TAXATION AND DEMOCRACY Lecture 23 TAXATION AND DEMOCRACY April 18, 2017

I. WHAT IS TAXATION?

1. What is Taxation: Two Answers I. WHAT IS TAXATION? 1. What is Taxation: Two Answers Answer #1:Taxes = the public taking from the private. People earn income through private economic activity. This income belongs to them. Taxation is the government taking money away from citizens and using it to pay for government activities. Extreme version: Taxation is theft.

1. What is Taxation: Two Answers I. WHAT IS TAXATION? 1. What is Taxation: Two Answers Answer #1:Taxes = the public taking from the private. People earn income through private economic activity. This income belongs to them. Taxation is the government taking money away from citizens and using it to pay for government activities. Extreme version: Taxation is theft. Answer #2: Taxes = The division of total income into public and private shares. The total economic pie is produced through complex, cooperative, interdependent economic activities. This pie needs to be divided up between public purposes and private purposes. Taxation is the way of accomplishing this in a capitalist economy.

2. Tax ideology and class interests I. WHAT IS TAXATION? 2. Tax ideology and class interests

2. Tax ideology and class interests I. WHAT IS TAXATION? 2. Tax ideology and class interests Key question: Who really benefits from a particular view of the problem? In whose interests is it to insist that taxation is the way government takes your money? Is this understanding more in the interests of the rich and powerful than of ordinary citizens or the poor? [But Note: Showing that a particular view serves the interests of privileged groups does not show that the view is incorrect.]

II. The Logic of Income Taxes

II. THE LOGIC OF INCOME TAXES Three different views of Tax Fairness

II. THE LOGIC OF INCOME TAXES Three different views of Tax Fairness Everyone pays the same amount (a “poll tax”)

II. THE LOGIC OF INCOME TAXES Three different views of Tax Fairness Everyone pays the same amount (a “poll tax”) Everyone pays the same percentage of their income (a “flat tax”)

II. THE LOGIC OF INCOME TAXES Three different views of Tax Fairness Everyone pays the same amount (a “poll tax”) Everyone pays the same percentage of their income (a “flat tax”) Everyone should have the same tax burden, make the same sacrifice (a “progressive tax”)

II. THE LOGIC OF INCOME TAXES The Flat Tax idea Compare two people: one earns $10,000/year, the other earns $100,000/year. Suppose there is a “flat tax” of 25%. This means that the poor person pays $2,500 in taxes and the affluent person $25,000 in taxes. This means that the better off person pays 10 times as much. If these two people were the only tax payers, the richer person would pay over 90% of total taxes for the common good – schools, police, the military, etc. Is this fair? Burden asdasdasd’l;as’dl;as’dla’sdla’sdl;

II. THE LOGIC OF INCOME TAXES What is an “Equal Burden”? Compare the same two people: one earns $10,000/year, the other earns $100,000/year. They each get a raise of $10,000. What does it mean for them to have “equal burden” or “equal sacrifice” in the taxation on this additional income? Suppose there is a “flat tax” of 25%. This means that the poor person and the affluent person each pay an additional $2,500 taxes because of their additional income. Is $2,500 the same burden on a person earning $20,000 as on a person earning $110,000? ASK THIS QUESTION TO THE CLASS

II. THE LOGIC OF INCOME TAXES What is an “Equal Burden”? Compare the same two people: one earns $10,000/year, the other earns $100,000/year. They each get a raise of $10,000. What does it mean for them to have “equal burden” or “equal sacrifice” in the taxation on this additional income? Suppose there is a “flat tax” of 25%. This means that the poor person and the affluent person each pay an additional $2,500 taxes because of their additional income. Is $2,500 the same burden on a person earning $20,000 as on a person earning $110,000?

II. THE LOGIC OF INCOME TAXES What is an “Equal Burden”? Compare the same two people: one earns $10,000/year, the other earns $100,000/year. They each get a raise of $10,000. What does it mean for them to have “equal burden” or “equal sacrifice” in the taxation on this additional income? Suppose there is a “flat tax” of 25%. This means that the poor person and the affluent person each pay an additional $2,500 taxes because of their additional income. Is $2,500 the same burden on a person earning $20,000 as on a person earning $110,000?

II. THE LOGIC OF INCOME TAXES “Equal Burden” continued How much income would someone earning $110,000 have to give up to be the equivalent sacrifice as $2,500 for someone earning $25,000? Key idea from economics: the declining marginal utility of money. Above a certain income, the more you earn, the less difference an additional dollar makes to your welbeing. Ask this question

II. THE LOGIC OF INCOME TAXES “Equal Burden” continued How much income would someone earning $110,000 have to give up to be the equivalent sacrifice as $2,500 for someone earning $25,000? Key idea from economics: the declining marginal utility of money. Above a certain income, the more you earn, the less difference an additional dollar makes to your wellbeing.

