The Fallacies of Taxation as a Tool of Social Engineering

Recently, I have published several pieces examining Barack Obama's tax policies. Many of the responses, especially those that defended it, were especially illuminating. I will get to those in a minute but first I want to examine two videos that are equally illuminating.




This is the now famous, or even infamous, confrontation between Barack Obama and Joe the Plumber. The part that is relevant to this discussion is when Barack Obama explains that that under his plan Joe would have received bigger tax breaks as he worked his way up the ladder. Rather than seeing his tax plan as punishing the rich, one could view it as giving enough to the poor. By this view, one would assume then that the problem that poor folks face is that their tax burden is too high. Of course, this is a ludicrous position. Forty percent of American earners pay ZERO in federal taxes. The only thing that the federal government collects from these folks is the 6.5% they pay into payroll taxes to go toward Social Security. By Barack Obama's supposition, the biggest problem someone making $23,000 yearly is that they have to contribute to the payroll tax. Of course, this is silly. The biggest problem that someone making $23,000 yearly is that they only make $23,000 yearly.

This is where Barack Obama's entire philosophy falls apart. In order to credit those at the bottom so that they aren't even paying the payroll tax, he will then add to the tax rate of those at the top. Yet, it is those at the top that are the ones that are hiring the guy making $23,000 yearly. It is those people that will face a higher tax burden. As such, by Barack Obama's own admission, he will help the $23,0000 a year employee with their 6.5% payroll tax burden, but hurt them in their attempt to make more than $23,000 a year. As such, we have example one of why taxation for social engineering is a bad idea.



In the second video, Bill O'Reilly debates two college students that support Barack Obama. One of the students supports Barack Obama because he is the only one promising to bring affordable health care to all. As such, this student believes that health care is someone's god given right. By this token, she also believes that affordable housing, a living wage, food, and clothing are also a god given right. Of course, the natural leap means that the government must provide and by extension tax those that can afford it to give to those that can't.

The other student is in favor of Barack Obama because he rejects what the Bush tax cuts have done. He sees the Bush tax cuts as favoring the wealthy. Remember, the Bush tax cuts cut the marginal rate on everyone that pays taxes. In other words, by wealthy, he means all those that made enough to pay federal taxes at all. What upset Democrats about Bush's tax cuts was that he didn't offer any tax relief to those that didn't pay taxes in the first place. To Bush's opponents, someone paying zero should also get a cut and pay negative taxes. Furthermore, Obama acolytes see the government as providing to those that can't and taking from those that can to provide it.

This is fallacy number two of taxation as a means of social engineering. The proper view of taxes, in my opinion, is as a necessary evil. The right way to view taxes is to find a way to tax everyone as little as possible and in the process make government work as efficiently as possible. Instead, the Obama Doctrine, if you will, means that government provides as much as possible to those that can't and takes as much as possible from those that can't.

The third fallacy comes from this comment to one of my pieces.

I thought it was common wisdom that the poor spend a greater proportion of the money they receive than the wealthy simply because they NEED to. Maybe it’s not on designer or luxury items, but it’s on essentials like food, clothing, etc. Isn’t that why many believe the trickle-down theory is wrong? The wealthy would more likely invest their excess, but then you’re again, supporting investors versus consumers. I think they both need to be supported tomake the economy better.

It does make sense, too, that we have some targeting tax breaks. For example, people who earn close to the poverty line shouldn’t be expected to pay an equal % of taxes as someone who earns a lot of money. That would mean everyone would pay a whole lot less or else more people would be unable to pay for food, shelter, etc. because their taxes would be so high. That certainly wouldn’t make things better for wealthy people that live in the US unless they want to be isolated in ever-shrinking, affluent communities surrounded by ever-growing, poor communities. Those situations never end well, I’m afraid.

It’s a wonder that people who want to argue that jobs are created by investing in large companies don’t argue that jobs are created by investing in big government. I don’t know why you’d trust one or the other to do the best for everyone with the money. Politicians are corrupt and the government is flawed, yet companies are led by people who aren’t really worried about how investors see them, just that they keep generating profits. Both have corruption, over-spending, people at the top with disproportionate power and not hurt as much by bad decisions. Even the Stock Market was hurt by the bad decisions by so many of these managers that benefited from tax breaks already available to them. Companies definitely help us by creating jobs, driving innovation, giving us global power, etc. But by the same token, government gives us the post office, hospitals, fire dept, global power (through the Armed forces), etc. Why can’t it be a balance to invest in both? Again, I realize this is a question of the economy, not the Stock Market.

