Principles of Taxation: Fair or Foul?

Underlying every sovereign system of taxation are some ideas used to justify and support, in the context of that society’s sense of justice, public acceptance of the tax burdens imposed on them.

For example, in a dictatorship, such as Nazi Germany, Hitler created a public need, as well as hope, by sponsoring a war machine that promised to free all Germans of the economic shackles imposed on them after WWI.

That may have been a Keynesian scheme of extraordinary size and deception, intended to pull Germany out of its inflation-ravaged depression in the 1930s. It did succeed for a while in bringing the German economy back to vitality. But, it was, of course, doomed to fail, as all fraudulent schemes ultimately do. Along the way, however, the German people accepted the burden because the goal at the time seemed worth the cost. Not to mention their fear of the Gestapo if they did not pay.

Thank goodness none of that history applies today!

In democracies such as ours, where the will of the people has vastly more power than that of self-appointed leaders, public support for taxation is far more subtle and rests on a delicate foundation of trust. ‘The People’ have to see clearly that the uses of the tax burden are consistent with their view of the world, and they must believe that the tax burden is borne in a reasonably equitable way among all sectors of their society.

In our current political environment, both the benefit and equity of the tax burden are increasingly doubted. We are riven not only by a dispute over how taxes are spent, but also by dwindling confidence in the opaque and distorted political system that dictates the allocation of the tax burdens among classes. The issue is less “why so much” than “why so much for me, when my neighbor, who makes twice what I do, pays half as much.”

Oversimplified, our political world seems to be divided between people who insist on more defense and less social expense and people who insist that only social expenses are paramount. A similar division exists about who should carry the burden. The first group wants the masses to pay more; and the second group wants the privileged rich to pay more. “The People” simply want fairness and transparency, and, by wide margins, support both defense and social programs.

One might think the politicians could compromise and find some sort of common ground, particularly when that ground is shared by the people who elect them to office. They yet may, but the game plays on with a serious risk that our economy could go over the edge of sensibility in the process.

When one rethinks the methods of the distribution of the burden of taxation in today’s world, there are a couple ideas that have had little attention but which might have some real merit and warrant a closer look today.

There is talk about a large scale revamping of our tax system to make it fairer and more acceptable to many people. Most people think that is a worthy goal and favor it. But, until it has been revealed thoroughly, no one can know enough to place any reliance on what the outcome might look like. Some reform proposals (think ‘flat tax’) greatly simplify the tax code, but exacerbate the disproportionate share of taxes shouldered by middle- and lower-income households. Others simply create new wrongs to address particular grievances.

Our tax system has been built on a few basic principles. The first is progressivity, applied largely to income with the better off paying more than less well-off people. This is the heart of our existing tax code, with higher rates kicking in as incomes move up the scale. The second is transparency and simplicity of collection and enforcement, with clarity about how much different types of people pay. Third is a basic belief in a general sense of fairness.

Unfortunately as a tax system ages, it inevitably gets top heavy and unwieldy. And, as time passes, everything gets a coat of confusion, leading to a broad loss of confidence. Half a century ago, it was already so bad that the best advice at Harvard Law School about studying tax law was “do not try to understand it; just learn it.” It has gotten a lot worse in the intervening years.

Perhaps the most important goal in revamping our tax system should be a genuine clarity in purpose and principle. From this foundation and with a commitment to the minimum level of taxation sufficient for the purposes for which it is raised, the specifics of the kinds of taxes we assess and the question of who has to pay how much may become easier. Perhaps instead of starting from a progressive income tax system we might begin on a different basis:

  1. Transparency and simplicity of collection and enforcement can be enhanced by using more of a transaction and sales tax system.
  2. Fairness and equity in distribution of the burdens can be much more visible in such a system.
  3. And, progressivity can be built into such a system by having different rates at different and higher levels of the taxable events, or through other readily available mechanisms (exceptions, exemptions, tax credits, etc.).

The basic argument for moving away from an “income tax” is that the definitions and calculations are so fraught with interpretation and manipulation that they have lost relevance, not to mention the confidence of the tax-paying public.

