At the founding of this country, Benjamin Franklin said that despite the promise that the new Constitution would endure, only two things could truly be certain in the newly United States of America: death and taxes.
The death rate continues to hold at 100 percent, as The Onion once entertainingly reported. But for about half of the country, taxes – or at least federal income taxes – have disappeared.
Recently, the self-proclaimed 53 percent movement has gained the media’s attention. The movement’s name, intended as a contrast to Occupy Wall Street’s “99 percent,” is based on Congressional Budget Office data showing that, after credits, 47 percent of Americans owed no income tax in 2009, leaving the remaining 53 percent to carry the burden of supplying the country’s revenue.
That 53-percent figure came under attack long before the first “We are the 53 percent” sign appeared. Critics point out that payroll taxes, as well as state and local taxes, are not accounted for in the 53-47 divide. Including all federal taxes, only about 10 percent of households pay nothing, according to New York Times columnist David Leonhardt.
Of course, Social Security and Medicare payments are supposedly contributions toward future personal benefits, sometimes described this way in the same breath that they are described as “social insurance,” and not Ponzi schemes. Cutting through this self-contradictory logic, the truth is that most people who pay Social Security and Medicare taxes expect to receive far more in future benefits than they will ever contribute.
Setting aside quibbles about statistics, however, it is obvious that large segments of the population have become accustomed to paying less into the government than they get out of it. A record 49 percent of Americans now live in a household where someone is getting at least one form of government benefit, according to data from the U.S. Census Bureau. That number will only increase as the average age of the population does. Every day 10,000 Americans celebrate their 62nd birthdays, marking their entrance into the ranks of those eligible for Social Security, Bloomberg recently reported.
On its own, this trend is bad enough. It is a recipe that is sure to produce more and more debt. There is, however, an even deeper problem. All the benefit-receiving non-taxpayers are also voters. As more people receive benefits, a larger segment of the electorate gains a stake in keeping those benefit programs going. At the same time, as fewer people pay taxes, fewer voters have a personal interest in considering the costs of those benefits.
A democratic society can choose to make its government as big or as small as it wants. It can choose to collect minimal taxes in exchange for minimal services, or it can subsidize many of its citizens’ wants, as well as their needs, providing funding for things like health care, the arts, transportation, education and retirement. In the second case, people need to be willing to pay for all those services in the form of much higher taxes.
The problem with our current system is that too many people believe benefits can increase indefinitely while relying on that conveniently vague entity, “the rich,” to support those programs. Unfortunately, there isn’t actually any magical fountain of unlimited cash. Eventually “the rich,” actually an assortment of individuals and small business owners, are tapped out, while the incentives for individuals with talent and initiative to become rich – as opposed to, say, taking less economically productive jobs in government, academia or the non-profit sector – disappear.
As I have written here before, as the owner of a successful and well-established business, I’m one of the “rich” people who gets targeted for tax hikes, and I’m willing so see my taxes go up – if yours do, too. If we want prudent management of our national budget, the key issue is not the level of tax rates, but the number of people who feel they have a stake in the costs, as well as the benefits, of their government. That’s the only way a democratic society can come to a rational balance between those costs and benefits.
This philosophy is embedded in the various flat- or flatter-tax proposals bandied about by Republican presidential candidates. A flatter tax system would not be essential, however, to produce some reasonable balance. Democrats who want to raise taxes on the rich and who oppose flatter rate structures could get their wish simply by blocking all legislation to extend the Bush-era tax rates that expire at the end of 2012. But those same Democrats, by and large, are the ones arguing that vast swaths of the population should pay no federal income tax at all, while a growing share use their government as an endless ATM. The Democrats’ approach largely undoes the welfare reforms that President Clinton signed in the 1990s, while avoiding the politically unpalatable term “welfare.”
It is conceivable that, after facing the true costs of government services, middle-class Americans could decide that they are worth the price and start happily forking over substantial portions of their incomes. More likely, however, there would be an immediate wave of sticker shock and we would, as a country, start racing to put some of our priciest purchases back on the shelves.
Even if taxes are no longer a certainty, one thing is: In the end, you always get what you pay for.
Larry M. Elkin, CPA, CFP®, president of Palisades Hudson Financial Group a fee-only financial planning firm headquartered in Scarsdale, NY. The firm offers estate planning, insurance consulting, trust planning, cross-border planning, business valuation, family office and business management, executive financial planning, and tax services. Its sister firm, Palisades Hudson Asset Management, is an independent investment advisor with about $950 million under management. Branch offices are in Atlanta and Ft. Lauderdale. Website:www.palisadeshudson.com.