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Bi-Weekly Discussion - How Should We Think About Taxes?

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Brian B.
Bi-Weekly Discussion - How Should We Think About Taxes?

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We're currently hosting our discussions at Café Walnut, near the corner of 7th & Walnut in Olde City, just across the street from Washington Square Park. The cafe's entrance is below street level down some stairs, which can be confusing if it's your first time. Our group meets in the large room upstairs.

Since we're using the cafe's space, they ask that each person attending the meetup at least purchase a drink or snack. Please don't bring any food or drinks from outside.

The cafe is fairly easy to get to if you're using public transit. With SEPTA, take the Market-Frankford Line & get off at the 5th Street Station (corner of 5th & Market), and walk 2 blocks south on 5th and then turn right on Walnut Street and walk 2 blocks west. With PATCO, just get off at the 9th-10th & Locust stop and walk 3 blocks east & 1 block north. For those who are driving, I'd suggest parking in the Washington Square parking deck at 249 S 6th Street which is just a half block away.

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HOW SHOULD WE THINK ABOUT TAXES?

INTRODUCTION:

In honor of Tax Day which is tomorrow - and we hope you’re done - we’ll be discussing tax policy. I swear, it’s actually more interesting than you think!

In this group discussion. we'll look at the perspectives that 4 different fields offer us on the issue of taxation:

PART 1:
In the first part of the discussion, we'll look at the moral & political philosophy of taxation and ask whether taxes are akin to "legalized theft" as anarchists claim, or rather a "civic duty" and "the price we pay for civilized society". Is there a "social contract" that requires us to pay taxes? If so, how much taxation is just?

We'll look at how the US Constitution's "Taxing & Spending Clause" allows Congress to levy taxes for 3 purposes only - to repay government debt, common defense & general welfare. But does debt rob future generations? Does "defense" justify foreign wars? Does "general welfare" justify redistribution or only public works?

We'll discuss the moral justifications for taxation, both for how the taxes are collected & how they're spent. These fall into roughly 7 categories:

  1. User Fee: people should pay for state infrastructure or services they use (e.g. toll roads, postal service)
  2. Value Capture (Georgism): people should pay for the "positive externalities" they get from the state's provision of public goods like infrastructure, law enforcement, education (e.g. land value tax)
  3. Social Cost Absorption: people should pay for "negative externalities" they impose on society (e.g. pollution taxes)
  4. Paternalism: the state should use taxes to deter immoral/harmful behavior (e.g. sin taxes, luxury taxes) and to promote moral/prudent behavior that people might neglect (e.g. social security, individual mandate)
  5. Redistribution (Rawlsianism): the rich should be taxed (e.g. estate tax) to help the poor
  6. Protectionism: imports should be taxed to protect domestic producers
  7. Keynesianism: a public emergency like a war or recession may require deficit spending financed by monetary expansion (i.e. inflation tax) and/or debt that must be repaid through future taxes

PART 2:
In the second part of the discussion, we'll discuss "optimal tax theory" from economics. We'll start by reviewing Adam Smith's 4 "canons of taxation" (equity, convenience, certainty, efficiency) and 5 additional "canons" suggested by later economists.

Then we'll look at the "deadweight loss" (loss of economic efficiency) incurred by different types of taxes, why land value taxes could theoretically have zero deadweight loss, and how "Pigouvian taxes" (taxes on negative externalities) could improve the economy.

We'll then cover the "Laffer Curve" which explains why tax cuts could theoretically pay for themselves but often don't, and "Hauser's Law" which helps explain why tax increases don't always bring in alot more revenue. These concepts will give us some insight into how the experts evaluate tax policies.

PART 3:
In the third part of our discussion, we'll look at the psychology of taxation and try to get a sense of how the average person thinks about taxes, and how this differs from the way moral philosopher & economists think. Research has uncovered 6 factors that influence individuals' perception of their tax burden and its effect on their economic decisions: (1) perception of marginal tax rates, (2) tax complexity, (3) tax (dis-)incentives to work, (4) tax salience, (5) tax morale & perceived fairness, and (6) perceived inflation & the "money illusion". These are important because public perception of taxes constrains tax policy in a democracy.

PART 4:
In the fourth section of the discussion, we'll take a political science approach and look at how tax bills are affected by the political process and how voters respond to tax hikes & cuts, as well as gov't spending hikes & cuts. We'll consider if "Wagner's Law" holds true - i.e. does state spending inevitably increase as people vote for more social services as general income levels rise. We'll also see if this trend tapers off or reverses if/when social solidarity decreases due to immigration.