We are all familiar with sales and transaction taxes and that they give rise to a lot less manipulation and confusion. We do have to remember as well, that whatever tax system we utilize, it exists in a shrinking world and we have to be very careful not to disadvantage our economy by making our products and services uncompetitive in global markets.

A system based primarily on sales and transaction taxes (not the complex value added ideas of the past) can accomplish a great deal in a relatively simple way. The idea, of course, needs to be tested by people with access to big, smart computers which sample and try many iterations of how to patch together a new system of taxes with progressivity on many types of transactions from sales of cars, clothing, entertainment, energy, financial transactions etc.

People should be able to see sharply and clearly how the different configurations would affect their situation and thus be able to reasonably and easily judge how a new system would affect them. If computer tax geniuses can find a formula that distributes the burdens reasonably compared to today’s distribution, and it overall raises enough revenue for the national budget, then we will all be better off for a long time with a durable and transparent system.

One is reminded, in considering whether this type of quite radical idea could really be achieved of the question a stranger asked a grizzled, old Mainer about how to get to some faraway place. The Mainer thought a moment and said: “You can’t get there from here!”

Yes — there is a lot of truth in that wisdom. But, do not forget we did get to the Moon and now Mars.

And, perhaps we had better try something a bit radical or we may slip further and sooner into an even bigger mess.

The Mother’s Brother

We need in today’s world, politically in particular, to reinvent the mother’s brother idea of more primitive times. It could not hurt anything and it just might help a lot of things.

Margaret Mead, one of America’s all-time great anthropologists, was among the first to observe an interesting relationship in families in a primitive society early in the 20th century. She found in many situations that male children often had a closer and more loving relationship with their uncle, who was their mother’s brother, than their own father. This was, on its face, a puzzle. If it had been only one or two such examples, it might simply have been idiosyncratic. But, it was so common that it was almost the rule. How come?

She bore in and began to discover that there was an interesting and basic reason. The father in that society was of necessity, a tough guy who had to hunt and fight in dangerous conditions and he had to train his son to be the same way. As a consequence he had to be demanding, a disciplinarian and quite tough on the boy to prepare him for life’s requirements. Funnily enough she also found that the uncle, the mother’s brother, was frequently just as tough and demanding on his own son as his brother-in-law, but at the same time the uncle was able to be the softer, kinder father figure to his nephew. The puzzle became even more interesting.

As she dug deeper into these stories she clarified the reasons for that puzzle. First, it is widely and well known that all sons badly need a father figure who loves, understands and cares deeply about them. Second, it turns out that kind of relationship is very often incompatible with a father’s need to be tough and a demanding disciplinarian. (Something like that exists between the Captain of a navy ship and his second in command.) Third, consequently it became a common practice to split the roles and have the uncle (most commonly the mother’s brother) be the loving good guy. The wonderful result is that a lot of those boys grew up very well-trained and also emotionally well-balanced because of the loving and supportive environment of their youth.

Why is this particularly interesting and relevant today, and does it have to always be an uncle? No is the short answer. But, it also is not likely to happen in common modern families’ practices and needs to be planned if it is to happen.

There is some of this tradition still at work in a few modern families, in that aunts and uncles in families can be an important relief valve for normal adolescent family tensions. Unfortunately, however, with the dispersion of American modern life, not enough of those relatives are geographically proximate enough to be of much use.

What is far less common is the functional equivalent of a mother’s brother for people in positions of significant responsibilities in professions, business and politics. The higher people rise in society with serious responsibilities, their ability to let their hair down becomes more and more limited because of legitimate concerns about gossip, backlash and fear of being misunderstood. The fact is people who rise in those ways still, as the old saying goes, pull on their skirts and trousers one leg at a time and though many observers often come to believe that they are omnipotent, they in most cases do have normal people’s doubts, fears and moments of anxiety, which they very often have to cope with pretty much alone.

That is where a relationship with someone who is beyond fear or favor and can be completely trusted to be discrete becomes a valuable aid, not only to the individual in need but to the society at large that individual can importantly protect.

For example, in the past several years a number of major banks have gone through wrenching changes. In one of those banks, which has adjusted better than some of its competitors, by plain good luck the CEO had in his company a friend/colleague, who remained actively involved into his 80’s and who became the CEO’s main confidant. That man was able to be a sounding board for the many things the CEO had to weigh and consider including the fate of a number of top lieutenants at the bank. Without that equivalent of the mother’s brother to provide perspective, solace and advice to the CEO, that bank might have been in deeper trouble.

