Taxes Taxes and More Taxes

Why do we have to pay taxes? The answer is obvious. We need to pay taxes in order to fund the government. But then the question is why do we need government? This answer is less obvious. If we had less government we wouldn’t have to pay so much in taxes. But we need government. Without government we cannot be free as pointed out by Wall Street Journal columnist William Galston in a recent commentary. The most important task required of the government in the Constitution of the United States is to “secure the blessings of liberty for Ourselves and our posterity.” As Isaiah Berlin wrote, “Total liberty for wolves is death to the lambs.” Or as James Madison, framer of the Constitution, said, “If Men were angels, no government would be necessary.”

Our taxes support our common defense and our system of justice. Our military protects our liberty from the wolves outside our borders and our justice system protects our liberty from wolves inside our borders. But other government services provide for the general welfare. The cost of these constitutionally mandated services has been going down as a percent of GDP so one would think our taxes paid to the federal government would be going down as well.

But as Madison continued to speak, he said, “If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and the next place, oblige it to control itself.” Our government recently seems to have difficulty with this control of itself.

The constitutionally mandated expenditures are called discretionary spending but represent only about 26% of government spending according to the Congressional Budget Office. Two-thirds of government spending is so-called mandatory spending plus another chunk for the interest on our enormous debts.

The biggest pieces of mandatory spending are Social Security and Medicare that are supposedly funded by the payroll taxes we pay in addition to income tax. But we have two problems. The first problem is that the payroll taxes we pay to support Social Security and Medicare are insufficient to cover the cost of the programs such that the trust funds established to guarantee these payments are being depleted. Once the trust funds are depleted payments must come from general tax funds or additional public debt unless benefits are cut. The second problem we face is that Social Security and Medicare only make up about 54% of mandatory spending. The rest is made up of a lot of other programs that do not have their own funding and require general tax funds or public debt to fund their expenditures.

There is also a third problem that most people tend to ignore (that’s the way the politicians like it). Tax expenditures are not actual expenditures but forgone tax revenue that is lost due to subsidies, special deductions or exemptions granted by law. Politicians love them because they not only allow politicians to do favors for friends and benefactors, tax expenditures evade the budget process and do not have to be approved annually but become part of the tax code (which is why the tax code is nine thousand pages long). The US Joint Committee on Taxation estimated that the revenue loss in the 2024 fiscal year was $1.8 trillion!

The laughably misnamed Inflation Reduction Act and the CHIPS Act were jampacked with mandatory programs and tax expenditures. Presidential candidate Kamala Harris’ economic plan, announced a couple of weeks ago, is also packed with mandatory programs and tax expenditures at a cost estimated by the Committee for a Responsible Federal Budget to be close to $2.0 trillion over ten years. But don’t worry. You won’t have to pay for it. Ms. Harris is going to make somebody else pay for it.

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Kamala Harris, along with Bernie Sanders, Elizabeth Warren and many other progressive politicians, will tell you that all these wonderful benefits will cost you nothing because they will be paid for by making greedy corporations and billionaires pay their fair share of taxes. They explain that governments in the Nordic social welfare states provide their citizens with all sorts of free benefits, free college, free healthcare, etcetera. Except we know that nothing is free. So who pays for all the wonderful benefits enjoyed by Danes, Swedes, Norwegians, etcetera? Nordic fat cats paying their fair share?

No. The top income tax rate in Sweden is 52%. Much higher than the top US tax rate of 37% that Ms. Harris wants to increase. The top US rate is on people making more than $600,000 a year. The top Swedish rate is on people making over SEK614,000 a year. But SEK614,000 is only a little more than US$60,000. The Swedish income tax rate has two parts: local rates at around 32% and a national rate of 20%. 85% of Swedes pay the local income taxes while only those making more than SEK614,000 pay 20% on the amount over that deduction. So Swedes are highly taxed but everybody pays the taxes not just the fat cats.

I don’t imagine the Swedish corporations are greedier than US corporations but the Swedish corporate tax rate is only 20% (below the 21% corporate rate that the Trump administration passed and that the Democrats hate). So why does this supposedly quasi-socialist country have such a low corporate tax? Swedes are smart. They know that Swedish companies employ Swedes and Swedish companies need to be competitive with companies from other countries to keep those Swedes employed. You also have to keep in mind that US corporate taxes are only the levies of the federal government. Corporations also have to pay to state and local governments. So when Ms. Harris says she wants to increase the corporate income tax to 28%, companies located in California must pay almost 37% because California levies a corporate tax of 8.84% on those companies. That’s almost double the corporate taxes companies in Denmark and Sweden have to pay.

So where does Sweden get most of the money needed to pay for all the benefits they provide. They don’t borrow much. Sweden’s public debt as a percent of GDP is around 37%, only a third of the US debt burden. No Sweden gets most of its tax revenue from the value added tax (it’s like sales tax in the US). Value added taxes are paid by everybody and are considered regressive taxes. Sweden’s VAT is 25%.

The other Nordic countries have different taxation policies but they are all similar. High personal income taxes on just about everyone, high value added taxes and relatively low corporate taxes. There are other reasons why these countries have been successful but confiscating money from corporations and the wealthy is not how they do it. You can read more about the Nordic welfare states in my commentary, A Nordic Fantasy, published June 11, 2019.

The question arises, why are Kamala Harris and her progressive left friends so intent on taxing corporations and billionaires when the supposedly more socialist Nordic countries don’t? Ms. Harris and the progressive left think like Marxists. They believe that wealth and profits are exploitative and evil and should be purged from society. Nordic welfare states insist that they are capitalist free market countries. To them social welfare is more a cultural thing than an ideological thing, a sharing amongst kinsmen in these very homogenous countries.

I could go on and on about taxes, especially the specific taxes being proposed by presidential candidates Kamala Harris and Donald Trump, but that would make for a very long commentary. For an overview about tax policy, you can also read my pamphlet A Summation of the Principles of Taxation, available on Amazon or you can download it from my website. Regarding wealth taxes also being proposed by Ms. Harris you can find my analysis in the commentary, Taxing Picasso, published June 25, 2021.