The Unwritten Pact: Exploring the Social Contract in Modern Times

Imagine a vibrant tapestry woven from the threads of history, philosophy, and the aspirations of a nascent nation. This tapestry, constantly evolving and adapting, embodies the American social contract – an implicit understanding between citizens and their government, defining the delicate balance between individual liberties and collective responsibility, rights, and obligations. But within its intricate design, we can discern the distinct threads drawn from the ideas of our Founding Fathers, shaping the contract we strive to uphold today.

But how aware are we, the threads themselves, of this underlying fabric? Few can readily articulate the intricate details of the social contract in today’s complex world. Yet, we enter it every day, knowingly or unknowingly, through our participation in society. Our decisions to obey laws, pay taxes, and contribute to the collective good are tacit endorsements of this unspoken agreement.

Social Contract

The concept of a social contract has a rich history. Early philosophers like Plato and Aristotle grappled with the ideal form of government, suggesting that individuals surrender some freedoms for the benefits of a stable and just society. Later, Thomas Hobbes argued in “Leviathan” that humans, naturally in a state of war, agree to give up some liberties to a sovereign power in exchange for security and peace.

Jean-Jacques Rousseau, in his seminal work “The Social Contract,” further refined the concept. He envisioned a society where individuals, through an implicit agreement, create a collective identity and delegate power to a government that reflects their shared will. This agreement, he argued, ensures the common good outweighs individual interests.

Why Social Contracts?

Why are Social Contracts crucial? Before you can answer that, you have to ask WHY do we have a Government, and if we need one WHAT do they provide? A Social Contract does just that, it defines the basic relationship between an individual and Government, and in return for giving up some of your liberties, what responsibilities you place upon Government. They define the government’s role in providing essential services like infrastructure, education, and healthcare. These services, deemed valuable by the collective, that cannot be effectively provided by individuals alone. In return, citizens contribute through taxes, upholding the law, and participating in civic life. This reciprocal relationship forms the backbone of any functioning society. Our Founding Fathers debated vigorously over these items between compromises over individual rights, Federalism (strong central government), States Rights (Commonwealths), and Limited Government. We fought a Civil War upholding equal justice and rights under the law. The New Deal expanded government greatly into Social and Economic Security by encroaching on individual rights for the collective good. The debate goes on today with taxation and that a relatively few pay the vast proportions of our taxes, and what is fair, and should government be a redistribution tool. It lives on in regulation as seen in the banking and real estate sectors with the Great Recession and Gun Control debates. It is pervasive in our digital world with Privacy debates between safety and civil liberties.

America’s Social Contract

These threads are woven into the fabric of our society:

The Threads of Security and Sovereignty: Our founders, weary of tyranny and longing for self-governance, enshrined safety, and sovereignty as foundational threads. John Locke’s concept of natural rights, including the right to life, liberty, and property, became cornerstones of the Declaration of Independence. The Constitution further solidified these rights, establishing a sovereign government bound by law, responsible for securing its citizens from external threats and internal disorder. Yet, this security came with the implicit surrender of some freedoms – the acceptance of laws and regulations in exchange for collective protection.

The Threads of Freedom and Fairness: The struggle for freedom of speech, religion, and assembly echoed throughout history, informing the American tapestry. Inspired by Enlightenment thinkers like Voltaire and Montesquieu, the Bill of Rights guaranteed these essential liberties, recognizing their vital role in fostering individual expression and preventing the rise of oppressive regimes. This thread, however, remains in constant tension with the need for order and public safety, demanding ongoing negotiation and refinement.

The Threads of Equality and Justice: The ideals of equal justice and the right to rebel under tyranny were threads woven from the experiences of diverse groups seeking freedom and opportunity. The Declaration’s bold assertion that “all men are created equal” laid the foundation for the long and arduous struggle towards a more just society. However, reality often fell short of the ideal, requiring continuous efforts to strengthen this thread and ensure equal protection under the law for all.

