One Man’s Tax Break Is Another’s Tax Burden
The state is that great fiction by which everyone tries to live at the expense of everyone else. --Frédéric Bastiat
We can’t all pay less taxes. Well, we can, but we cannot if we at the same time insist on the government spending all that it currently spends.
When I say “all”, I am necessarily including future taxpayers including both those alive and paying today as well as those not yet paying which includes not yet born future taxpayers. We are all in this boat together.
Government has basically three ways to finance it’s use of resources—spending money in the colloquial sense. It can:
Force owners of resources to give it money by taxing people now.
Convince owners of resources to give it money by borrowing funds (selling U.S. Treasuries, etc.) thereby promising to force future owners of future resources to give it money (to repay the lenders) by taxing people in the future.
Convince owners of resources to continue using the money it issues as it depreciates the value of said money (inflation) forcing current and future owners of resources to have less resources.1
Notice that in all cases someone is forced to have less so that the government can use more. Losing sight of this essential fact causes many to mistakenly believe and profess what amounts to magical thinking. Namely, that no one has to pay for things the government is asked to do.
When the U.S. tax code grants someone a tax break for giving money to the local philharmonic or to a church or to a college (charitable donations) or for using debt to finance a house (mortgage deduction) or for using debt to finance a company (corporate interest deduction) or for having kids (child tax credit, dependent allowance, etc.) or for any other possible reason, it necessarily is raising taxes on someone else or inflating away the wealth of holders of U.S. dollars. PERIOD. TANSTAAFL holds as always.
Any complication added to the tax system aimed at reducing a tax burden is therefore at the same time a complication aimed at unintentionally increasing a tax burden.
Many are fine with this as they naively and generously assume the “rich” are now finally going to pay a little more—making a dent in the burden they keep avoiding, those bastards! Reality brutally lays rest to this fiction.
The wealthy pay an enormous share of taxes. At the same time there isn’t enough income concentrated in “the rich” to pay for all the spending the government currently does. Total government spending (local, state, and federal) in the U.S. is about $9.3 trillion. The adjusted gross income of the top 1%, 5%, 10%, and 25% is about $2.8, $4.9, $6.5, and $9.4 trillion, respectively2. I’ll leave it to the reader to work through the secondary effects of a 100% income tax rate on all income above about $100,000, which is the top 25% threshold.
Regardless of these wishful desires and the political gestures that fuel them, actual tax policy continues to be shaped around a more pragmatic approach of taxing the incomes of middle to upper-middle class Americans—those in the top half of income earners but below the top 10%. That’s where the money is to the tune of about $7.2 trillion or about 53% of total U.S. adjusted personal income.
That is the group along with the wealthy already who would be paying for your desired tax break. Thinking about current events, it is also the group who will pay for the $10,000 student loan forgiveness Biden has now granted. In fact it will be various people within this group as well as taxpayers in the bottom half of filers who will be paying for this gift to above-average income earners. It takes a certain amount of chutzpah for the we’re-gonna-tax-the-rich crowd to sell a give-a-tax-break-to-the-rich program to their key constituency, but they apparently have done it. You cannot be a zealot on income inequality and a proponent of student-loan forgiveness at the same time. They are contradictory positions.
More broadly and back to the main point, remember that the taxman cometh one way or another.
And also remember to raise your gaze. We should transition our tax system from taxing the creation of resources to the taxing of the use of resources. Any changes in the name of reform not moving in this direction are frivolous at best and scandalous at worst.
Pedantic point: The word “less” here is correct rather than “fewer”. Resources in this sense should be thought of as a pool of wealth rather than a number of items.
I adjusted the linked figures for inflation (15.29% December 2019-July 2022).