Your Monday morning post is courtesy of Stephen L. Hall.
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Sometimes the most complex and profound issues begin with the simplest of questions. It has been said that there are only two certainties in life, death and taxes. So, who dies? Everyone. And, who pays taxes? That question is not as simple and easy to answer. But, the answer to that question lies at the heart of every political question. Understand that and you understand your political adversary at a level they do not understand themselves.
So what actually is a tax? A tax is literally a taking of one’s property by the government. “The Congress shall have Power to lay and collect Taxes . . . .” Paragraph 1, Section 8, Article I, US Constitution. But, “private property [shall not] be taken for public use, without just compensation.” Amendment V, US Constitution. Taken literally, taxes were outlawed by the 5th Amendment, for what is the just compensation of taking $100 in taxes but $100. Any less would be unjust. Obviously, taxes were never meant to be included in the taking clause showing that the Constitution cannot always be taken literally and that even the Founding Fathers were, at times, at a loss on how to properly express their ideas precisely.
The first thing you have to understand is that only a person can pay a tax. Only a person can own property, and tax is a taking of property. I hear what you are thinking, that corporations own property, and corporations are not people. Corporations are a legal fiction, an artificial abstract amalgamation of private interests including ownership and employment. Corporations are owned by the shareholders, or a collection of fractional ownership. But those fractions must ultimately be owned by an actual person.
Union members and leftists often rail against big corporations when they really mean to rail against big business or commercial enterprises. Few people realize that unions used to be called something different; most familiar are guilds or trade association, but they were also known as cooperatives or corporations. Yes, unions are corporations, big corporations, a collection of individuals brought together for a common purpose. The property of the union is owned by its membership, its shareholders.
Cities are also known as municipal corporations. Governments, whether state, local, or federal, are also corporations. Just as unions are owned by their member and businesses are owned by their shareholders, governments are owned by their citizens.
Taxes are thus similar to profits of the company, or dues of a union, a share of the corporation’s resources. The company does not own the shareholder, nor the union own the worker, nor the state own the citizen. Taxes are the dues of the citizen to help run their state, in a manner of speaking.
Ergo, when we tax a company we do not actually tax that company, we tax the owners of that company. Actually, some of that tax gets passed on to customers buying the products of that company in the form of higher prices, some of that tax gets borne by the employees of the company in the form of lower wages, and some of that tax gets passed on to the owners of the company in the form of lower profits. Studies tend to show that corporate taxes get split up about evenly between these three groups.
Back to our original question of who pays taxes, but moving to a different context. Gov. Romney was embarrassed by his truthful revelation that about 47% of the American people do not actually pay any net federal taxes due to their low income combined with the personal tax deductions and credits available to people of lower income. His implication being that not paying taxes they were not persuadable by the promise to lower taxes that they were not paying anyway.
When a person gets their first job, works for a couple of weeks and receives their first paycheck, what is the first thing they say upon laying eyes on their earned wealth? Who is FICA and why are they getting all of my money? Why are the federal and state governments getting part of my money? Let us ignore FICA just for the sake of simplifying this essay though the arguments are essentially the same however more complex.
That working class individual is not going to be making enough money that they will owe taxes at the end of the year. When they file their tax forms, they will receive a refund of all the money which has been taken out of their paychecks. That person which gets all of their money back, or never even held a job, has paid, on net, zero taxes. These are the 47% of people to which Romney was referring, people who on net pay no taxes.
There is something else about taxes which must be considered to get a clear understanding of our original question. Taxes on wages or income, in order to actually be paid, must be paid to a third party. Which leads to the obvious conclusion that public employees do not pay taxes.
Simplified, let us assume a single flat tax of 30% and a single government, the state. Yes, I know that taxes on all levels on average come to more than 47.5% of the average person’s income, and that before Obamacare, and that the Koran instructs the state to tax non-believers into oblivion by taxing them at a rate of 50% which is what we are taxing ourselves.
If a private employer hires an employee at $60,000 per year, then at 30%, that employee pays $18,000 in taxes. The employer is out $60,000, the employee has netted $42,000, and the state has received $18,000. This is the way that most people perceive the payment of taxes, private sector payments.
However, when the state hires a public employee and pretends to pay them $60,000 per year, that employee appears to pay that same tax of $18,000. It is not the same, because that tax is not paid to a third party, it goes back to that same state. The state appears to pay $60,000 but immediately receives back $18,000. The state is only out $42,000 and the employee receives the same $42,000.
From the employee’s perspective these transactions look identical. But from the employer’s perspective, the private company pays 3/7 more than the state for the same employee. The state’s employee has not paid a tax, it only appears that way on paper. In reality, they have only been paid less money but not been taxed.
One more consideration in a more complex world, suppose that the state collects its money not through an income tax but through a sales tax. While both citizens pay 42 6/7% sales tax, the $18,000 which is paid in taxes by the private sector employee goes towards paying the salary of the public employee, while the sales tax paid by the public employee just goes back into the coffers of the state. The net incomes, net costs, and net taxes still end up the same on the sales tax as on the income tax. (Assuming for simplicity that the entire income is spent, of course.)
To expand back to our nation, this means that a state employee cannot pay a state tax, a federal employee cannot pay a federal tax, but a state employee pays federal taxes and federal employees do pay state taxes. People living on welfare, social security, or public employment retirees, as they receive their money from the government are essentially government employees for tax purposes. They are net recipients of taxes, not payers of tax.
One more consideration regarding taxation using our contrived state should have already occurred to the reader. In order to pay the salaries of every public employee, (including public retirees, social security and welfare recipients) there must be 2 1/3 private sector employees paying that 30% tax to support them. Because the state does not own anything and only collects tax money to pay its bills, tax revenues must be sufficient to cover these expenses.
Otherwise, the state will have to borrow money just to make its payroll. After that, it will have to borrow money to make payroll and to pay interest on the money they borrowed the previous years. As you can see, without a sufficient private sector base the state is forced to raise taxes or bury itself further and further in debt.
The politics of taxation is the process of taking the property of some, to purchase the labor of others for the purpose of operating that corporation which is the state. The very idea of limited government is the recognition that any state which grows too large for the people to support will topple. The words of the Founding Fathers may have been confused; their political ideals were not.
