Rethinking Taxation: A Flight of Fancy

by Joshua H. Liberatore

I’ve been reading the Federalist Papers recently on the subject of taxation, and an interesting convergence with a contemporary issue has surfaced quite suddenly: the nagging disconnect between fee and service. A lot of penetrating articles have accompanied the health care debate on the faulty linkage between cost and quality in the health care industry. In particular, the employer-based insurance model that characterizes (and often circumscribes) most Americans’ health care choices and consumption has handicapped them as smart and rational purchasers of theoretically competitive services. Since insurance companies foot 60–80 percent of most health care purchases, and employers pay 50–75 percent of insurance premiums, we as consumers don’t develop the savvy shopping skills we might exercise for the myriad other spending choices we make every day. Furthermore, we don’t hold providers immediately accountable for quality of service, and we don’t enjoy any good mechanism by which to do so. And when we do have complaints about billing, we tend to blame the insurance companies or the gap in our employer’s coverage.

    Isn’t the same true of the bulk of our tax burden? Where does it go? What does it pay for? How efficient is the government in allocating the money that gets shaved off our paychecks? Unless we are really paying attention, we simply don’t know. Even if we are interested in these questions and decide to look into a particular area of government spending such as education or farm subsidies, the answers aren’t readily forthcoming. Indeed, the search itself quickly becomes overwhelming. But what if we knew exactly what sort of government programs we were subsidizing with every consumer choice we made in the so-called free market. What if our taxes carried an inherent connection – thematic, associative, or in some cases, palliative – to our consumption patterns, a connection we could observe everyday? A romantic fantasy on that order seems worth pursuing.

    Since the earliest days of our republic, taxation has been the issue par excellence of our national (and perhaps local) politics. Almost everything we argue about politically comes down to the raising and spending of tax revenues, a recognition which ranks the moral and social dimensions of political questions as categorically useful but functionally secondary concerns. Let’s face it: It’s all about the money and for what purpose it is spent in our name. It’s a simple point perhaps, but in reading Hamilton discuss taxation in a more theoretical vein in his Federalist essays, several bright lights ignited for me. The principal observation is to recognize how much, for example, we take taxation – income and sales taxes, in particular, less so property taxes – for granted. Considering only the first two types of taxes for now, the possible virtues of a completely different arrangement in raising the necessary capital for the good of society, often called consumption taxation, capture my fancy. When we explore the range of benefits offered by consumption-based taxation, we cannot help but be compelled by its rational and ethical soundness.

    Let me start with a crucial disclaimer. My views on this subject, I grant, are very un-American, principally because consumption taxes tend to penalize consumer choices and might be seen to impinge on the free market, which though nonexistent in practical terms, inspires our faith and awe at every turn. But income taxes have their own ethical and practical shortcomings. Liberals don’t like to complain about taxation being heavier on the rich by percentage, if not in absolute terms. Many liberals even tend to favor a more sliding, redistributionist tax scheme whereby middle class folks see tax cuts proffered them while wealthy people fund continued government expansion. This is certainly the case with the current health care debate. These notions play well with most voters, the vast majority of whom find themselves, somewhat sadly, not among the most wealthy, even though politicians often talk as if we are the most important people in the world, the very bedrock of American prosperity.

    But intellectually, I’m not sure how progressive taxation favoring the middle class can be honestly defended as fair, unless one champions the argument that rich people have more to gain from government programs, which has the advantage of being true, in the sense of overall social influence and political clout. The paradox is not overly subtle: although politicians address their remarks to middle class audiences, they direct their policies toward the economic elite who fund campaigns and peddle power. Income-based taxation only conceals the basic injustice of that scenario, however. We don’t say, for example, that rich people should, by virtue of being rich, pay more for food, manufactured goods, property, or services. It just so happens that rich people make these choices on their own. Under no compulsion, wealthy folks tend to eat in fancy restaurants, shop at Whole Foods, buy expensive electronics and cars, avail themselves of pricier travel, financial, and health care services, and live in more affluent neighborhoods in bigger, costlier dwellings. Nothing wrong with that, is there?

    Here’s where consumption taxation comes in. If people were taxed based on what they spend rather than what they earn, not only would it be ethically superior and intellectually defensible, we could also bring some interesting connections to bear on government services, linkages which are much more politically useful and meaningful than the distance inherent in progressive income taxes. I begin with my pet concerns as examples: pollution and the environment. If gas taxes applied directly to fund a whole suite of environmental and ecological mitigation measures – everything from national parks, the Department of Interior’s operating budget, wetlands and forestry preservation, water and air cleanup efforts, carbon offset purchases, just to name a few, the fuel we love to burn would contain within its very combustion the money needed to palliate against the damages automobiles cause. Similarly, a flat, fixed-rate tax (or one levied in proportion to price, weight, efficiency) could be paid on each automobile or vehicle purchased that could be used to pay for the car’s lifecycle waste management, material recycling and reclamation, highway and bridge maintenance and repair, public transportation infrastructure, Department of Transportation programs, and the like.

