taxpayer that is taken from the taxpayer for the government. The most common type of consumption tax in the United States is the sales tax. It’s not just a pure transaction tax. Various exceptions such as the ‘sale for resale’ and ‘manufacturing’ exception attempt to prevent the tax from being applied to transactions that to not end in the consumption of the product sold. Sales taxes can and often do vary by type of product consumed. In Europe another type of consumption tax called the VAT is common.
So which of these taxes are less bad and which are worse? I would answer this question as follows: income taxes occupy a middle ground while consumption taxes are less destructive for a given amount of revenue raised and wealth taxes are more destructive for a given amount of revenue raised.
The reason for this is as follows: all taxes have the effect, in addition to depriving taxpayers of large amount of money, thereby making us all poorer directly, of incentivizing taxpayers to substitute leisure for work and consumption. This is because work is unpleasant relative to leisure but can be used to further desirable consumption. However at some point the work results in taxable money which the government will take a part of, before it makes it too said consumption. First it’s income (taxable by income taxes), then it is wealth (taxable by wealth taxes), then it’s consumed (taxable by consumption taxes). Because these two effects are present in all of the modern taxes without distinction we only need consider the taxes impact on the decision of whether to invest the proceeds or work or consume them. The other decision, whether or not to produce the wealth in the first place, is equally impacted by all.
From the perspective of the wealth of the country we want the maximum amount of money to be invested and the minimum amount to be consumed for any given quantity produced. This means we will have more capital with which to produce in the future rather than less therefore making it easier for us to produce more. Income taxes are completely neutral towards the question of investment or consumption. When a dollar is produced the government takes its cut. Whether it’s then invested or consumed makes little difference (except for timing effects which are not decisive to this question). A wealth tax by contrast directly incentivizes consumption by imposing the tax on the holding of the investment but ending the taxation once the wealth is consumed. A consumption tax directly incentivizes investment as the tax is only imposed once the wealth is consumed not if it is only reinvested.