The Threads of Individualism and Collective Responsibility: The concept of a commonwealth, where individuals contribute to the greater good, was present in the writings of Thomas Paine and others. This thread intertwines with the emphasis on individual responsibility, acknowledging that individual freedoms thrive within a framework of shared values and civic participation. The social contract demands active citizenship, not just the passive enjoyment of benefits, reminding us that our individual choices and actions contribute to the well-being of the whole.

Balance

However, no relationship is without its trade-offs. Our adherence to the social contract demands we surrender some individual freedoms for the collective good. We accept taxation, regulations, and limitations on personal behavior in exchange for stability and shared benefits. Striking the right balance between individual liberty and collective responsibility is a constant negotiation, a dynamic tension that defines the evolution of societies.

The danger arises when governments overstep their bounds, violating the implicit trust of the social contract. Excessive surveillance, regulation, taxation, unchecked power, or policies that disregard the needs of the citizens chip away at this unwritten agreement. When the perceived benefits of the contract no longer outweigh the sacrifices, social unrest and a breakdown of order can occur.

“Any government powerful enough to give you everything you want is strong enough to take everything you have” attributed to Thomas Jefferson

Maintaining a healthy social contract demands constant vigilance and active participation. We must understand our rights and responsibilities, holding our governments accountable for fulfilling their obligations and maintaining our individual liberties.

Civic Duties

So, the next time you pay taxes, vote in an election, or simply follow the rules of the road, remember, you are participating in a grand experiment known as a social contract, about the terms of our shared existence. The social contract, though woven from unspoken threads, forms the very fabric of our civilization, and its continued strength depends on our collective awareness and engagement. At the Tax Project we believe that all citizens should be participants in this intricate fabric, ensuring the tapestry of America remains vibrant and strong and that what the government provides, how we are taxed, and regulated, and the freedoms we give up in exchange should be open and transparent to all and be conscious decisions of every Citizen. The Social Contract hinges on citizens understanding our Tax system and supporting responsible policies to ensure this cornerstone of American society remains viable and thrives.

The Unwritten Pact: Exploring the Social Contract in Modern Times

From Loophole Buster to Middle Class Menace: The Rise of AMT

1969. A year of moon landings, Woodstock, Tie Dye, the Summer of Love, Vietnam War protests, and less glamorously, the birth of the Alternative Minimum Tax (AMT). What began as a narrow measure to prevent a handful of very wealthy individuals from exploiting tax loopholes has morphed into a complex beast, ensnaring millions of taxpayers, including the middle class.

 Born from Inequality

Imagine a world where billionaires could legally reduce their taxable income to zero – that is what sparked the AMT’s creation (Sound familiar?6). Congress, alarmed by reports of such tactics (In 1969!), devised this parallel tax system with stricter deductions and exemptions, aiming to ensure high earners paid their “fair share.”

 A Modest Beginning

Back then, the AMT targeted a tiny fraction of taxpayers – just 155 individuals in its first year1 making over $200,00 a year.4 It collected a mere $85 million, a drop in the ocean of federal revenue. Yet, it served its purpose, preventing blatant tax avoidance by the ultra-rich.

 The Unintended Creep

Fast forward to today. The AMT’s net has widened significantly, instead of the handful of extremely rich it is netting roughly 5 million taxpayers and is projected to catch 7 million by 2026 (See TCJA update). The culprit? Inflation and a lack of indexing. Unlike regular tax brackets, the AMT’s exemptions have not been adjusted for inflation, meaning increasingly middle-class Americans get swept up as their incomes rise with the cost of living. In 1969 when Congress passed AMT to today the Consumer Price Index from the Bureau of Labor and statistics based on annual inflation has risen a cumulative 900%. Which means a dollar in 1969 would be worth $9 today2.

