Refining Our 'Theory' of Taxation

We Americans are taxed at just about every juncture in life that involves money.  We are taxed when we earn our money and when we spend our money.  We are even taxed when we give our money away, unless our gift recipient is a government-approved entity.

We are taxed when we don't realize we're being taxed, as in the hidden, embedded taxes built into the prices of the goods we buy, which pay for corporate income taxes.  (You didn't think that corporations paid taxes, did you?)

In addition to all the taxes Americans are already paying, government continually enacts new types of taxes.  For example, ObamaCare is loaded with new taxes.  Given the proliferation of new taxes and the continuing cry from progressives to raise tax rates, Americans might consider why we tax what we tax.  It's been said that if you want less of something, tax it.  If that be so, then we need to be very clear about what it is that we tax, and how we justify taxing what we tax.

A new tax currently being promoted is the financial transaction tax, or FTT.  Left-wing writer Katrina vanden Heuvel, who thinks the FTT is a swell idea, reports: "Sens. Tom Harkin (D-Iowa) and Sheldon Whitehouse (D-R.I.), along with Rep. Pete DeFazio (D-Ore.), unveiled a bill that would place a light tax on all financial transactions --- three pennies on every $100 traded."  Vanden Heuvel thinks the FTT is irresistible: "an idea whose time has come."  But Andrew Morriss writes: "Studies by both the International Monetary Fund and a United Kingdom think-tank predict that most of an FTT would be passed on to consumers."

Progressives might stop and consider where the justice is in the FTT.  When securities are sold, folks already pay a tax: the capital gains tax.  So if members of Congress want to raise revenue from Wall Street transactions, rather than tacking on yet another tax, they could just raise the capital gains tax.  Oh, wait; they just did that on January 2 in the Battle at Fiscal Cliff.  And not only did Congress raise the tax rate on long-term capital gains, but they raised it by a third.

The FTT is another example of how the government thinks it has a right to regulate and tax every event in our lives.  Some in Congress want to enact a value-added tax, or VAT.  The VAT would be yet another hidden tax, but one levied at every stage of production and paid for by the end-user.

Recently, there's been a call to enact a national sales tax.  Some want to add such a tax on top of all the other taxes, their rationale being to capture revenue lost to the underground economy.  But everyone would pay this sales tax, including those who pay taxes already on the books.  A better reform would go after the underground economy directly, and not further burden those who operate in the above-ground economy and who are already paying their "fair share."

A type of tax that has been around for ages is the asset tax, aka the wealth tax.  One species of asset tax is the property tax, and it's rather strange: one buys something and pays the sales tax on it -- only for the privilege of paying property taxes on it for as long as one owns it, even if that property presents no cost to the government.

With the asset tax, government taxes one for owning things.  The government is currently trying to get folks to own more things; it's prodding them to spend more and stimulate the economy.  But when they acquire more things, the government then hits them with asset taxes for having done so.

In an early draft of the Declaration, Jefferson wanted the big three unalienable rights to be Life, Liberty, and Property.  Despite the substitution of Pursuit of Happiness for Property, the right to property got enshrined in the Constitution, namely in the Fifth Amendment: "No person shall be ... deprived of life, liberty, or property, without due process of law."  But if property is a fundamental right (along with life and liberty), how can it be taxed?  (Progressives would tax Life and Liberty if they could get away with it.)

Another irksome tax taxes a specific type of property: real estate.  But if one's real estate is one's house, then the real estate tax taxes not only a fundamental right (property), but a fundamental need: shelter.  I'm happy to report that some tax jurisdictions don't tax food (which some think necessary to Life), but that could all change with the movement to swap state income taxes for sales taxes.

One problem with asset taxes is that they are ad valorem taxes - i.e., levied on assessed market value.  So if the value of one's property rises, so can one's property taxes.  Also, property taxes can bear little relationship to any cost borne by the taxing government.  For instance, one will pay far less in property taxes for an old gas-guzzling clunker than for a new fuel-efficient hybrid that emits far fewer noxious greenhouse gases.  Also, a mansion may cost the government less than a modest house.  If residents get the same government services, shouldn't their property tax bills be the same?

Death is a "juncture in life" that triggers a particularly irksome ad valorem tax: the inheritance tax, or estate tax.  Thankfully, this wretched tax is levied but once for each American, but it's difficult to see the justice in it.  After all, nothing has been produced nor consumed, nor has any cost be put upon government.  When an estate is transferred to an heir, it's merely a matter of re-titling property.  How does Congress justify taking some of that property?

Seems like theft to me.  But the government's power to tax has always been held to be quite broad, and the courts have affirmed the sweeping nature of that power.

However, one place where government's power to tax has been curtailed is the poll tax.  In striking down the poll tax in Harper v. Virginia Board of Elections (1966), Supreme Court Justice William O. Douglas wrote that "the right to vote is too precious, too fundamental to be so burdened or conditioned."

What else in America is "too precious, too fundamental" to be taxed?  Inasmuch as the Constitution provides for it, what exactly is it that capitation (the head tax) taxes?  Does capitation tax one's existence - one's Life?  If the Constitution does not allow the taxing of voting, surely it doesn't allow the taxing of Life.  Perhaps capitation can be justified as a tax on citizenship.  But perhaps "sin taxes," such as the steep taxes on tobacco, must be seen as a tax on "the pursuit of Happiness."

We need to refine our "theory" of taxation, because right now Americans are getting taxed for just about everything.  It might be a good exercise for Congress to tell us just what can and can't be taxed.  Or maybe we'll have to tell them.

NOTE: Wednesday on The Kudlow Report, Larry featured this segment: "Unprecedented Power Grab: Taxing the Internet."  It was terrific; watch it.  (Here's my idea for capturing "lost" sales tax revenue due to e-commerce on the Net.)

Jon N. Hall is a programmer/analyst from Kansas City.

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