2. U.S. MARGINAL INCOME TAX RATES (single tax payer) II. THE LOGIC OF INCOME TAXES 2. U.S. MARGINAL INCOME TAX RATES (single tax payer) Bracket 1. 10% on income between $0 and $9,325 Bracket 2. 15% on the income between $9,325 and $37,950 Bracket 3. 25% on the income between $37,950 and $91,900 Bracket 4. 28% on the income between $91,900 and $191,650 Bracket 5. 33% on the income between $191,650 and $416,700 Bracket 6. 35% on the income between $416,700 and $418,400 Bracket 7. 39.6% on income over 418,400 Example: A person who earns $100,000 will pay total income taxes of $21,175, or a total tax rate of 21.0%. Here is how that is generated: Income bracket income earned in this bracket % Tax due 1 $ 9,325 10% $932.50 2 $ 28,625 15% $4,293.75 3 $ 53,950 25% $13,487.5 4 $ 8,100 28% $2,268 Totals $100,000 21% $20,981.75

3. Tax System Complexity Problem #1. How to define “taxable income” II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #1. How to define “taxable income” Examples: A family with 5 children vs a single adult earning the same amount of income A person with large medical expenses vs a person with no medical expenses earning the same amount of income A person whose house is destroyed by a hurricane vs a person whose house is undamaged earning the same amount Solution: Tax Deductions as a way of making tax rates fairer

3. Tax System Complexity Problem #1. How to define “taxable income” II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #1. How to define “taxable income” Examples: A family with 5 children vs a single adult earning the same amount of income A person with large medical expenses vs a person with no medical expenses earning the same amount of income A person whose house is destroyed by a hurricane vs a person whose house is undamaged earning the same amount Solution: Tax Deductions as a way of making tax rates fairer

3. Tax System Complexity Problem #1. How to define “taxable income” II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #1. How to define “taxable income” Examples: A family with 5 children vs a single adult earning the same amount of income A person with large medical expenses vs a person with no medical expenses earning the same amount of income A person whose house is destroyed by a hurricane vs a person whose house is undamaged earning the same amount Solution: Tax Deductions as a way of making tax rates fairer

3. Tax System Complexity Problem #1. How to define “taxable income” II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #1. How to define “taxable income” Examples: A family with 5 children vs a single adult earning the same amount of income A person with large medical expenses vs a person with no medical expenses earning the same amount of income A person whose house is destroyed by a hurricane vs a person whose house is undamaged earning the same amount Solution: Tax Deductions as a way of making tax rates fairer

3. Tax System Complexity Problem #1. How to define “taxable income” II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #1. How to define “taxable income” Examples: A family with 5 children vs a single adult earning the same amount of income A person with large medical expenses vs a person with no medical expenses earning the same amount of income A person whose house is destroyed by a hurricane vs a person whose house is undamaged earning the same amount Solution: Tax Deductions as a way of making tax rates fairer

II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #2. Deductions are a policy tool to create incentives for people to do certain things in the public interest: the problem of “tax expenditures” Examples: Green energy: tax breaks for individuals to weatherize their houses or for companies to invest in solar panels. Home mortgage interest deduction: If you think home ownership is good public policy and you want to encourage people to buy their own homes, then the mortgage interest deduction is a way of funneling government revenues to help people buy homes. Charitable contributions: If you give $10,000 and your marginal tax rate is 35%, you get back $3500 in tax refunds, so the contribution only really costs you $6,500. In effect the government is giving the charity $3,500.

II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #2. Deductions are a policy tool to create incentives for people to do certain things in the public interest: the problem of “tax expenditures” Examples: Green energy: tax breaks for individuals to weatherize their houses or for companies to invest in solar panels. Home mortgage interest deduction: If you think home ownership is good public policy and you want to encourage people to buy their own homes, then the mortgage interest deduction is a way of funneling government revenues to help people buy homes. Charitable contributions: If you give $10,000 and your marginal tax rate is 35%, you get back $3500 in tax refunds, so the contribution only really costs you $6,500. In effect the government is giving the charity $3,500.