That example suggests the thought that if more than a few of the 535 members of the House and Senate in Washington had unofficial mother’s brothers in their lives, we just might see some more wisdom and cooperation and less political stubbornness which often ignores the national interest in favor of some ideology or petty political short-term goal.

How that could work is a bit hard to predict, but if the idea could be addressed and understood no doubt a way could be found. A good place to start would be to encourage retired members of those bodies (who are presumably still on the government retirement payroll) to be teamed up with active, sitting members, perhaps largely of the opposite party, to try to insure that a balance of views could seep into the considerations. Of course, it would take time for any active member to come to trust his/her uncle to be 100 percent discrete. But over time it could be a step in the right direction.

It is true that no one can ever simply legislate trust or love; but it may be possible to split the roles of mentors/advisers to political leaders, as the primitive society apparently did, to help create a new generation of wiser and better adjusted legislators.

A Riddle of Smarter vs. Dumber

Clearly we are living in and through a lot of transitions in our rapidly changing world. Perhaps one of the biggest changes we face is how we learn daily what we need — and want — to know and learn about concerning what is going on in the world around us.

Former Secretary of Defense Rumsfeld, despite his many failings, got one thing very right when he said one of our biggest enemies in life is when we are unaware that we do not know what we do not know. That sounds like a circular thought, but it is all too real and right. Intelligent beings can only protect themselves and advance their goals if they have a realistic sense of the limits of their knowledge and skills and then probe what they know they do not know with insight and judgment.

For the first thousands of years of human existence the only means we had to learn was through our eyes and ears, limited to what was actually in front of us or physically within earshot.

We still, of course, have those same (perhaps somewhat enhanced) physical capabilities, and we have been using them with increasing sophistication in the last several hundred years.

In addition, what was and is between our ears (our brains) evolved very rapidly at the same time. With the growth of human knowledge and information came ever more ability and need to receive and process even more information, which became an essential part of life.

When humans learned to write and, of course, read, that started to push the need for ever more information exponentially, as still more and more people learned to read and write.

Then Gutenberg invented printing to replace laborious, slow and expensive manual copying. Soon, mass-produced books and newspapers began to spread rapidly and the knowledge and information explosion (which we also talked about with the advent of the internet) really began. That was almost like the BIG BANG, which was (if you want to believe it) the beginning of the universe and everything in it.

Things went along swimmingly for half a millennium. Books, pamphlets and periodicals became widely available and widely consumed, and remained so until very recently, when the newest digital technologies began to displace them with more efficient and accessible sources of acquiring all forms of information.

One of the most important contributions to the printed word was that editors made judgments about what and how to present information to readers. And, because that process of editing invited competition (at least wherever there was freedom of the press), receivers of information were able to choose and rely on their selected sources.

Now in the 21st century, internet-based sources of largely free news and knowledge are beginning to seriously edge out the old, edited print sources that were paid for because the buyers valued them. But, when the preferred and available price was nothing, everything began to change radically.

Internet information comes largely unfiltered, unedited and, frequently, unverified simply because it exists in digital form and can be scooped up and seen by anyone, anytime. And, ‘seeing simply becomes believing’.

Most of us get up in the morning thinking “What is the news today?” Some of us also think “What happened yesterday that I never knew anything about before, but, if I had known there was something to know, I would have wanted to know?”

Up to now, most of us have relied on daily ‘information fixes’ from the New York TimesWall Street Journal and local versions of the same sort.

But what happens ‘tomorrow’ when there is nothing out there except ‘everything’ – a vast, unfathomable pile of information that has not been focused reliably for readers. How will people be able to learn what they do not know, what they need and want to know?

There must be some reasonable means for the essential people in the chain of news gathering and dissemination to obtain enough income to make their efforts worthwhile. This need really is not being addressed yet because of the misplaced belief that the right price is zero. As a result, the economics of journalism are in free fall.

