(Topics: The Economy | Back to Home)

Where to begin? Taxes may be the least understood and most broken part of the entirety of modern life. And there are three big problems: first, we don't like paying taxes, second, taxes are ridiculously complicated, and finally, taxes are archaic anyhow.

It's an open question as to whether or not it's patriotic to pay your taxes [1]. But I think no one complains about tax cuts, just like no one complains when their favorite things go on sale. Taxes are weird in this way: we want the benefits of taxes, but most of those are indirect and rare. Because for so much of what you pay in taxes it's basically insurance. For example: you're very unlikely to be rescued at sea by the Coast Guard, but it's part of what you pay for [2].

And it gets worse due to harsh reality: we'd all prefer to pay less in taxes, but the richer you are the more you can afford to figure out how to legally pay less. Think of it this way:

Most everyone wants taxes to be “fair”, but making taxes “fair” is effectively impossible. This is the truth we all need to acknowledge to start this conversation. Because no matter whether you're talking about sales tax, or income tax, or property tax, or the tax on cigarettes, taxes are not applied consistently. There are almost always ways around them. There are almost always loopholes—some of which cannot be closed [3].

This is problem number one with the entire concept of taxation. We want it to be something that everyone pays, but there is no good way to make everyone pay for something. There are too many of us and too much going on in the economy, and plus having lots of money equips you with the power to avoid paying taxes.

I'll quote a little bit of the Tariff Act of 1789 that was passed by the U.S. Congress to demonstrate how complicated taxes were even at the start of our country.

Notably this section covers foreign tariffs several types of alcohol. In 1791 Congress passed a law requiring domestic excise taxes on distilled spirits. So we are not dealing with anything new, at least conceptually, when we talk about taxes being complicated.

Today the government raises revenue in much the same way. That is, the authorities require that payments be made in specific situations. We still collect a lot of tariffs (about $100B a year) but that's only a tiny fraction of the total money collected from citizens. We now have income taxes, captial gains taxes, property taxes, sales taxes, excise taxes on gasoline and cigarettes. Colorado doesn't charge sales tax for a cup of soda but they do charge for cups and straws as these are non-essential to the beverage. Arizona charges a tax on blocks of ice. Indiana has a tax on marshmallows but not on marshmallow cream. While this sounds ridiculous it's only a more expansive version of “brown sugars, loaf sugars, and all other sugars” having different tarriff rates in 1789. Modern taxes also suffer from some of the same problems that our country faced in its infancy which were also faced by the tax collectors of ancient Egypt. Namely: it's pretty easy to hide your grain from whoever is doing the counting. That's in part why lawmakers have to keep inventing more and more convoluted ways to attempt to ensure everyone is contributing their fair share.

The fundamental issue we face is that taxation is an idea that is centuries of date. Taxes were invented by the Egyptians before humans even had any kind of loose change or bills. In those days there was no way to provide any kind of shared services for a community—such as defense against invaders, civil order, or aid to the indigent—except for taking some resources from everybody.

For the Egyptians that was grain. The Pharaohs went around on a regular basis demanding some from all the store houses. They captured more from the wealthy by counting the number cows they could see (as it is much harder to hide your cows than your grain.) Which shows that even back then the government was already trying to deal with tax fraud.

Governments continued to expand this system as we moved from bartering to using precious metals and minted coins and finally to pieces of paper which promised that that we had rare, valuable items in a vault somewhere. As economies became more complex, so did tax rules.

And there is a general economic issue of the government inserting itself in a transaction. If you pay $X for something plus $Y in taxes does that mean the real price is $X or $X+$Y? After all you can clearly *afford* $X+$Y. If the tax is decreased does the seller have the right to demand more? If the tax is increased does the buyer have to pay more? But there is a bigger problem with taxes than just the difficulties of enforcement and the oddities of who is actually making the payment. Taxes are most seriously broken, in my view, *because the modern economy is fundamentally different.* Finance and fiscal policy in 2024 is nothing like it was in 1789 or in 2500 BC. The way money works—and therefore the way the economy works—has changed in a profound way.

The government needs money to pay salaries in the army, build bridges and schools, maintain the national parks, and a million other things. But most of the *value* in the economy is not the money in your wallet that is used to buy things. Nor it is even the money in your checking account. Because after all if you drop $1,000 at First Localville Bank they don't keep it. They loan most of it out. This is called “fractional reserve banking” and is fairly new in the history of the world.

Plus what if you buy $1,000 of stock in a company? That firm certainly don't hang on to your cash; they use it to pay bills or hire people or buy other businesses or whatever they think is best. In modern economies money *multiplies.* And almost all of that activity is happening in places the government can't see, just like the Egyptians couldn't see the bags of grain that farmers would hide. We will never be able to write a tax code that is fair and equitable and right-sized because we cannot possibly know where all the transactions are happening or where all the wealth is stored. That might have been possible when it was just grain and cows. But not any longer. And it's been unworkable for a lot longer than any of us have been alive.

My belief is that with the appropriate level of economic management [4] we can reduce the need to directly require individuals and organizations to make direct payments to the government. Doing so takes four steps:

1. Reduced spending. - If we can decrease total expenses incurred by the government then the government doesn't need as much money.

2. Increased user fees - Toll roads have a great benefit: you only pay if you use them. Same goes with the post office. I think there are lots of government services that can shift to user fees.

3. Greater government market participation - Right now the government doesn't really participate in the stock market [5]. But I think just as the market puts money into T-bills because that's safe, the government has to find a way to invest in the market. (I mean, the government already buys lots of equipment and food and gasoline and software and so on from the private sector. Can we streamline the economic benefits?)

4. Monetary Policy Magic - I don't profess to know how this will work but we have to admit that modern economics gives us tools we didn't have in the past. It's controversial, but we seemingly have increased the net wealth of the world by 2.5% out of thin air. And on several occasions central banks have arguably rescued economies with previously unavailable options [6].

And I think maybe some day we can not have any taxes. Whatever the government sells as a user service will be solid enough to turn a profit, or we'll be able to use monetary policy.

It doesn't seem farfetched to me. Just something in the distant future.

[1] In 2008 Joe Biden said yes, as does Mark Cuban and one letter to the editor in the New York Times. A think tank says avoiding taxes is patriotic as does columnist after columnist. And one blogger says it's both.

[2] In 2019 the U.S. Coast Guard saved 4,335 lives in imminent danger.

[3] And when they are, they open other loopholes (or make things worse in general.)

[4] By “manage” I mean “mostly both monetary policy and fiscal policy, but also regulation and ongoing research.”

[5] Yes, the government buys stock to bailout companies. And the government does have it's own internal investment system. I'm talking about actually letting some of those funds go into the market, which is an idea that has some drawbacks.

[6] Like quantitive easing, which is not the same as money printing. Before the modern era a government couldn't do this because there were no government securities to trade in.