I’ve been thinking about the question of how to equitably distribute tax burden in society.
100’s Philosophy
200’s Myths & Religion
300’s Social Science
400’s Language
500’s Science
600’s Technology
700’s Arts & Recreation
800’s Literature
900’s Geography & History
It may help you to know I'm a serious fan of the Dewey Decimal System not just for its ability to classify books in a library, but for the underlying philosophy that led to its categories. I don't even 100% agree with the categories that resulted—I just like the thought process Dewey went through in order to arrive at the categories.
Melvil Dewey conceived of an ordered series of questions that primitive man must have asked as he evolved socially, intellectually, and culturally from a cave dweller to a citizen of civilized society.
100’s Who am I?
200’s Who made me?
300’s Who is the man in the next cave?
400’s How can I make that man understand me?
500’s How can I understand nature and the world about me?
600’s How can I use what I know about nature?
700’s How can I enjoy my leisure time?
800’s How can I give my children a record of man’s historic deeds?
900’s How can I leave a record for men of the future?
When trying to wrap my head around a conceptual space, particularly one that involves a series or evolution of steps, I sometimes find myself reaching for Dewey's list of questions to use as a kind of conceptual scaffolding while I try to devise something better to use. And that's what I found myself doing in this case.
One's economic life, it seems to me, follows a structurally similar evolutionary path to the one Dewey describes. Admittedly, some go to college and some don't. Some start families and some don't. So the details will differ. And even for the shared issues, we might each confront them in a different order. But that was true for Dewey's system, too. So use your imagination and you'll quickly see where I'm going.
We start life with our parents taking care of us, asking questions like this:
Hey, Mom, where‘s my lunch money?
How can I afford an iPod on my tiny allowance?
How am I ever going to afford college?
How can I get a job that pays enough for me to live on my own?
Finally we break free and set out on our own, struggling at first to become self-sufficient:
How can I afford an apartment?
How can I make enough money to buy groceries?
How can I afford to buy new clothes?
How can I pay for transportation to and from work?
How can I afford to pay my college loans?
It's a good feeling to get these items under control, but it's not enough. Yes, paying for the basics is good, but we're still at the point of being hand to mouth, with no margin for error. We still have to plan for contingencies. If we can't handle those, we're only kidding ourselves in our belief that we're self-sufficient:
Heat costs how much? How will I ever afford that?
Hey, my car broke down. I was supposed to budget for that?
How can I afford that medical treatment?
Wait a minute. I can't afford to be unemployed. What now?
While still repaying college loans, I have to re-educate myself?
What if I'm unable to work later in life?
If we're lucky, we do eventually rise above it, but often it takes a long time. Ideally, though, once the above items are mastered, we start to have surplus income and can finally turn our attention from needs to wants:
How can I repay those who have been helping me?
How can I make enough money to afford an iPhone?
How can I make enough money to afford cable TV?
How can I afford to go on a vacation?
At this same time, we may begin nesting:
How can I afford to buy a house?
Can I afford to have a family?
How can I afford to feed, clothe, and house my family?
How can I survive the loss of a job without putting my family at risk?
Can I assure my children go to college?
Or our world may expand in other ways:
How can I help my friends?
How can I afford to contribute to charities?
Can I employ others by by starting my own business?
My point here is to portray life as a continuum from helping ourselves to helping others. And finally now with that in mind I can make some of the points I wanted to make.
First, it should be obvious that the first and most important thing each of us can do to help society is to eliminate society's need to help us. If we are not self-sufficient, we cannot help others.
I mention this because I've sneakily omitted taxation from the above lists of questions. This is because I want to make a point about where taxation is appropriate. It seems obvious to me that presently we tax people before they are able to help themselves. And I just don't see the point of that.
Taxing lower income people delays the time in their lives at which they can be self-sufficient. It also introduces inefficiency into the system: The entire process of taxation expends societal energy that is simply lost productivity. Taxing our weakest members is silly since they'll just turn around and ask for the money back—and the process of getting that money back to them will use up some of the money. Our tax revenue should come only from genuine individual surpluses.
And by surplus I don't just mean that people should have a few dollars left in their paycheck to go to taxes. I mean that everyone should try to fill a savings account with $100,000 for emergencies. If they haven't got that, and most people don't, then they aren't ready for the kinds of major expenses life is sure to dish out—unemployment, illnesses, accidents, retirement. Once they've provided for those, then they can begin generating a surplus.
They should be filling that account before they get to the point where they are allowed to pay taxes. Paying taxes should be seen as a privilege, a status symbol, something people aspire to do as part of their personal growth.
Of course, that might not leave a lot of taxpayers. What a burden that will be on those who are able to take care of themselves. Darn. That's awful. We hear all the time about how the economic system is not a zero-sum game, and how it's possible for someone to get rich and for others to do well. Fine, let's see it played out.
If the wealthy want to be taxed less, they should arrange for society to enrich as many others as possible, in order to have friends who share the “burden” of taxation. If enough people make a decent enough wage to achieve a surplus, it won't be so lonely at the top. If instead the present trend continues, concentrating the wealth in an ever-shrinking portion of the population, those few wealthy should expect to pay a steep price for membership in that elite club, because the rest of us can't afford to help pay the taxes until we can afford to take care of ourselves.
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Comments
Very well stated and highly rated.
