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April 2017 Policy Study, Number 17-7


A Commentary on Property and Taxation


Part 10



This would probably be a good place to introduce you to a couple of those unsuspecting consumers.  Ladies and gentlemen, meet Gatsby Goodtimes and Joe Hardscrabble.  Well, you may already know them; but let me tell you a little about them anyway.


Mr. Goodtimes is the CEO of one of the companies we’ve been exploring.  Between his salary and the additional revenue he receives from stock in the company and his other investments, Mr. Goodtimes earns enough that, even after all the “progressive” taxes we’ve placed on him, he still has a take-home pay of $100,000to spend on his standard of living.


On the other hand, Old Joe Hardscrabble can only earn enough to take home $10,000, even though his share of these “progressive” income taxes is much less than that of Mr. Gatsby Goodtimes.  Well, so far this is looking perfectly awful.  Let me brighten you up a little bit.  Folks, this is no big deal.  Just remember that both of these gentlemen took home what they demanded for their services, and neither of these gentlemen felt the sting of their tax burden.  It was graciously picked up by the company and embedded into the cost of the product as a cost of labor.  And they lived happily ever after, right?  Well, maybe not.


(For the purpose of this illustration, we need to make some assumptions.  First, we are going to assume that both men spend their entire disposable income on consumption.  Old Joe would probably find this necessary in any case.  Gatsby probably wouldn’t, but he’s a fairly profligate individual and does so anyway.  Second, we need to choose a figure to represent the aggregate tax percentage that has accrued in the finished goods and services each will be purchasing.  Depending on what is included in the figure and who is doing the figuring, I have seen a good case made that this figure can be over 60 percent.  To avoid unnecessary argument and for ease of illustration, we will arbitrarily choose the figure of 50 percent to be imbedded in the cost of the final product.  Regardless of the rate we choose, the behavior of the principle illustrated will remain the same.)


The first thing you will notice is that we are using the same 50 percent rates for both men.  Because of the way our taxes work their way through the economic system (they aggregate and are embedded in the cost to the ultimate consumer), we have lost our sought-after progressivity.  Now that’s bad, right?


The second thing you will notice is that under our current system of taxation, we dunned Mr. Goodtimes for $50,000 ($100,000 x 50% = $50,000), and we dunned Old Joe for only $5,000 ($10,000 x 50% = $5,000).  Mr. Goodtimes was made to pay ten times as much as Old Joe.  Our sense of fairness convulses only slightly as we rationalize, “Joe can use the break; besides, Gatsby can afford it.”  So that’s good, right?  (An aside, in regard to the questions posed at the ends of the two prior paragraphs:  is the quest for progressive taxation the emanation of our sense of justice and fair play, or might it be the emergence of our envy?  This is left for you to ponder.)


The third thing that happens, and it is generally overlooked, is this:  both men are consumers, and as such there is no one left in the economic chain of events to which they can continue to pass the tax burden.  The tax bill has inevitably come due, and it most assuredly will be borne by each man, whether or not he has the slightest comprehension it is contained in the cost of the products and services he purchases.  The harsh reality is that while we may have taxed Mr. Gatsby Goodtimes $50,000, he has retained $50,000 of real, spendable income; and while we may have taxed Old Joe only $5,000, he has retained only $5,000 of real, spendable income.  Now, that is perfectly awful!  There is no question in my mind on this matter.


In a nutshell:  we have left our consumers, who were also producers, with less take-home pay because of the taxes withheld from the fruits of their labor.  And to add insult to injury, they have to pay a much higher price for their goods and services because of the large amount of tax that has been surreptitiously slipped into the cost of producing the goods and services they chose to consume.


Please don’t fail to recognize the significance of the prior paragraphs.  It is exactly the reason the rich get richer and the poor get poorer.  Because whatever tax rate we chose, and to whomever we chose to apply it on the income scale, is simply included in the cost of the retail product at the point of final sale.  The aggregate tax rate for all consumers is the same.  Because a higher percentage of Joe’s meager income is consumed supplying him with the necessities of life, and because a relatively lower percentage is used by Mr. Goodtimes for the same purpose, the tax causes relatively more harm to Joe than it does to Mr. Goodtimes.  And the greater the percentage of tax imposed by government, the greater the relative disparity in true spending power of their respective incomes.  Relatively speaking, Mr. Goodtimes becomes more affluent and Joe becomes less affluent.