The Price of “Fairness”

This unforeseen expansion creates a paradox. While the AMT still catches some high earners who game the system (or just follow what the law allows depending on your perspective), it now also burdens many individuals simply earning a decent living, and while well off, most do not consider themselves rich. For example, in contrast to those it was intended in 1969 making over $200K or over $1 million in current dollars, a family of 4 in San Francisco or New York making $250,000, while in the top 20th percentile of income, is by no means “rich” based on the cost of living in these areas and nowhere near the 1969 equivalent. This is especially true as many caught in AMT are wage earners that do not derive most of their income from investments, capital gains, or have businesses that have significant write offs. They face unexpected tax bills, negating deductions, and credits they otherwise may have relied on. This “invisible tax” can be financially devastating, pushing families into debt, and causing hardship for many in the middle class, and depriving them of wealth creation that can help them in their later years.

Overhead

While it did “catch” the very wealthy, it trapped what has become middle income (if upper middle) taxpayers in a much wider net. While roughly 5M million users are subject to AMT, 9.7M must calculate it even if they are not subjected to it.2 For these taxpayers they must calculate their taxes twice, once for their normal taxes and a second time for the AMT to determine the higher of the two. The Tax Foundation has estimated that this burden adds up to $4.6 billion on compliance overhead. 5

A Call for Reform

The unintended consequences of the AMT have ignited a debate. Critics argue it has become a regressive tax, disproportionately impacting the middle class for which it was never intended and undermining its original purpose of catching the very wealthy who were paying nothing. Some advocate for complete repeal, while others propose indexing adjustments and raising exemption levels. Members of both sides of the aisle including Bernie Sanders, and Ted Cruz have called for the complete elimination, while members like Hillary Clinton have proposed raising the limit significantly and adding a 2nd tier she refers to as the Buffet Rule for the Uber wealthy based on Warren Buffets calls for higher taxes on the very wealthy3. Many question the basic premise of AMT to begin with, the whole reason AMT exists is because of the maze of deductions in the Tax Code, especially available to business owners and higher net worth individuals. Congress enacted these for beneficial reasons, like economic incentives for growth or other areas the government wanted to incentivize. Having an alternate parallel tax system seems to defeat many of those incentives and calls into question why have all the incentives and complexity if you just turn around and create another level of complexity on top of it defeating the original purpose. Some might suggest this seems to be a fight between congress and itself.

Update: Tax Cuts and Jobs Act of 2017

Well, amazingly after almost 50 years, major changes to the AMT and good news came in 2017. Prior to the implementation of the Tax Cuts and Jobs Act of 2017 (TCJA), approximately 5 million taxpayers were impacted by AMT. The TCJA increased the AMT’s exemption and exemption phaseout through 2025, reducing the number of taxpayers subject to the AMT, to an estimated 200,000.3 While this has been great news, it is set to expire next year and if so, we will be right back where we started. Hopefully, congress will correct this and make it permanent before it expires next year.

Citation

1.      Bureau of Labor and Statistics (BLS) – Consumer Price Index (CPI) – annual inflation rate
https://www.bls.gov/cpi 

2.      Tax Foundation – Taxpayers subject to AMT
https://taxfoundation.org/blog/taxpayers-subject-alternative-minimum-tax/

3.      Tax Foundation – AMT Glossary
https://taxfoundation.org/taxedu/glossary/alternative-minimum-tax-amt/

4.      Tax Foundation – Background Individual AMT
https://taxfoundation.org/research/all/federal/backgrounder-individual-alternative-minimum-tax-amt/

5.      Tax Foundation – The Tax Cuts and Jobs Act Simplified the Tax Filing Process for Millions of Households https://taxfoundation.org/research/all/federal/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-americans/https://taxfoundation.org/research/all/federal/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-americans/

6.      Business Insider – Billionaires avoiding paying federal income tax
https://www.businessinsider.com/how-billionaires-avoid-paying-federal-income-tax-2021-6?op=1

From Loophole Buster to Middle Class Menace: The Rise of AMT

Tax Project Institute

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