Transfer Machine
By
John
Stossel January/February 2010 Volume: 60 Issue: 1
The government who robs Peter to pay Paul can always depend on the
support of Paul, George Bernard Shaw once said.
For a socialist Shaw demonstrated good sense with that quotation.
Unfortunately, America has become a laboratory in which his hypothesis is
being tested.
The theory of government I was taught says that government provides
benefits, primarily security, to the entire population. In return we pay
taxes. But lately the government has been a distributor of special
privileges, taking money from some and giving it to others. America is
now about evenly split between those who pay income taxes and those who
consume them.
The Urban-Brookings Tax Policy Center
recently disclosed that close to half of all households will pay no
income tax this year. Some will pay less than zerothat is, theyll get
money from those of us who do pay taxes.
The Tax Policy Center adds that this year the average income-tax rate for
the bottom 40 percent of earners will be negative and that their cash
subsidy will equal 10 percent of the total amount the income tax brings
in, thanks to the Earned Income Tax Credit and President Obamas Making
Work Pay program.
The view from the top also shows the lopsidedness of the tax system. The
top 20 percent of earners make about 53 percent of the income in America
but pay 91 percent of the income tax. The top 1 percent pay 36 percent.
The IRS says the bottom half of earners pay less than 3 percent.
How the Other Half Votes
This presents a serious problem because government has such vast
powers to dispense favors. As Shaw suggested, people who pay no tax will
not hesitate to vote for politicians who promise big spending. Why not?
They will get stuff without having to pay for it.
Yes, working people who pay no income tax still pay taxes: sales tax and
payroll (Social Security and Medicare) taxes. But the income tax is big
and visible, so its a problem that a growing number of people dont pay
but get benefits from those who do.
Frédéric Bastiat, the great nineteenth-century French economist, defined
the State as that great fiction by which everyone tries to live at the
expense of everyone else. I dont know if he envisioned one half of the
population living off the other half.
Its important not to confuse the interests of the taxpayers with the
interests of the politicians and other tax consumers. Yet that is done
all the time. When the government bought toxic assets (of zero market
value) from the banks, it said taxpayers would profit when the economy
recovered and the assets once again commanded a positive price in the
market. Even if we make the dubious assumption that the government is
savvy enough to buy low and sell high, its not the taxpayers who would
benefit from any profits. The politicians will spend every penny rather
than cut taxes.
To put it bluntly, we are not the government.
The built-in unfairness of the tax system has prompted a range of
tax-reform proposals, such as a flat tax and replacing the income tax
with a sales tax. These alternatives are better, but they have their
drawbacks, too. For that reason, there is something more urgent than tax
reform: spending reform.
The true burden of government, the late Milton Friedman said, is not the
tax level but the spending level. Taxation is just one way for the
government to get money. The other waysborrowing and inflationare also
burdens on the people. The best way to lighten the tax burden is to
lessen the spending burden. If government spends less, it takes less. And
if it takes less, the tax system will weigh less heavily on us
all.
Once again, we find wisdom in Adam Smith: Little else is requisite to
carry a state to the highest degree of opulence from the lowest barbarism
but peace, easy taxes, and a tolerable administration of justice: all the
rest being brought about by the natural course of things.
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