Suppose an automaker could produce a very nice car for $10,000, and the government suddenly levied a $10,000 tax on every one of the cars that they produced.  The automaker says, “Well that’s fine with us; but now our cars are going to cost $20,000apiece.”  Who of us wouldn’t be up in arms?  The object of our rage would be the government which levied the tax, and rightly so.  What I’m suggesting to you is that this is indeed what is happening — albeit in bits and pieces at every stage of production, rather than in one fell swoop.  As things stand now, most of us are blissfully unaware of the actual impact of income tax, and our anger is wrongly directed at the producer of the product; in this case, the automaker.


It is my distinct impression that the more tax we introduce into the system through higher rates, even if it is with the express intention of obtaining it from Gatsby or big business and using it to help all the Joes of this country, the more we proportionally hurt those on the bottom rung of the economic ladder.  If you earn your keep by the sweat of your brow, you are going to assume the same aggregation of taxes that is included in a loaf of bread, a pair of shoes, blue jeans, or any other consumer item, at each step in the chain of economic production that Mr. Gatsby Goodtimes does.  The only alternatives to paying this tax are to steal or to beg, and currently we are seeing more of both every day in our present society.  And there is yet another effect that an income tax based on production will produce:


If direct taxes upon the wages of labour have not always occasioned a proportional rise in those wages, it is because they have generally occasioned a considerable fall in the demand for labour.  The declension of industry, the decrease of employment for the poor, the diminution of the annual produce of the land and labour of the country, have generally been the effects of such taxes.  In consequence of them, however, the price of labour must always be higher than it otherwise would have been in the actual state of the demand: and this enhancement of price, together with the profit of those who advance it, must always be finally paid by the landlords and customers.  (Emphasis added).  (Adam Smith, Book V, Chap II, Article 3d).


It is my sincere belief that the main and insidious purpose of this method of taxation that was chosen by “the state” is precisely the opportunity for obfuscation that it provides.  If the taxpayer were to actually comprehend his true level of taxation, he would refuse to comply.  This is the reality of how our tax system behaves.  It is also the reason that ALL tax schemes will ultimately be regressive.  The impact of this deception is that it allows government to grow to be much more powerful and pervasive in our lives than would otherwise be the case if the average taxpayer was aware of his ultimate tax burden.


Would that this was merely an economic problem; but the inexorable consequences of income tax are devastating to the sovereignty of the individual as well.  Income tax can be, and I believe is, used to control the individual by keeping him in a condition of economic dependency.  When you are in a condition of dependency, you are of necessity subservient.  This is why income tax is such an efficient tool to be used to modify the behavior of the individual.  You will get less of any given behavior if there is a tax penalty applied to it and more of that behavior if there is less of a tax penalty, no tax penalty, or even a positive reinforcement associated with that behavior.  This carrot and stick is used to mold your behavior.  It is social engineering, pure and simple. 


Let’s revisit Old Joe Hardscrabble once more before we leave this section.  Old Joe is taxed at his source of income.  All of the goods and services are priced well above what they would be without the taxes which are embedded in them, including his food and housing.  It seems everything is priced beyond Joe’s ability to obtain it.  In his desperation to feed and house his family, Joe turns to his rich uncle, Uncle Sam, for help in the form of food stamps and housing assistance.  Joe has just been hooked.  Joe will jump through all the hoops he’s asked to.  If his family needs ADC (aid to dependent children) and Joe needs to be out of the house for his children to qualify as dependent, Joe will even move away from his family.  The homage Joe must pay, and will continue to pay, to maintain his family is to cast a vote for a system that, in large measure, has created his problem to begin with.


I have been told that income tax is a voluntary self-assessment on my income, and so it is.  (Those of you that believe that it works this way in reality might want to check into the purchase of some prime real estate with an ocean view I have for sale in Kansas.)  With the way our tax laws are enforced, we all know there’s nothing voluntary about it.  Our application of the current income-tax system is an undisputed claim by government to any and all of the fruit of our labor.  We concede the point to government when we merely bargain with them on the matter of what the tax rate will be and on whom and on what items it will be levied. 


The point that should be opened for debate is whether the government has the authority, a real, undisputed claim, to seize (read “confiscate”) the fruit of our labor when it is over and above our objection.  Without a real and educated choice as to what part of the fruit of your labor you are voluntarily willing to use to support your government, you are not merely subservient to, but are at the mercy of, that government.  The question isn’t whether our government has the constitutional authority to tax its citizens, but rather, “Will that government abide by the originally established constitutional authority, and will it be honest and forthright with its citizens when it exercises that authority?”




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