Apr 9, 2024

Death and Taxes

Benjamin Franklin, America’s polymath extraordinaire, is credited with uttering one of history’s most famous – and perhaps least celebrated quotes:

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except Death and Taxes.”
Benjamin Franklin

While the sentiment might lack inspirational flair, its truth has only become more evident over time.

Certainty not Doom

There are certain givens in life, the Sun will rise tomorrow, the tide will continue to roll in. However, in Cosmic time even these may not be true. Death however, is the inevitable end and hangs over all of us. Taxes, while certainly less dramatic, are just as inescapable. While certainly Death is a morbid topic, Franklin’s quote was meant to project certainty and stability into a young nation with a sense of optimism for our future, and not foreshadow a pending doom. Taxes are the lifeblood of any functioning society, funding essential services like infrastructure, education, and national defense.

Civic Duty

Let’s dispel these notions and explore the true meaning of Franklin’s words in the context of responsible citizenship. The idea that taxes are a grudge, a forced purchase, something to be minimized or evaded at all costs, disregards the fundamental social contract that binds us together. We live in a civil society, a complex organism that relies on a shared investment for its well-being. Roads, schools, hospitals – these aren’t built and maintained by magic. They require resources, and those resources come from the collective contributions of its citizens – in the form of taxes.

This doesn’t mean there isn’t room for debate. Tax policy is a complex beast, and there’s always a conversation to be had about fairness, efficiency, and how tax dollars are spent. At the Tax Project Institute, a non-profit dedicated to Civic Education and Fiscal Responsibility, is committed to promoting transparency and openness in tax policy. We believe a well-informed citizenry is essential for a healthy democracy.

Here’s the key takeaway: we all have the legal right, and even the moral obligation, to minimize our tax burden through legitimate means. Deductions, tax breaks, and strategic financial planning are all part of responsible financial management. But this right exists within a larger framework of civic duty. Taxes are the mechanism that builds and maintains our society. By contributing our part, regardless of how large or small, we make investments in our future that benefits us all, creating a more secure, prosperous, and livable environment and everyone in Society plays a role.

Franklin’s quote isn’t meant to be a harbinger of doom. Quite the opposite, it’s a reminder of life’s realities and the framework within which we operate and his hope for a more perfect future for our Nation. Taxes might not be glamorous, but they are a cornerstone of a thriving nation. The Tax Project Institute advocates for a tax system that is transparent, open, efficient, and promotes economic prosperity. But ultimately, it’s up to each citizen to embrace their Civic responsibility and contribute to the collective good.

Misinformation and Bad Advice

Yet, in the age of social media and misinformation, myths about taxes being optional or somehow avoidable have begun to spread³. As we approach Tax day, misinformation, bad advice, scams, and outright false hoods abound and appear to be on the rise. The IRS often puts out guidance to beware of such dubious information and schemes each year (Advisory)¹. Increasingly, in our hyper partisan Nation, trust in traditional media is on a serious decline, and more and more people are turning to alternative channels and social media as their primary news sources. In fact, many now believe that they are being misled by traditional media². In many cases, you can find valid, and fact-based data, often not covered in traditional media, but you are also likely to encounter questionable to outright false information. Use your best judgement, be skeptical, and discerning, and know no matter how much we want it to be true, our obligations as citizens do not leave us until Death. So, the next time you pay your taxes, you don’t have to love them, you don’t have to like them, but know that it is an investment in the future – your future, and future generations of our nation we all share.

Citation

“Death and Taxes”: A Citizen’s Responsibility in a Thriving Nation

Behavioral Taxes: Essential Services vs. Behavior Shaping

Apr 6, 2024

Taxes fund the essential services of society; education, infrastructure, public safety, defense – all things that underpin our daily lives. These programs aren’t discretionary in an ordered and civil society, and are not easily replicated as individuals or small groups; they’re the supports for our well-being, just like a foundation of a building. A strong society needs a sturdy foundation, and similarly, we shouldn’t take government services for granted. Paying taxes is our contribution to the collective good, ensuring a safe and civilized society.

