The Ignorance Tax

I’ve listened with great amusement to the ramblings of various politicians who profess to have the cure for our suffering economy. They seem far more adept at fixing the blame … than fixing the problem.

During the recent Presidential race, the winning candidate promised “no new taxes” … at least with the exception of a small minority of individuals whose collective votes cannot possibly sway an election. Now, having seen how well that phrase faired for George H. W. Bush after the 1988 Republican Convention (i.e., “Read my lips … no new taxes”), you would have thought that no one would ever have the temerity to use that phrase again. However, it seems as long as you can skillfully argue for a caste system that plays one segment of society against another (i.e., the “Haves” versus the “Have Nots”), it ostensibly still has appeal.

The nuances of class warfare seem beyond the comprehension of the losing party. The Republicans had the audacity to float the idea of a flat tax and, even more audaciously, the idea of possibly incorporating it within a value-added tax (as some other countries successfully do). What were they thinking?

The flat tax concept is based upon the premise that everybody should pay their fair share and be treated as equals. How un-American! It’s easy to see why this can’t work. Let’s say everyone paid a 23% income tax, and we eliminated all deductions because we intuitively “know” they must be loopholes that only benefit the rich. On the new, one-page Form 1040, you’d write down your income, multiply the number by 23% and pay that amount (basically: 23% of Income = Tax Owed). Even the Secretary of the Treasury could figure that out! If a poor person made $10,000 and a rich person made $100,000, the poor person would pay $2,300 in income taxes and the rich person would pay $23,000. Okay so far! However, the poor person would only have $7,300 to spend while the rich person would have $73,000. How utterly unfair! I’d feel much better about it if we could add their net pay together and divide it by two so they could both take home $40,150. Now, that’s what I call equality: equal pay for equal work ... at least in the democratic sense.

The second concept is very similar but is even more controversial. It potentially would eliminate the IRS and all of the jobs it creates for America. Egad! What would happen to the law firm ads on TV that promise to protect us from IRS harassment if we haven’t filed our returns for the past seven years? Unemployment would skyrocket since the IRS employs about 102,000 people, and another 1.2 million private sector workers help us prepare our taxes on a seasonal basis (133,700 at H&R Block alone). It is fascinating that seasonal workers can apparently understand the 55,000+ pages of tax code when our Secretary of the Treasury clearly cannot. I suppose if it weren’t for those skilled seasonal workers, more of us would be qualified to serve in a Cabinet position at the White House … but I digress.

The current tax code calls for a graduated income tax under which the rich are taxed aggressively and the poor are taxed on a far more limited basis … if at all. Even though it takes 55,000+ pages of Code and about 1.3 million people to pull this off, the good news is that 5% of the people pay 60% of the taxes that fund our government. How cool is that? There’s a 95% chance that you’re not one of them … and even a better chance if you don’t work particularly hard.

So, now that we’ve established that the current graduated income tax is a good thing, let’s spend a few trillion dollars. Besides, we can always raise taxes on the rich and print more money in the interim. With respect to the latter, our money supply is growing by leaps and bounds. I remember the days when a billion dollars was considered to be a lot of money. Now, our Congressional leadership can pass a bill that spends 1,000 times that much without even meriting a detailed review because everything is a “crisis” and we have to “buck up” (thank goodness there wasn’t a Freudian slip when the President made that inspirational comment).

So, what’s the impact of the surge in our money supply? Well, there’s this thing call “inflation.” A rough rule of thumb is that the rate of inflation in the following year can be estimated by subtracting the rate of growth in productivity from the rate of growth of the money supply. For example: the current growth rate of our money supply is 16% while our rate of growth in productivity is 1.8%. That’s a projected rate of inflation of 14.2% … and Jimmy Carter isn’t even President!

Let’s say that projection is overzealous. Let’s be conservative (or at least less liberal) and cut it in half. Then we’d have a rate of inflation rate equal to 7.1%. For every dollar I presently spend on food, I’ll get to spend a little over $1.07. The same would be true for gasoline, clothing, housing, utilities, etc. In fact, on average, I’ll get to spend 7.1% more on everything.

Since the rich and the poor both have to buy products and services, a 7.1% increase in prices essentially impacts them equally … much like a flat tax or value-added tax. Luckily, we don’t call it a “tax” even though it’s driven by government action and is applied against the purchasing power of our income. Sure, it feels like a tax, but it’s not. Trust me! Otherwise, the phrase “no new taxes” would just be political rhetoric that was used to capture votes.

I can tell by your expression that you’re not happy. You’re just not buying my argument on behalf of the administration. Okay, you want “change” … you’re going to get “change.” Here’s the truth (… now, that’s what I call “change”). Sponsoring programs we cannot afford and funding them by increasing the money supply and more aggressively taxing the rich will lead to a pretty hefty rate of inflation for some period of time. So, while the winning party may not directly increase taxes on anyone but “those who earn over $250,000,” the reality is that the other 95% of the population will incur an indirect tax in the form of inflation.

Personally, I like the concept of “inflation.” It lets me cling to political rhetoric; cling to the belief that the government can continue to create new programs without having the money to pay for them; and cling to the belief that the “way out” is to print more money and more aggressively tax the rich. Yes, “inflation” is a term with which I’m comfortable. Besides, it’s much better than renaming it “The Ignorance Tax.”

Copyright (c) 2009 Dr. T.J. O'Hara