We'll finish up by looking at what current polling tells us about Americans' tax preferences and how this might affect the electability of politicians running on high-tax & low-tax platforms.

RELEVANT MATERIAL FROM PAST MEETUPS:

Back in August of 2017, we had a meetup entitled "Classical Liberalism & Property Rights" and in Part 4 we addressed the question of whether taxation is "theft" and if not what can tax revenue legitimately be spent on - redistribution or only defense & public goods:
https://www.meetup.com/Philadelphia-Political-Agnostics/events/242037334/

In May of 2018, we had a meetup entitled "Does America Offer Equal Opportunity?" and the Intro section dealt with different ethical conceptions of equality & why some of them (notably John Rawls' "difference principle") justify taxation for economic redistribution:
https://www.meetup.com/Philadelphia-Political-Agnostics/events/xvbrznyxgbtb/

In February of 2018, we had a meetup entitled "Political Science & Political Myths", and in the 4th section we looked at Thomas Frank's argument that the white working class votes is tricked by Republicans into voting against its economic self-interest, such as cutting taxes for the rich. Many political scientists, notably Larry Bartels & Andrew Gelman, have disputed the details of Frank's account:
https://www.meetup.com/Philly-Skeptics/events/241726423/

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DIRECTIONS ON HOW TO PREPARE FOR OUR DISCUSSION:

The videos & articles you see linked below are intended to give you a basic overview of some of the major theories & debates over taxation. As usual, I certainly don't expect you to read all the articles & watch all the videos prior to attending our discussion. The easiest way to prepare for our discussion is to just watch the numbered videos linked under each section - the videos come to about 43 minutes total. The articles marked with asterisks are just there to supply additional details. You can browse and look at whichever ones you want, but don't worry - we'll cover the stuff you missed in our discussion.

In terms of the discussion format, my general idea is that we'll address the topics in the order presented here. I figure we'll spend about 30 minutes on each section.

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I. WHAT PHILOSOPHY CAN TELL US ABOUT THE MORALITY OF TAXATION:

  • IS ALL TAXATION "LEGALIZED THEFT" OR IS THERE A MINIMAL AMOUNT OF TAXATION THAT IS MORALLY ACCEPTABLE - EVEN OBLIGATORY AS A "CIVIC DUTY" TO HELP MAINTAIN LAW & ORDER?
  • DOES THE MORAL JUSTIFICATION DEPEND ON HOW TAX MONEY IS SPENT - I.E. ARE THERE SOME GOV'T ACTIVITIES THAT ARE SO IMMORAL THEY'D JUSTIFY TAX EVASION?
  • DOES THE MORAL JUSTIFICATION FOR TAXATION DEPEND ON HOW IT'S COLLECTED - I.E. ARE THERE SOME FORMS OF TAX THAT ARE INHERENTLY ILLEGITIMATE EVEN IF THEY'RE BEING SPENT ON WORTHY CAUSES?
  • ARE INDIRECT TAXES LIKE EXCISE TAXES & TARIFFS MORE FAIR SINCE WE CAN AVOID THEM BY NOT BUYING GOODS TO WHICH THEY'RE APPLIED?
  • IF INCOME TAXES ARE JUST, WHICH IS MORE FAIR: A FLAT TAX OR A PROGRESSIVE TAX?
  • WAS HENRY GEORGE RIGHT THAT A LAND VALUE TAX IS JUST BECAUSE WE ONLY HAVE RIGHT TO THE FRUIT OF OUR LABOR, NOT THE LAND ITSELF? SHOULD THIS TAX ALSO APPLY TO OTHER NATURAL RESOURCES (E.G. MINERAL & WATER RIGHTS, AIRSPACE, BANDWIDTH, ETC.)?
  • DOES THE "LOCKEAN PROVISO" OFFER A MORAL JUSTIFICATION OF A LAND VALUE TAX TO FUND A BASIC INCOME - I.E. DO WE OWE A GROUND RENT TO THOSE WITH NO PROPERTY?
  • DO WE OWE THE COMMUNITY TAXES FOR "NEGATIVE EXTERNALITIES" WE IMPOSE ON OTHERS - E.G. DO WE OWE A GAS TAX FOR THE NEGATIVE EFFECTS OF BURNING GASOLINE (I.E. POLLUTION, TRAFFIC, WEAR & TEAR ON PUBLIC ROADS)?
  • ARE "SIN TAXES" ON THINGS LIKE TOBACCO, ALCOHOL & GAMBLING JUSTIFIED AS TAXES ON NEGATIVE EXTERNALITIES, OR ARE THEY PATERNALISTIC INCURSIONS ON PERSONAL LIBERTIES?
  • IS ROBERT H. FRANK'S JUSTIFICATION FOR "LUXURY TAXES" VALID - I.E. THEY DISCOURAGE THE RICH FROM FLAUNTING THEIR WEALTH & SETTING OFF A VICIOUS CYCLE OF "KEEPING UP WITH THE JONESES"?
  • SHOULD TAX REVENUE ONLY BE SPENT ON NATIONAL DEFENSE, COURTS & POLICE OR DOES THE CONSTITUTION'S "GENERAL WELFARE" CLAUSE ALSO JUSTIFY PUBLIC WORKS (ROADS & TRANSIT, UTILITIES)?
  • DOES THE "GENERAL WELFARE" CLAUSE ALSO JUSTIFY TAXES TO FUND SOCIAL PROGRAMS (SCHOOLS, COUNSELING) & ANTI-POVERTY PROGRAMS (FOOD STAMPS, SECT. 8 HOUSING, MEDICARE)?
  • IS IT IMMORAL FOR A GOVERNMENT TO RUN BUDGET DEFICITS & INCREASE THE NATIONAL DEBT, WHICH WILL PUSH THE TAX BURDEN TO PAY FOR CURRENT SPENDING ONTO FUTURE GENERATIONS?