Evolving Tax Landscape

However, the tax landscape is evolving from taxes that support general purpose basics that serve all citizens as public services to some focusing on specific behaviors¹. Tax levies on things like soda, cigarettes, alcohol, single-use bags, gambling, recyclable packaged goods, luxury goods, disposable items, etc. These taxes have a dual purpose: generating revenue and influencing behavior by making certain options less attractive. This raises a critical question: how do we balance the need for essential services funded by traditional taxes with the potential infringement on personal freedoms associated with behavioral taxes and who gets to decide? A fundamental question at the basis of the Social Contracts that form the basis of each country’s constitution (see article on Social Contracts).

Correcting Negative Externalities vs Directing Behaviors

A British Economist named Arthur Pigou described in The Economics of Welfare² that markets don’t always optimally allocate resources on their own. These “negative externalities” that the market does not include in the price, like a factory polluting a river, don’t cover the cost of the negative health outcomes that may be born from the manufacture and sale of these goods. Hence the term later applied “Pigouvian taxes” illustrate this tension perfectly. Therefore Pigouvian taxes designed to address negative externalities make producers pay for the societal costs of them through taxation, like the aforementioned pollution. While they promote public good, they do so by using the market to influence individual behavior through price changes and market forces. Pigouvian taxes and Behavioral taxes often act the same, by using price and tax mechanisms to influence behavior. However, unlike Pigouvian taxes where you may be able to draw a clear line between correcting for negative externalities like Climate Change by charging a Carbon Tax, behavioral taxes like the Soda tax put into question the government’s role versus individual liberties. It can be said that for example soda leads to weight gain and a higher risk of diabetes, and other health issues and that those increase the cost of healthcare to all, therefore the government has a role in incenting you to stay healthy. However, is this tax really correcting a negative externality or incenting a behavior alone? There is little evidence in cities like Philadelphia that the revenue generated from the soda tax is used to correct the negative externalities by investing in greater health outcomes for soda drinkers³, but to raise general fund revenue for the city. If you want to eat Bacon and Eggs, and smoke three packs of cigarettes, near no one else, a day, while it may not be the best life choices, if you’re paying your own healthcare costs and these choices bring you joy then should the individual be able to make that choice, good or bad?

Choice and Two Tiered Societies

This raises concerns about individual freedom and a potential two-tiered society where only the wealthy can afford certain “vices.” So while some Behavioral taxes are Pigouvian taxes attempting to correct, and direct funds to remediate negative externalities, others are clearly not and just designed to incent behaviors and raise revenue. These types of taxes clearly incent folks economically, potentially limiting choices individuals would make naturally. While we may be doing good, we should question if that is something we wish to regulate ourselves on. Not only does it regulate choice, but most of these behavioral taxes are highly regressive. Soda taxes, Cigarette taxes, Alcohol taxes all have higher impacts on those on the lower social economic scale, impacting a larger percentage of their income. Do we want to create a society where only wealthy people get to choose their vice while everyone else is effectively economically locked out, or should everyone be able to choose the type of drink they want, the bag they want to use, if they want a straw for their drink, etc.

The Sweet Spot

The heart of the issue lies in finding the sweet spot between government intervention and individual liberty. It’s a balancing act. On one side sits the government’s role to promote public health and well-being, while the other represents our individual rights and freedoms. Behavioral taxes aren’t meant to be a direct attack on our choices. They’re designed to “nudge” us towards healthier or more sustainable options. Imagine a parent encouraging their child to eat fruit by making vegetables less appealing – that’s the basic idea. Behavioral taxes aim to make the less desirable option less attractive.

However, the potential for a two-tiered society is a valid concern. When only the wealthy can comfortably afford a sugary drink, it creates an equity issue. The challenge is designing these taxes effectively without disproportionately burdening lower-income individuals. Solutions like using tax revenue to subsidize healthier alternatives can ensure that everyone has access to better choices, not just those who can afford them.

Optimally, we want to create an environment where healthy and sustainable choices are the most attractive option for everyone, but through their own choice. It’s not about imposing a nanny state, but about gently guiding society towards a better future. As we navigate this complex landscape, careful consideration is crucial. Behavioral taxes should be implemented with a keen eye on their broader impact. Only we as individuals can strike the right balance between funding essential services and safeguarding our individual liberties.

Citations:

Behavioral Taxes: Essential Services vs. Behavior Shaping

Feb 12, 2024

Taxation, often seen as unavoidable, is more an art form than a mere financial obligation. It is a delicate balance between funding government operations and not overburdening the taxpayers.