II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #2. Deductions are a policy tool to create incentives for people to do certain things in the public interest: the problem of “tax expenditures” Examples: Green energy: tax breaks for individuals to weatherize their houses or for companies to invest in solar panels. Home mortgage interest deduction: If you think home ownership is good public policy and you want to encourage people to buy their own homes, then the mortgage interest deduction is a way of funneling government revenues to help people buy homes. Charitable contributions: If you give $10,000 and your marginal tax rate is 35%, you get back $3500 in tax refunds, so the contribution only really costs you $6,500. In effect the government is giving the charity $3,500.

II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #2. Deductions are a policy tool to create incentives for people to do certain things in the public interest: the problem of “tax expenditures” Examples: Green energy: tax breaks for individuals to weatherize their houses or for companies to invest in solar panels. Home mortgage interest deduction: If you think home ownership is good public policy and you want to encourage people to buy their own homes, then the mortgage interest deduction is a way of funneling government revenues to help people buy homes. Charitable contributions: If you give $10,000 and your marginal tax rate is 35%, you get back $3500 in tax refunds, so the contribution only really costs you $6,500. In effect the government is giving the charity $3,500.

II. THE LOGIC OF INCOME TAXES CHARITABLE DONATIONS Two ways the government can allocate money to various kinds of nonprofit activity in the public interest 1. Set up a government agency, allocate funds to that agency, institute a bureaucratic procedure for giving out grants. Examples: National Science Foundation, National Endowment for the Humanities, National Endowment for the Arts 2. Allow tax deductions for individual contributions to nonprofit organizations. This is a form of highly decentralized participatory government spending: the people directly decide how to allocate public funds. This is the way government spends billions of dollars a year on religion: tax expenditures for church donations (in addition to churches not paying taxes).

II. THE LOGIC OF INCOME TAXES CHARITABLE DONATIONS Two ways the government can allocate money to various kinds of nonprofit activity in the public interest 1. Set up a government agency, allocate funds to that agency, institute a bureaucratic procedure for giving out grants. Examples: National Science Foundation, National Endowment for the Humanities, National Endowment for the Arts 2. Allow tax deductions for individual contributions to nonprofit organizations. This is a form of highly decentralized participatory government spending: the people directly decide how to allocate public funds. This is the way government spends billions of dollars a year on religion: tax expenditures for church donations (in addition to churches not paying taxes).

II. THE LOGIC OF INCOME TAXES CHARITABLE DONATIONS Two ways the government can allocate money to various kinds of nonprofit activity in the public interest Set up a government agency, allocate funds to that agency, institute a bureaucratic procedure for giving out grants. Examples: National Science Foundation, National Endowment for the Humanities, National Endowment for the Arts 2. Allow tax deductions for individual contributions to nonprofit organizations. This is a form of highly decentralized participatory government spending: the people directly decide how to allocate public funds. Example: This is the way government spends billions of dollars a year on religion: tax expenditures for church donations (in addition to churches not paying taxes).

II. THE LOGIC OF INCOME TAXES THE PROBLEM WITH CHARITABLE DONATIONS The richer you are the more you are in a position to “vote” for government spending on things you like. Alternative: “Non-refundable tax credit” targeted for specific purposes: everyone gets the same amount to allocate to non-profit purposes in civil society.

II. THE LOGIC OF INCOME TAXES THE PROBLEM WITH CHARITABLE DONATIONS The richer you are the more you are in a position to “vote” for government spending on things you like. Alternative: “Non-refundable tax credit” targeted for specific purposes: everyone gets the same amount to allocate to non-profit purposes in civil society.

II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #3. Deductions that reduce the fairness of taxation – the problem of “loopholes” Examples: Home mortgage interest deductions: A rich person with a million dollar mortgage on an expensive house and a $10,000/month interest and a marginal tax rate of 35%, saves $3,500 a month, or $42,000/year. Working class person who buys a home with a $100,000 mortgage with a $1,000/month interest payment and only a 15% marginal tax rate, saves $150/month, or $1800/year. The rich person’s house costs ten times more, but the subsidy is over 23 times more. Corporations can count as “business expenses” all sorts of things which are disguised forms of consumption for executives: company cars, private corporate jets, corporate meetings in Hawaii resorts

II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #3. Deductions that reduce the fairness of taxation – the problem of “loopholes” Examples: Home mortgage interest deductions: A rich person with a million dollar mortgage on an expensive house and a $10,000/month interest and a marginal tax rate of 35%, saves $3,500 a month, or $42,000/year. Working class person who buys a home with a $100,000 mortgage with a $1,000/month interest payment and only a 15% marginal tax rate, saves $150/month, or $1800/year. The rich person’s house costs ten times more, but the subsidy is over 23 times more. Corporations can count as “business expenses” all sorts of things which are disguised forms of consumption for executives: company cars, private corporate jets, corporate meetings in Hawaii resorts