1a) Kezyma, "Taxation is theft. Or is it?" (video - 5:46 min.)
https://www.youtube.com/watch?v=EnQiANWh40E

1b) David Pakman, "Taxes Aren't Theft" (video - 10:18 min, start at 4:49)
https://www.youtube.com/watch?v=QUUtWJTPaEA&t=4m49s

II. WHAT ECONOMICS CAN TELL US ABOUT OPTIMAL TAX POLICY:

  • ARE ADAM SMITH'S "FOUR CANONS" (EQUITY, CERTAINTY, CONVENIENCE, EFFICIENCY) GOOD PRINCIPLES FOR EVALUATING TAXES? WHAT ABOUT THE OTHER FIVE "CANONS" (PRODUCTIVITY, ELASTICITY, SIMPLICITY, DIVERSITY, EXPEDIENCY)?
  • WHAT IS THE "DEADWEIGHT LOSS" (DWL) FROM TAXES? CAN WE RANK TAXES IN ORDER OF DECREASING DWL?
  • IS IT TRUE THAT AN UNIMPROVED LAND VALUE TAX WOULD HAVE ZERO DWL & WOULD CREATE A POSITIVE EXTERNALITY BY ENCOURAGING THE MOST PRODUCTIVE USE OF LAND?
  • ARE PIGOUVIAN TAXES A GOOD WAY TO DEAL WITH NEGATIVE EXTERNALITIES? IS THIS WHY ECONOMISTS FAVOR A CARBON TAX TO FIGHT CLIMATE CHANGE?
  • WHY DO SOME ECONOMISTS FAVOR REPLACING THE INCOME TAX WITH A NATIONAL SALES TAX OR "VALUE-ADDED TAX" (VAT)?
  • WHY DO SO MANY ECONOMISTS FAVOR ELIMINATING TAX DEDUCTIONS FOR MORTGAGE INTEREST & HEALTH INSURANCE?
  • IS THE "LAFFER CURVE" ACCURATE? IF SO, WHERE DOES IT BEND?
  • SHOULD THE GOVERNMENT TRY TO ACHIEVE THE MAXIMUM POSSIBLE TAX REVENUE? OR WOULD TAX RATES BELOW THE LAFFER CURVE'S PEAK MAXIMIZE GDP & BETTER SERVE GENERAL WELFARE?
  • IS “HAUSER'S LAW” VALID - I.E. DOES THE U.S. GOV'T ALWAYS TAKE IN ABOUT 20% OF GDP IN TAXES NO MATTER WHAT THE TAX RATE IS? IS THIS BECAUSE THE U.S. HASN'T INSTITUTED A VAT WHICH IS HARDER TO AVOID?

