Why Do We Have Taxes?

As I’m sitting here eating my lunch, I’m reading the articles about Mitt Romney and musing about taxes. Have you ever thought about our tax system and why we have taxes? I bet if you asked people why taxes exist, after bitching that they are too high, they would say “To fund the government.” But they attempt to do a lot more than that, and that’s where our problems start.

If taxes were simply to fund the government, we’d probably have the same rate for all types of income, across people and businesses. But we don’t. We have differing rates for different things, and deductions and rules hither and yon. Why? The answer is simple: to help those we want to help, and to encourage behaviors we want to encourage.

This is where “the rich are different from us” comes into play. Most people you likely know earn most of their money through their jobs. That’s normal income. The “rich” don’t earn their money through their salaries: they earn it through investment income, dividends, bonuses (often in the form of stock that is later sold), and such other ways. Passive income like that is taxed differently. Basically, the normal income is taxed so the poor should pay less and the rich more. However, the rich pay less because their income is passive income, and that is taxed lower supposedly to encourage people to invest in stocks and bonds and industry.

This may help you understand Mitt Romney’s taxes. His income is in categories that are taxed at lower rates, because that is behavior that Congress wanted to encourage. Similarly, this is why loopholes such as that exploited by Newt exist. Newt took advantage of an S Corporation: A corporation that exists solely to funnel corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. The income can go to the shareholder in two ways: as salary, or as pass-through income. Guess which is taxed lower? Guess where Newt funneled his income?

This is one reason why the President is going to call for Tax Reform during the State of the Union. The problem is not that taxes are too high (actually, they may not be high enough). The problem is that we don’t have a clear mission for what our tax system is to do and fund, and what we want to encourage and discourage. The current system is so arcane as to be inequitable. The goal of the tax system should be that the tax burden should borne by those that can afford to bear it, and the tax system should encourage what makes America strong: getting an education, locating businesses in America and employing American workers, investment in America through home and business ownership and stewardship, and doing good for others through charitable works. Doing the right things should receive incentives; doing the wrong things (such as offshore outsourcing) should be discouraged.

Let’s heed the call for Tax Reform, and think about how we truly want to raise money to fund government operations (we can debate later about what is the appropriate size of government; we can hopefully all agree we need some government).

Music: Our Men in San Francisco (The Limeliters): The Rising of the Moon


One Reply to “Why Do We Have Taxes?”

  1. I know you are old enough to remember tax simplification/reform under President Reagan. These things run in cycles – when the teax code becomes complex and inequitable enough popular pressure causes a push towards simplification, and then things become complicated again as the code changes in response to either economic pressure or the desire to use the tax code to reward or encourage behavior.

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