    Now, understand, to be effective, these taxes would have to be high and somewhat onerous, but they’d be functionally off set by the refreshing and novel absence of income tax. We’d get to keep our entire paychecks, and any raises and bonuses we happen to receive would fully translate into new income rather than getting lost in tax adjustments and deductions. Instead, our consumer choices would carry all the burden of their eventual cost to society, both realized and invisible. Many economists are already talking about the advantages of true pricing for our energy costs, adjustments that would reflect the genuine cost of our energy use not just the base retail price, what economists call accounting for externalities. Politically, it’s a difficult sell, but the need for true pricing is slowly gaining traction now that some sort of fledgling carbon legislation seems imminent. True pricing is, of course, a “free-market” alternative to government regulation, no less insidious than your average airline government subsidy. Consumption taxation combines these strategies and applies them to all purchases, not just energy use.

    In a consumption-based tax scheme, of course, each consumer category carries a different tax rate, a little like states levying different sales tax rates for groceries, liquor, cigarettes, hotels, airplane tickets. And certain things we purchase, like gasoline at the pump, already have targeted taxes that presumably go to good use. So the idea is not entirely foreign, but the taxes are by and large too low, especially in the case of the gasoline tax, and we have no idea or don’t care what the beneficiaries do with the money. But if these categories had thematically-connected and thus logical links to government services and programs, we’d begin to notice powerful adjustments in consumer behavior, adjustments that signify meaningful solutions to real problems. A Democratic Congress already attempted to achieve something like this back in 2006 when they suggested funding a renewal of the State Children’s Health Insurance Program with a new cigarette tax, arguing that higher taxes would discourage smoking. President Bush threatened to veto the measure, and not until the Obama Administration took power in 2009 did SCHIP, which provides health insurance to 11 million children, finally get a new lease on life.

    Take food as another example. Our groceries are already taxed at a different level than our cars and computers, but groceries as a category are already quite broad and problematic. On one level, we’d want to see the grocery tax go directly to things that we already pay for (farm subsidies, international food aid, agricultural land management programs, rural poverty mitigation, the Food and Drug Administration). In the cases of USDA farm subsidies (current loyalty: agribusiness lobbies) and the FDA (current loyalty: pharmaceutical companies), a consumption tax might have quite an educational effect on the American consumer, who would begin to comprehend and scrutinize the program he was paying for each time he purchased produce, canned corn, pork chops, or Tylenol. Smart consumption taxation could provoke some healthy debate about the value and efficiency of these programs because we’d be directly investing in their continued operation on a daily basis.

    On another level, we’d also want to see some disaggregation in the taxes we pay on food, and this is where the potentially frightening, fascistic component of my proposal begins to send red flags up to libertarians. A large and broadly mandated Federal agency like Health and Human Services (responsible for Head Start programs and disease research at the CDC) would see a cut of the grocery and restaurant taxes, but certain divisions could carry different tax burdens. Food purchases outside of a small grouping of fresh produce, staple grains, meat, and dairy – your sugar cereals, cookies and chips, all beverages other than water, coffee, and tea – would carry a premium tax to cover the costs of heart disease research and obesity reduction programs, as well as Title I free lunch programs in public schools. It sounds a bit totalitarian, and perhaps it is, but its advantage is the enormous potential to outweigh any ideological discomfort when, again, we consider that we wouldn’t be paying any income tax. Most middle class people’s incomes would rise by almost 20 percent, real money by any standard.

    I’ve mentioned only Federal programs and expenditures so far, but some kind of local taxes would still be necessary, perhaps based on property or rent taxes, to pay for law enforcement, municipal waste disposal, and all basic local-level services. But we’d do away with state income tax: state government budgets would all have to come from property consumption, toll fees on state roads and bridges, business taxes, and perhaps a per capita slice from the Federal levy on general consumption. Again, consumption would be directly linked to service quality and availability. We’d know exactly where our money was going and why.

    Obviously, I’m not an economist, and I have no mathematical notion of how specific numbers and category breakdowns would have to look in order to imitate the current revenue stream from income taxes. My guess is that you could gradually scale back overhead budgets for most of the Federal agencies, as the consumption taxes started to settle into their mitigation role. Gas taxes would be made high to encourage less driving, for example, so roads become cheaper and fewer to maintain; meanwhile, public transportation revenues steadily increase, and their additional funding from gasoline and car purchases allows them to expand and serve more areas, meeting the needs of more consumers who are responding rationally to the new incentive scheme and driving increased demand.