II. THE LOGIC OF INCOME TAXES 3. Tax System Complexity Problem #3. Deductions that reduce the fairness of taxation – the problem of “loopholes” Examples: Home mortgage interest deductions: A rich person with a million dollar mortgage on an expensive house and a $10,000/month interest and a marginal tax rate of 35%, saves $3,500 a month, or $42,000/year. Working class person who buys a home with a $100,000 mortgage with a $1,000/month interest payment and only a 15% marginal tax rate, saves $150/month, or $1800/year. The rich person’s house costs ten times more, but the subsidy is over 23 times more. Corporations can count as “business expenses” all sorts of things which are disguised forms of consumption for executives: company cars, private corporate jets, corporate meetings in Hawaii resorts.

III. Myths & Realities about taxes in the US

1. Are taxes high in the US? (2010 data) III. MYTHS & REALITIES OF TAXES 1. Are taxes high in the US? (2010 data) Total tax revenue as percentage of gross domestic product, 2010 Denmark  47.6 Spain  32.3 Sweden 45.5 Poland 31.7 Belgium 43.5 New Zealand 31.5 Italy 42.9 Portugal 31.3 Norway Canada 31.0 France  Greece   30.9 Finland 42.5 Switzerland 28.1 Netherlands 38.7 Japan 27.6 Hungary 37.9 Turkey 25.7 Slovenia 37.5 Australia 25.6 Luxembourg 37.1 Korea 25.1 Germany  36.1 United States 24.8 Iceland 35.2 Chile 19.6 United Kingdom 34.9 Mexico 18.8 Israel 32.4 OECD-Total 33.8

III. MYTHS & REALITIES OF TAXES 2. Are taxes fair in the US? State & Local taxes as % of family income

IV. The Attack on the Affirmative State

Definition of the Affirmative State III. THE ATTACK ON THE AFFIRMATIVE STATE Definition of the Affirmative State A state that provides a wide range of public goods and plays active role in solving social problems and advancing public purposes. Examples of affirmative state activities: Education: K-12, higher education, life-long learning, skill retraining Building infrastructure like roads, sewers, high speed rail Providing health care and preventive health Proving eldercare and daycare for preschool children Public safety Subsidies for the arts and recreation Regulations of: pollution, health and safety in the workplace; food quality and product safety; truthful advertising.

Definition of the Affirmative State III. THE ATTACK ON THE AFFIRMATIVE STATE Definition of the Affirmative State A state that provides a wide range of public goods and plays active role in solving social problems and advancing public purposes. Examples of affirmative state activities: Education: K-12, higher education, life-long learning, skill retraining Building infrastructure like roads, sewers, high speed rail Providing health care and preventive health Proving eldercare and daycare for preschool children Public safety Subsidies for the arts and recreation Regulations of pollution, health and safety in the workplace; food quality and product safety; truthful advertising.

2. Core defenses of the Affirmative State III. THE ATTACK ON THE AFFIRMATIVE STATE 2. Core defenses of the Affirmative State (1). Democracy as a value: the issue here is the appropriate scope of state activity for a robust democratic society (2). Expansive public goods and economic regulation are necessary for the values of efficiency, prosperity, and fairness. (3). The value of freedom – understood as positive freedom – also requires an affirmative state.

2. Core defenses of the Affirmative State III. THE ATTACK ON THE AFFIRMATIVE STATE 2. Core defenses of the Affirmative State (1). Democracy as a value: the issue here is the appropriate scope of state activity for a robust democratic society (2). Expansive public goods and economic regulation are necessary for the values of efficiency, prosperity, and fairness. (3). The value of freedom – understood as positive freedom – also requires an affirmative state.

2. Core defenses of the Affirmative State III. THE ATTACK ON THE AFFIRMATIVE STATE 2. Core defenses of the Affirmative State (1). Democracy as a value: the issue here is the appropriate scope of state activity for a robust democratic society (2). Expansive public goods and economic regulation are necessary for the values of efficiency, prosperity, and fairness. (3). The value of freedom – understood as positive freedom – also requires an affirmative state.

2. Core defenses of the Affirmative State III. THE ATTACK ON THE AFFIRMATIVE STATE 2. Core defenses of the Affirmative State (1). Democracy as a value: the issue here is the appropriate scope of state activity for a robust democratic society (2). Expansive public goods and economic regulation are necessary for the values of efficiency, prosperity, and fairness. (3). The value of freedom – understood as positive freedom – also requires an affirmative state.