2a) Mary Black, "The Four Canons of Taxation" (video - 8:28 min, start at 0:50)
https://www.youtube.com/watch?v=uCxEhawnh8s&t=50s

2b) NPR Planet Money, "A Tax Plan That Economists Love (And Politicians Hate)" (podcast - 4:16 min)
https://www.npr.org/sections/money/2012/10/18/163106924/a-tax-plan-that-economists-love-and-politicians-hate

III. WHAT PSYCHOLOGY CAN TELL US ABOUT THE VIEWS OF THE AVERAGE TAXPAYER:

  • DO MOST PEOPLE VOTE ACCORDING TO THE "SELF-INTERESTED VOTER HYPOTHESIS" & TRY TO CUT THEIR TAXES? OR IS THE "TAX AFFINITY HYPOTHESIS" CORRECT - I.E. DO PEOPLE ENJOY PAYING TAXES WHEN THEY THINK IT SUPPORTS THEIR COMMUNITY?
  • DOES HIGH GOVERNMENT APPROVAL RATINGS INCREASE CITIZENS' WILLINGNESS TO PAY HIGHER TAXES & DECREASE TAX EVASION?
  • HOW DOES BELIEFS ABOUT THE PERCENTAGE OF CITIZENS THAT PAY TAXES AFFECT "TAX MORALE" - I.E. VOLUNTARY COMPLIANCE?
  • WHY DO VOTERS PERCEIVE CLOSING TAX LOOPHOLES AS PREVENTING "CHEATING" WHILE RAISING TAX RATES SEEMS UNFAIR?
  • WHY DO VOTERS TEND TO DISLIKE PROPERTY TAXES, EVEN THOUGH ECONOMISTS FAVOR THEM?
  • DO RICH PEOPLE IN THE U.S. INEVITABLY BEGIN TO FLEE STATES ONCE THEIR TAX BURDEN HITS A CERTAIN LEVEL?
  • WHY DO SOME SMALL TAX HIKES CAUSE TAX REVOLTS WHILE OTHER LARGER TAXES DON'T?
  • WHY DO MANY PEOPLE GET UPSET BY A SMALLER TAX REFUND EVEN IF IT MEANS THEY PAID LESS IN TAXES?

3a) SWI w/ Lars Feld, "Tax ethic: paying taxes is not just about money" (video - 6:18 min.)
https://www.youtube.com/watch?v=xLlhUfkBMI0

3b) Cheddar, "The Psychology Of Tax Refunds Is Costing Us" (video - 5:43 min.)
https://www.youtube.com/watch?v=5ehpkGg0JOc

IV. WHAT POLITICAL SCIENCE & CURRENT POLLING CAN TELL US ABOUT THE LIKELY DIRECTION OF TAX POLICY:

  • DOES "PUBLIC CHOICE THEORY" PREDICT THAT SUCCESSFUL POLITICIANS WILL TAX THE GENERAL PUBLIC & SPEND ON SPECIAL INTERESTS THAT SUPPORT THEM?
  • CAN "EVIDENCE-BASED POLICY MAKING" HELP WEED OUT UNPRODUCTIVE GOV'T PROGRAMS & FOCUS OUR TAX DOLLARS ON PROGRAMS THAT WORK?
  • IS "WAGNER'S LAW" EMPIRICALLY VALID - I.E. DOES GOV'T SPENDING IN A DEMOCRACY NATURALLY RISE WITH GDP DUE TO POPULAR PRESSURE FOR MORE SOCIAL SPENDING?
  • ARE DEMOCRACIES DOOMED TO BUDGET DEFICITS, RISING DEBT & AN EVENTUAL FISCAL CRISIS SINCE THE POPULACE INEVITABLY WANTS MORE GOV'T SPENDING THAN IT IS WILLING TO PAY FOR IN TAXES?
  • DOES INCREASES IN A SOCIETY'S ETHNIC/CULTURAL DIVERSITY REDUCE THE ELECTORATE'S WILLINGNESS TO PAY HIGH TAXES TO FUND SOCIAL WELFARE PROGRAMS?
  • DOES "HAUSER'S LAW" REIGN IN THE U.S. PARTLY BECAUSE LOBBYISTS INEVITABLY GET CONGRESS TO CREATE TAX LOOPHOLES?
  • CAN GOV'T GET THE PUBLIC TO AGREE TO HIGHER TAXES IF IT MEANS A LOWER STANDARD OF LIVING?

4a) Ben Powell, "Public Choice: Why Politicians Don't Cut Spending" (video - 2:19 min)
https://www.youtube.com/watch?v=6uR4lqa7IK4

4b) Evan Puschak, "Why So Much Tax Money Is Wasted" (video - 5:38 min.)
https://www.youtube.com/watch?v=MvC6kwU3zgA

XXX

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