    As drivers begin to understand that they are directly subsidizing subway riders (and they already are, just through income taxes), they will take a good look at their consumption levels. A consumption-based tax scheme necessarily involves what seem like moral choices made by the government on behalf of consumers, a nanny state telling people what’s good and bad for them, penalizing the bad and rewarding the good. If that seems outrageous and draconian, let’s remember that our current taxation scheme already makes those same choices, but the connections to services are opaque to consumers, since the apparent neutrality of income taxes being skimmed from our pay checks merely conceals the destination of funds by dumping them into a huge pot. Hence, any perceived moral neutrality in the current scheme is illusory.

    Now, you may wonder how national defense fits into this. My answer is simple and will undoubtedly appear naive: when “national defense” returns to the more modest and truthful meaning it enjoyed for Hamilton and Madison, we will find that it costs infinitely less. Currently, we spend more on so-called defense than the rest of the world combined, more than nine times what our nearest rival China spends on “defending” a population of 1.3 billion people. Just let those numbers sink in a bit. How good is the defense we get for such an absurdly high cost? Was our Pentagon able to defend the passengers on United Flight 93 on September 11, 2001? No, but the passengers organized and defended themselves, at least to the effect of preventing the plane that carried them from becoming a weapon of mass destruction. Since Elaine Scarry has already illustrated the profound ironies of that case study in her fine essay “Citizenship in Emergency,” I will limit my discussion to a few simple points. Under a consumption-based tax scheme, we’d be looking at cutting the military budget by at least two-thirds and much-reduced armed forces. (If you examine the corresponding numbers before World War II – only two generations ago – you will see that a small standing army is not historically impossible to achieve.)

    Perhaps a basic per capita annual head tax could be levied to fund the armed forces, called up only during real national emergencies (not the dozens of “national emergencies” currently in force with respect to places like Zimbabwe and Burma). This head tax would be returned as a full rebate to anyone willing to serve in the military, whether as an active duty soldier or in a civilian support capacity. Just imagine how different our debates would be about what constitutes “national security” interests, by far the fattest, juiciest lemon the American public has been swallowing year after year since 1948. Imagine the reticence we would intimately feel in making the choice to go to war. With only a small standing army, taxes would naturally have to be increased to pay for mobilization, so we would think carefully about when and why to do it. We would never reelect a President who sent our soldiers on a colossally expensive fool’s errand in Iraq, as we did in 2004 (if by a tiny margin), a blunder which are still paying for in lives and treasure. We would never maintain bases in advanced industrialized countries like Japan, Italy, South Korea, and Germany, all with their own armies, financially and technologically equipped to defend themselves. One thing is clear: If we paid for war more directly, a lot would change.

    An important caveat remains the unemployed and indigent. How would we design the system to accommodate for the underprivileged? In a pure consumption-based taxation model, the bag of chips a bank teller buys costs the same as the one bought by the pensioner, the widow, and the public housing resident. To avoid punishing poor people with a system that makes basic items and services quite a bit more expensive, appropriate vouchers and government benefits would have to be arranged. Food stamps, unemployment insurance, and public housing could all still exist, but their funding would have to come through subsidies provided by other consumer products.

    What about government programs that have no tangible connection to average consumers, agencies like NASA and the Peace Corps? One option is to cut them, which in the case of moon exploration and expensive space toys for scientists to play with, I for one would shed nary a tear. The Peace Corps is relatively cheap to run (compared to NASA at least), however, and if we wanted to keep it and other small humanitarian agencies, we might have to designate a special tax or find a logical connection to a related consumer product. We’d probably start having to pay for the Smithsonian museums too.

    Romantic idealism at its most ambitious? Merely as an intellectual exercise, this flight of fancy can teach us a lot though. At least it helps clarify the powerful disconnect we necessarily feel under the current scheme with the way our income-based tax revenues are spent on our behalf. After all, our employers take care of the hassle of paying taxes for us. Most of us don’t even look at the numbers until February or March. What would it be like if we noticed several times a day, observing different taxes levied on all the consumer choices we make all the time. We’d start paying attention. We’d start holding specific government programs more accountable; otherwise, we’d vote with our feet in our consumption patterns. Would it be such a bad thing? Of course, not everyone would pay attention to these new taxes and some people frankly wouldn’t care. But at least their negligence would be paid for, and the SUV-driving, chain-smoking, junk-food eating, trash-tossing warmongers would subsidize the consequences of their choices instead of leaving it to others to clean up the messes their habits make. Now that’s my idea of freedom.

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