Michael Lipper: when it comes to taxes, we all have a special interest

A few days ago, I was asked my views on taxation fairness and was provided with two opposing views of tax policy for comment; one from a New York Times columnist and the other a Wall Street Journal opinion piece. My response follows.

The biggest unanswered question facing all nations with deficits is, “What are we paying for on an individual basis?” In the matter of tax policy each of us, in effect, forms a special interest group. Those of us living in suburbia are in favor of money to be spent on roads and possibly suburban transportation.

Our urban friends would prefer that money be spent on mass transit in their cities. When we, our close family and friends are healthy, excessive spending on public health is overdone. However, when any of us are ill, we want the best healthcare available.

Only those of us who fear future wars and terrorism are supporters of national defense spending etc., etc. Since we are not able to order our services à la carte, our next problem is how to pay for all the services that we want and pay for the sometimes wasteful spending for others that might have more votes than us.

Governments pay for these services through taxes, fees, sale of assets, and borrowing. In the end, borrowing is self-defeating, but perhaps acceptable to many who do not have grandchildren.

One of the lessons from history is that the ability to levy taxes leads a society into certain actions. Think of taxes as the price we pay for services. If the price becomes too high, we will modify our behavior. If we tax income or capital at too high a rate, we will generate less income or capital.

Since we have not successfully developed wide scale revenue-generating user fees, we will need to use taxes to pay for all those wanted and unwanted goods and services. Each of us has very good reasons to believe that someone else should pay our share of the expenses.

As I believe that as a society we spend too much, I would favor various forms of consumption taxes with an appropriate carve-out for life sustaining items and the poor. Unfortunately the remaining purchases would probably be too small to be a good base for tax generation.

There is another risk; that if legitimate user fees get to be too high, we will create a black or grey market with all its socially undesirable characteristics. There are other victims from an imposed tax on “luxury goods.” When we decided to tax large yachts, the yacht building business left the US for friendlier locations.

Because every inhabitant of this great country benefits from our collective government services, each person should pay something. Otherwise, we will continue the situation whereby people who do not pay taxes will want additional services to be paid by others.

Tackling tax

Thus, I am afraid we need a graduated tax rate approach. My own view is that income should be taxed and deployed capital should not until the capital is producing dividends.

The more we adjust these principles to take into consideration legitimate needs of people, or the society as a whole, the more we will create special interest groups who not only want their needs taken care of, but who are willing to trade their votes to support other people’s needs on a reciprocal basis.