I don’t want to reward anyone at the expense of the weak. I’m guessing most of the wealthy investors wouldn’t classify themselves as weak even with a tax hike. I don’t even make enough to pay the tax hikes that some of those folks make, so I’m guessing they’ll still do pretty well. What I do want is for us to invest more in the country so that we’re not just supporting people (through tax breaks and FDIC insurance) who invest all over the world at the expense of building our economy (again, I know, not the Stock Market). Thinking more about this – would you be more amenable to the tax hikes if they were offset by greater tax breaks for employing a larger proportion of US citizens? That way companies would be allowed to operate as usual (no overall tax hikes) if they promised future investments in the US. They would have to agree to things like giving people livable wages for the US, of course. But this could even have a positive (or net neutral) effect on the Stock Market - more consumers with enough disposable income to spend on goods and services.

The fallacy here is two fold, though one has already been discussed. The fallacy is that taxation should be decided based on need. The poor need the money more and thus giving them relief will stimulate the economy more than giving the wealthy relief. This fallacy comes down to the idea that since we are adding taxes on those that can afford it, there is no added pain to the economy. This comes from the fallacious thinking that the only economic stimulation comes from spending. Of course spending, if you will, comes in many forms. The wealthy can spend on a second home, an investment property, or even an apartment building. An extra tax burden would jeopardize such a purchase. They could also "spend" on a new business, and an extra tax burden could also jeopardize that "spending". They could also "spend" on a mutual fund, stock, annuity, or even simply a money market, checking, or savings account. All of those forms of "spending" would stimulate the economy just as much as spending on normal items like food, gas, clothes and furniture. (The other fallacy is the re hash of the idea that poor folks are overburdened with taxes which of course they aren't) By limiting this kind of spending, the economy is stunted as much, and frankly more, as the economy will be stimulated by giving tax breaks to poorer folks, most of whom have little or no tax breaks.

Finally, there is the last fallacy articulated by this comment.

I do not think that slight rate increases to marginal rates for those over $250,000 is punitive. It won't stop me from trying to get back into that bracket! And increasing the amount subject to social security withholds is also not punitive. A politician could never say it, but the economic concept of diminishing returns applies, in a way, to income. Yes, a dollar buys the same amount of goods/services for a rich person as a poor person. But there is a very significant difference. The $600 extra dollars that "Joe the Plumber" would have to pay if his story actually added up (TaxComparisons and Joe the Plumber) is much more disposable to him than for the family making only $45,000. When I was making $200,000, a $600 expenditure wasn't even something to think about; we just did it. But for the $45,000 family, that same $600 is a huge amount; an amount that might feed them for the month; an amount they might juggle between food, utility bills and car payments. So yes, folks with significantly more money do have the ability to more easily pay a $600 tax increase.

Another comment states that Obama's taxes would be for redistribution. Well, I disagree. Obama has plans for an infrastructure investment fund to rebuild our roads, highways and bridges. I haven't seen anything from McCain on this. And your friends who are starting businesses will benefit greatly from improved infrastructure.

The last fallacy is the idea that "mild" tax increases won't affect the behavior of those that they will affect. Of course, they will. It's unlikely that anyone will work less or not attempt to maximize profits. What is certain is that they will use the tax code in order to do everything they possibly can to wind up in the most favorable tax bracket. Think about Obama's plan. If you make $250,000 and more your taxes go up. If you make between 200,000-250,000 they stay the same. The rest get some sort of a tax credit. Of course, everyone is going to do everything humanly possible to avoid being in the first two categories. As such, many of these folks will be making business and personal finance decisions based on their tax implication rather than their worthiness. Maybe someone will buy a house, a car, or make a signficant capital investment all in the hopes of avoiding an added tax burden. People take on losses all the time in order to maximize their tax benefits. We don't want people making decisions based on their optimum tax benefit. We want people making decisions based on their optimum personal benefit. By increasing the gap between the burdens on the haves and have nots, Senator Obama allows for even more decisionmaking based on its tax implication rather than personal implication. That is fallacy number four.