Taxation and Democracy -- the Deviousness of George Skelton

George Skelton, the Los Angeles Times political columnist in Sacramento, has raised the question of whether, especially in these hard times, public employees get too much in the way of salary and benefits. (June3,2008 issue.) In so doing he subtly suggests they do. Skelton also wrote a column (May 5, 2008) on taxes as a solution to the State budget crisis in which he says “Least stable is an income tax system that depends too heavily on the wealthy. Their incomes rise and fall steeply with the economy -- and therefore so do state budget deficits. In 2005, million-dollar earners comprised only one-third of 1% of all taxpayers but paid 36.5% of the income tax.” Putting these two statements together we get the hackneyed pit-classes-of-working-people-against-each-other conservative approach to fiscal problems. This time it goes to the ludicrous extreme of saying the rich should not be fairly taxed because their radically varying income is not a stable base for taxation. Presumably the middle and poorer classes of citizens whose income consists mainly of regularly taxed and reported salaries should bear the brunt of taxation. Furthermore, he offers the typically deceptive statement that “…million-dollar earners comprised only one-third of 1% of all taxpayers but paid 36.5% of the income tax.” without indicating what proportion they had of the total income. This is the point of the well known story about Bill Gates greatly increasing the average wealth of customers at a bar the moment he walked in. This kind of dishonesty permeates our consideration of one of the most important democratic issues, namely, a basic society-wide economic equity.

Every once in a while citizens get fed up with this gross and continuing inequity and force legislators to do something. Usually the response is to fix a particularly glaring tax loophole. This band aid approach to tax fairness has contributed to a massive wealth and income disparity between the rich and the poor not seen since the end of the 19^th century. In what follows I want to offer a few suggestions on what should be done to correct this staggering imbalance.

First, there is a profound need to establish the basis for a tax system. I suggest that in a democracy that basis is the welfare of society as a whole. That welfare should define all other tax values such as fairness. That welfare requires that the distribution of wealth not be so disparate that democracy cannot function. Conventionally the tax basis has been some form of fairness, violated though it may be. This is, for example, the basis for our income tax system or our sales tax in which the monetary value of an item stipulates the amount of tax paid, unless the tax is being used for some other purpose, e.g. to reduce tobacco use. I think the tax system must be more firmly rooted than this because “fairness” can be variously defined, e.g. “It is fair that a person keep all the wealth he/she has managed to acquire,” or “It is fair that parents pass on all their wealth to their progeny.” This sense of fairness is deadly to a democracy. Taxes are essential to our democracy; without them we would have a society of the rich and the poor in which a democracy cannot exist. In the capitalist system wealth is better positioned to acquire more wealth than is the absence of wealth. Wealth thus inevitably becomes concentrated in the hands of a few and wealth is power. This being the case it is necessary to redistribute a portion of the gross national product to those with less income to insure the continuance of democracy. Our method for doing this is taxation. The wealthy, because of their economic and hence political power are continually contriving ways to avoid paying taxes. What is needed is an ongoing strategy for capturing taxes with the assurance and regularity that we exercise with worker salaries.

The tax system is already rigged in favor of the rich. My wife and I recently got a taste of this when we sold some property we had held for twenty years. Our profit was taxed at only 15% instead of the 28% we were accustomed to pay on our salaried earnings. Additionally the wealthy have a variety of ways of earning income, stock options, government subsidies, depletion allowances for extracting oil and minerals from public land (Notice, the worker can not depreciate his body, his only asset, as he ages.) and hiding income in the Cayman Islands.

I want now to suggest a way a vast amount of wealth, which is not now taxed, can be. It is called the Tobin Tax in recognition of James Tobin, an economist, who first proposed it. It is, like the sales tax and the value added tax, a transaction tax. Tobin was concerned with ameliorating the gross imbalance of wealth between the northern and southern halves of our planet. He was impressed with the billions of dollars that flow 24/7 around the globe. This is an enormous quantity of fiscal transactions. If these transactions could be taxed a small amount billions of dollars could be transferred to the poorest areas of our planet. The wealthy may hide their money in the Cayman Islands or disguise it in other forms of transactions, but increasing their wealth requires fiscal transactions. These are almost always electronic and the transactions themselves must be noted. Even money laundering requires a transaction. The importance of this source of revenue is further evidenced by the fact that the financial segment of our annual gross domestic product has replaced manufacturing as the predominant segment. Finance is now our major “industry.” A Tobin tax in California would do much to level out the tax contribution of the wealthy that Skelton is concerned about.

While taxation may seem a dull subject, its crucial role in protecting our democracy should be a focus of progressive thinking and action.

Bob Newhard