“The art of taxation is the art of plucking the goose so as to get the most feathers with the least hissing.” Jean-Baptiste Colbert

This concept was famously summed up by Jean-Baptiste Colbert, who knew that taxation was the art of collecting the most taxes while minimizing the complaints over taxation.¹ This analogy is more relevant today than ever, especially when considering the U.S. tax system’s complexity and its relationship with citizens.

The challenge lies in the inherent tension between the need for the government to collect taxes to fund public services and the natural desire of individuals and businesses to minimize their tax liabilities. Tax policies must be designed to be fair, efficient, and effective, encouraging compliance while discouraging evasion and avoidance. This balance is precarious, and tipping too far in one direction can lead to dissatisfaction, economic distortion, or both.

The Challenge of Taxation

How to solve Unlimited Wants with Finite Means

Jean-Baptiste Colbert, serving as the Finance Minister under King Louis XIV of France, revolutionized the way we think about taxation.¹ His philosophy emphasized the importance of a tax system that is as painless as possible for the taxpayer while still being effective in meeting the needs of the state. His approach underlines today’s tax policies, aiming for a system that extracts necessary resources without stifling economic growth or public contentment.

US Tax Code

The U.S. tax code, a labyrinth of rules and regulations, is a testament to the complexity and intricacy of modern taxation. It is akin to a vast, sprawling metropolis, where every street, building, and alleyway has been meticulously planned, yet can still confound those navigating it without a map. This complexity arises from the need to address a multitude of scenarios, ensuring fairness across diverse economic situations.

Taxation in the U.S. embodies a symbiotic relationship between the government and its citizens. As with the ebb and flow of a river, so goes our taxes. Over various periods of time we have expected our government to provide more or less services and that balance of what the government provides, and what individuals provide creates the basis for the Social Contract (See our article: Social Contract). It is a partnership where individuals and businesses give up some of their freedoms and liberties to live in a society fueled by their taxes that provide the public services everyone relies on, from roads and schools to national defense and social welfare programs. This relationship requires trust and transparency, where taxpayers comply with their obligations, believing in the effective use of their contributions.

The Art of Taxation

The “art” of taxation, therefore, lies in crafting policies that achieve the delicate balance of maximizing revenue without discouraging economic activity or provoking widespread discontent. It is about understanding the psychology of taxpayers, employing strategies that encourage voluntary compliance, and designing a tax system that is perceived by citizens as fair and just.

A Model used by economists called the Laffer Curve² is a U-shaped curve that shows the relationship between tax rate and tax revenue. If you tax someone nothing and move the tax up to 1% people will continue to work and revenue will rise. As rates on taxes rise, revenue continues to rise until the rates reach a point where rates are too high. The curve begins to bend before plateauing and people begin actively avoiding paying taxes (through legal and illegal means). After it plateaus, revenue begins to drop and people are both actively avoiding taxes, and at a certain point dropping out of the workforce as it is no longer worthwhile. For example, if you were taxed at 100%, would you work? Obviously not, as there would be no reward for your labor, and the model reflects that knowing that people will stop working well before 100%.

The art of taxation is akin to weaving a complex tapestry, where each thread represents a different tax rule or policy, and the goal is to create a harmonious and functional whole. It requires a deep understanding of economics, sociology, and human psychology, like Colbert’s approach centuries ago, proving that while the tools and context may have evolved, the underlying principles of effective taxation remain timeless.

Citations

Brittannica Jean Baptiste Colbert
https://www.britannica.com/biography/Jean-Baptiste-Colbert
Laffer Curve
https://en.wikipedia.org/wiki/Laffer_curve

Tax Project Insitute Resouces

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Freedom of Information is the Oxygen of Democracy

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About Us

Death and Taxes

Certainty not Doom

Civic Duty

Misinformation and Bad Advice

“Death and Taxes”: A Citizen’s Responsibility in a Thriving Nation

Evolving Tax Landscape

Correcting Negative Externalities vs Directing Behaviors

Choice and Two Tiered Societies

The Sweet Spot

Citations:

Behavioral Taxes: Essential Services vs. Behavior Shaping

The Art of Taxation

Tax Project Insitute Resouces

We are a non-profit

Latest articles

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