On the taxation front, while I think your suggestion is interesting, I think there are a couple of things to worry about (these are ideas that aren't original with me). First, let's take your analogy of a kid wanting an iPod--in fact, let's say it's a family with three kids, and each one wants and iPod. If the family were run by majority vote, and the kids voted together on their short-term collective interests, they'd win every time. There's no father- or mother-figure to say "No" in a representative democracy, and I think this would pose problems in trying to limit spending. (Budget arguments are complicated, and not everyone agrees on the likely outcomes. See supply-side aka voodoo economics, which somehow became mainstream in the Bush II years.) It's even worse, though; we'd need to think not only about the untaxed majority spending too much, but also raising taxes on the minority to pay for it. If this isn't carefully managed, it's easy to see a positive feedback loop emerging--the taxpayers just wealthy enough to pay taxes have an incentive to raise both the rate and the minimum threshold for paying (there's a natural linkage there), to get them out from under. And then another set of taxpayers right on the boundary says, "Hmm..."
The other problematic issue is a bit more philosophical, and I don't know whether it actually holds in practice, but it's the notion that if you pay for some service, you have a stake in it, including in its success. So if I'm paying taxes, I'm part of the system. I demand certain things (which is not a problem in your approach) but I also vote and play juror and go to town meetings and so forth. I participate. I'd want to make sure that the notion of civic duty were retained and not replaced by a feeling of "The government? That's where I get my money, but I don't have anything to do with it."
It doesn't have to be subject to vote. I'm not saying it's subject to market. The amount to allow is possible to calculate. We presently do it based on expenses not on the basis of expenses plus the savings we really need everyone to do. It's a fantasy to say that someone making almost no money and paying some tiny fraction is really "helping" the US by paying some trivial sum. They're really just paying in money they'll have to ask for later. It will probably be burned up by inefficiency in the interim anyway. (And the government is no better about avoiding spending on its analog of an iPod than we are, so it's probably not in safe hands in the interim.) But if it's money they'll need the money later, why not just leave it to them. It is their money and it is most efficiently returned to them by never taking it.
By taking it, we create a perceived right of the people to demand it back. By leaving people with the money they make, until they are genuinely able to afford to help others, they will feel less like someone owes them. The entitlement society is built partly out of the notion that many people feel righteous because they know they are taxed unfairly.
And, too, like the movie The Minority Report, we don't let them save up because we've already decided they won't. Our guess about the future denies them the right to create a future. We don't trust them. We bet on them doing bad rather than good. And yet we trust the rich to do good rather than bad. We do it in the name of freedom and trusting people's better nature. And we see where that bet has led us, and who is picking up the tab. I'm saying there is an asymmetry in who we trust and in who we tax and in what allowances we make. I'd like to see more bias toward having accommodations for minimums that we know people will really need, and more bias toward taking care of the extra expenses out of places where there is really, objectively, extra money.
But I wonder about the incentives, in the tax policy you've proposed. For example, somebody who doesn't yet have a $100K savings account -- who you say is not yet ready to pay taxes -- yet just keeps living paycheck to paycheck, spending everything they earn. This sounds like a difficult life, when their annual income is $10K. I don't have quite as much sympathy when their income is $500K/yr, and they manage to find ways to spend that all too.
I'm also sympathetic to Rob's concerns, e.g. the "participate in government" rather than just see it as a source of handouts; and the question of how people on the margins of almost-being-taxed, choose to act.
I enjoyed learning about the basis for the Dewey Decimal System and I love how you wove that into the point you were trying to make of allowing everyone to become self-sufficient instead of taxing the death out of them. Anyone can see that 30% tax on a wage of $60,000 is going to hurt quite a bit more than a 30% tax on a wage of $500,000. Plus, the way our income tax is set up, those who earn the most, pay the least tax percentage-wise. Clearly, these rules were made by the rich.
Thanks for a brilliant post. It should be required reading in certain economic circles. Highly, highly rated.
This comment is particularly striking: People are not really breaking even if they are just feeding and housing themselves, if they're still not banking enough money to take care of themselves on a rainy day. I never hear money talked about in these terms, and I don't know why, because it's so sensible.
Saturn, yes, it's not written a lot about. And yet just about any parent who checks in a child and sees them spending on luxuries rather than banking money knows this is so. Because they know they'll be the ones to get the call when money is short (and they know that they can't deduct the value of that charity when they cover the expense—family, as a tax accountant once explained to me, is the worst charity... sigh). So I'm just saying what is common knowledge at some level. I will take credit for the Dewey thing, though. I suspect that's a pretty non-standard use of that text and more personal to how I think... I like to think maybe it is a sense of how he might have analyzed or codified certain kinds of problems, too. I'm glad you found it fun.
Also, the issue of low-income people filing a tax return on $1.03 of interest income wouldn't be a problem if our tax system weren't so complex. My tax return (not done by me) runs to 50 pages. The max for a complicated person should be 2 pages. A low-income person should be able to file their taxes on a postcard. Turbotax can find you hundreds of deductions. That's ludicrous.
It should be obvious that there's a lot more room for manipulation with a stupidly complex system than a simple system.
Here's a story that someone once told me; I never verified if it's true, but in some sense it doesn't matter, since I can easily imagine something like this happening and since it illustrates something I'd also like to avoid: When I was in college at MIT, the subway cost $0.25 to ride. It wasn't full of automated machines to take tolls then, it had people at every gate. I was told the cost of toll takers was not paid for by the fee, and that it cost the state money to take the tolls, that it would be cheaper to let people ride for free. But, I was told, the electorate liked the idea of seeing the people who used the service have to endure a little pain for the privilege, so it made the system cost anyway. Note that this has nothing to do with the efficiency of the work required by the rider; it's everything about people wanting to see pain in the person they imagined to be affected and not really caring if the practice was helping anything.
Thoughtful writing, as usual.