The Biden Administration, along with the radicals in the Democrat Party, has been vigorously promoting the idea that the first principle of taxation is that everyone ought to pay their fair share which begs the question: What does fair share mean?
In short, the answer is that it depends on whom you ask. Every taxpayer, whether rich or poor, would naturally say as little as possible. Every tax collector would reply as much as is needed to cover government expenditures. Every member of Congress would proclaim with as much as necessary to meet the needs of their constituents. Every trader in stocks and bonds would answer whatever reduces uncertainty in financial markets.
President Biden would argue that as much as it will take to pass his multi-trillion dollar spending packages allowing for a generous amount of borrowing of funds through the Treasury and the Federal Reserve System, thereby adding to the public debt.
No economist or financial specialist can provide an answer to the question of what constitutes anyone’s fair share. Should it be the same rate for everyone across the board regardless of income? Should be the same for every taxpayer with the exception of those who live below the poverty line? Should it be progressively higher rate for those with higher incomes? Should it be a progressively higher marginal tax rate at higher income levels? Should some portion of everyone’s income be excluded so tax is paid only on the amount of taxable income? Should it be proportional to the benefits received from government? Other questions arise when attention changes from income tax, to capital gains tax, estate tax, death tax, corporate taxes, and import duties.
The reason why these questions are so difficult to address is that “your fair share” is a value-laden issue which depends on the values held by the very persons you ask. No economist or financial specialist can answer that question for all taxpayers except for her own self. What those professionals can do is give estimates as to the effects of any change in taxes would have on the economy Even then, they can only give you estimates, not hard data.
The final decision regarding “your fair share” rests with the people’s Congressional representatives who in representing the people represent their values as well, imperfectly for sure, but better than any other private or public group in a republic.
Higher taxes on personal and corporate incomes will increase tax evasion, on the incentive to not report all of your income. The latest guesstimate of the amount of income that is not reported, referred to as the underground economy, was $2 trillion in 2017 which if subjected to a tax rate of 25 percent amounts to a tax revenue loss of $500 billion a year, growing as the economy grows.
President Biden has said that his new increases in federal taxes on personal income and corporate profit will add $2.41trillion to federal revenues over 10 years. That’s $241 billion a year, and less than one-half the taxes lost through the underground economy. In other words, Biden could finance the improvements to the nation’s infrastructure without raising taxes by tightening the loophole on tax evasion. He could even squeeze into this huge spending package no deficit spending if he further close that loophole. Instead he had decided to borrow what he cannot raise through higher taxes.
The federal debt has increased every year over the last 70 years except FY 1951 and 1956 on the shaking argument, reinforced by professional economists, that it is better to borrow and maintain spending at a level consistent with the needs of the people rather than make provisions for reducing the public debt and cutting other spending. There are two kinds of debt: internal and external. Net interest payments on the $16.8 trillion public debt outstanding at the end of FY 2019 totaled $423 billion. Even before the very large Covid-19 induced increase in government deficit spending in FY 2020, wherein both the debt and interest payments have become much greater, the Treasury Department characterize these developments as “unsustainable”.
As Nobel Laureate Paul Samuelson observed in the first edition of his text issued in 1946 and used by millions of students of introductory economics for more than 40 years afterward, the internal debt is owed by and payable to Americans: “Paul receives what Peter loses.” While income inequality might not have been as great a concern then as it is today, the interest paid on the public debt today is the fastest growing expenditure in the federal budget. It follows that hidden in the total cost of Biden’s infrastructure spending is an increase in income inequality between the taxpaying class and the bondholding class.
The external debt is owed to foreign investors and the interest is payable by American taxpayers to those investors. Those investors have purchased those bonds as safe investments in a troubled world. Today, the external debt amounts to $7.119 trillion. At an interest rate of 2 percent American taxpayers are obligated to pay foreign holders of that debt $142 billion every year.
Over the years, the U.S securities held by Chinese and Japanese investors have grown to more than $1 trillion each. While the Japan is an U.S. ally, China is not. If Chinese investors begin to sell their holdings of U.S. treasuries, the price will drop, driving yields upward, and making it even more costly to borrow money across the board and inviting a recession. China with its holdings of treasuries can trigger a recession anytime it wants. What China would do with the cash from the sale of its holdings is a further problem.
What does the United States look like in the years ahead? It depends on where you cast your eyes. If you’re looking at what President Biden sees, it’s a prosperous and unified nation with good-paying union jobs from the reconstruction of bridges, tunnels, highways, air terminals, harbors, electric vehicles powered by wind and solar, and a government willing to step in and provide for the many needs and wants of the American people. If you’re looking elsewhere, it’s a divided nation with a deluge of immigrants from around the world competing for the available jobs, continual fighting over the content of the Bill of Rights, and a people strapped with ever-increasing interest payments on a public debt that has been used to give us everything we need and want.
Will it be a vision of a self-governing republic with a Creator who endowed all men and women with certain inalienable rights? Or something radically different?
Edward J. O’Boyle is a Senior Research Associate with Mayo Research Institute. He has offices in West Monroe, Lake Charles and New Orleans. He can be reached at 381-4002 or firstname.lastname@example.org.