III. THE ATTACK ON THE AFFIRMATIVE STATE 3. Three-pronged attack on the Affirmative State Attack on the legitimacy of Taxation: Constant reiteration of the idea that taxation is oppressive, that the government is taking away your money. (2) Attack on the intentions of Government: Big Government is oppressive; it wants to dominate, regulate and control your lives for the benefit of bureaucrats; politicians and bureaucrats are corrupt. (3) Attack on the competence of government: Big Government is filled with red tape, incompetence, stupid regulations that generate great inefficiencies.

III. THE ATTACK ON THE AFFIRMATIVE STATE 3. Three-pronged attack on the Affirmative State Attack on the legitimacy of Taxation: Constant reiteration of the idea that taxation is oppressive, that the government is taking away your money. (2) Attack on the intentions of Government: Big Government is oppressive; it wants to dominate, regulate and control your lives for the benefit of bureaucrats; politicians and bureaucrats are corrupt. (3) Attack on the competence of government: Big Government is filled with red tape, incompetence, stupid regulations that generate great inefficiencies.

III. THE ATTACK ON THE AFFIRMATIVE STATE 3. Three-pronged attack on the Affirmative State Attack on the legitimacy of Taxation: Constant reiteration of the idea that taxation is oppressive, that the government is taking away your money. (2) Attack on the intentions of Government: Big Government is oppressive; it wants to dominate, regulate and control your lives for the benefit of bureaucrats; politicians and bureaucrats are corrupt. (3) Attack on the competence of government: Big Government is filled with red tape, incompetence, stupid regulations that generate great inefficiencies.

4. Four types of anti-Affirmative State transformations III. THE ATTACK ON THE AFFIRMATIVE STATE 4. Four types of anti-Affirmative State transformations 1. Cutbacks of publicly funded programs Less funding for higher education, therefore higher tuition Less funding for medical research Less funding for job training, public housing, etc. 2. Deregulation Weaker regulations of toxic waste Weaker regulations of logging Weaker regulations of product safety 3. Lax enforcement Fewer inspectors of health & safety Fewer auditors on taxes Fewer food quality inspectors 4. Privatization Prisons Military subcontractors – food, mercenaries Public utilities privatized

4. Four types of anti-Affirmative State transformations III. THE ATTACK ON THE AFFIRMATIVE STATE 4. Four types of anti-Affirmative State transformations 1. Cutbacks of publicly funded programs Less funding for higher education, therefore higher tuition Less funding for medical research Less funding for job training, public housing, etc. 2. Deregulation Weaker regulations of toxic waste Weaker regulations of logging Weaker regulations of product safety 3. Lax enforcement Fewer inspectors of health & safety Fewer auditors on taxes Fewer food quality inspectors 4. Privatization Prisons Military subcontractors – food, mercenaries Public utilities privatized

4. Four types of anti-Affirmative State transformations III. THE ATTACK ON THE AFFIRMATIVE STATE 4. Four types of anti-Affirmative State transformations 1. Cutbacks of publicly funded programs Less funding for higher education, therefore higher tuition Less funding for medical research Less funding for job training, public housing, etc. 2. Deregulation Weaker regulations of toxic waste Weaker regulations of logging Weaker regulations of product safety 3. Lax enforcement Fewer inspectors of health & safety Fewer auditors on taxes Fewer food quality inspectors 4. Privatization Prisons Military subcontractors – food, mercenaries Public utilities privatized

4. Four types of anti-Affirmative State transformations III. THE ATTACK ON THE AFFIRMATIVE STATE 4. Four types of anti-Affirmative State transformations 1. Cutbacks of publicly funded programs Less funding for higher education, therefore higher tuition Less funding for medical research Less funding for job training, public housing, etc. 2. Deregulation Weaker regulations of toxic waste Weaker regulations of logging Weaker regulations of product safety 3. Lax enforcement Fewer inspectors of health & safety Fewer auditors on taxes Fewer food quality inspectors 4. Privatization Prisons Military subcontractors – food, mercenaries Public utilities privatized

4. Four types of anti-Affirmative State transformations III. THE ATTACK ON THE AFFIRMATIVE STATE 4. Four types of anti-Affirmative State transformations 1. Cutbacks of publicly funded programs Less funding for higher education, therefore higher tuition Less funding for medical research Less funding for job training, public housing, etc. 2. Deregulation Weaker regulations of toxic waste Weaker regulations of logging Weaker regulations of product safety 3. Lax enforcement Fewer inspectors of health & safety Fewer auditors on taxes Fewer food quality inspectors 4. Privatization Prisons Military subcontractors – food, mercenaries, detention Public utilities privatized