Because of the need to ensure that there is an intermediate process to filter and qualify news, could government, in this transitional period, try to establish standards and create a mechanism [perhaps even a tiny transactional tax] for “media managers” to earn an appropriate amount to keep alive this essential element in the news process, in a way that keeps government out of the process except to insure that the private sector can stay productively involved? Government does have a real stake in keeping the private editorial process alive and well.

There are a few mechanisms being developed that may allay some of these concerns. One is RSS, which can deliver a check list of sources and subjects to your inbox. But RSS is only as good as the sources to which the reader subscribes, and which might not include the things that person wants to know but did not know until after the fact. RSS also falls short in supplying reliable, edited information, and in economics

Another is a more robust form of artificial intelligence which constantly ‘reads’ a person’s email and social media and tracks the news they consume to try to figure out, better than that person herself, what she needs and wants to know.

The riddle is that the more information there is and the easier it gets to find it, if one knows what one wants to look for (both of which are the case today), the more difficult it is becoming to be reliably and timely informed in a substantive way.

If there is an answer to the puzzle, it must lie in finding a way to convince consumers of information that the best way to be ‘well and timely’ informed is to be able, willing and required to pay a reasonable price to the people whom they choose to rely on as the sources of their wisdom.

In a world where the ‘best’ price is no price, except for the distraction of ads, we are doomed to be dumber as we get smarter, even while we are drowning in all the information imaginable.

Years ago, when the builder of the biggest, fastest analog computer at that time, with all the information in the world in it, demonstrated it, he asked for the toughest question anyone could think of to ask it to show how smart it was.

What he was asked was “is there a God”? The computer immediately answered: “YES, there is now!”

Should we begin to wonder?

The Evolution of Human Governance

Jared Diamond has sounded a clarion call in his most recent and interestingly provocative book, The World Until Yesterday. Diamond has thought a lot about the evolution of human life and the processes of enabling and managing those lives; he has also spent big chunks of his life digging (literally in some cases) through the primitive world (he says traditional) and the early existence of intelligent beings as far back as 11,000 years. Several truly interesting and usefully important insights emerge from his histories.

First, although humans were more adept at a lot of simple rudimentary techniques than most people today know or believe, our species remained for most of those 11,000 years in a primitive state of organization. Families, clans and tribes constituted the core organizational units of society. There were few or no states as we know them today, for the simple reason that, for most of that history, the only form of communication was individually spoken sounds/words. There was, therefore, no ability for larger groups of people to know each other well enough to organize their lives on a larger scale.

Second, when writing, printing and other very recent (last 100 years or so) means of modern communication came along, the pace and content of that communication ramped up amazingly quickly, which, in turn, stimulated the growth of human skills and the spread of innovation in all areas of human activity, including, very importantly, governance. The collective systems we now call nation-states became ubiquitous, and have continued to change and evolve.

Third, in the last 500 years we have witnessed a variety of forms of governance around the globe, including Kings and Queens and other lesser forms of royal governance, as well as religious powers, some of which still exist in form if not substance. It is quite clear now, of course, that those particular forms of governance have largely outlived their times and in only a few years (viewed in the span of 11,000 years) will be completely gone.

Fourth, we have seen various forms of dictatorships and how, with difficulty and pain, each has run its horrible course, even in the present — witness Nazi Germany, the communist Soviet Union and, currently, the forerunners of the Arab Spring.

It is only in the last 250 years, in a variety of ways and places, that those democracies as we think of them today have emerged. There have been some strange and tragic takes on democracy in its relative infancy. Imagine trying to explain to 25th century Americans that a ‘dictatorship of the proletariat’ was a legitimate goal for the Russian Revolution at the beginning of the 20th century That state has happily morphed away from its original simple fraud on the people in whose name the dictatorship sought to rule, and is struggling today to become a modern democratic state, albeit somewhat different from our model.

In Europe and other parts of the world, so-called representative democracies have been emerging for a couple of hundred years. Those models have been based primarily on parliamentary systems which we and they are discovering (with some confusion and pain) are quite different from our model of separation of the executive and legislative functions.

Today, far too many of us tend to think, reflexively and automatically, that our American form of democracy is the ultimate expression of human self-governance, that it has long been perfected and should be able to serve us and the whole world in its present form forevermore.

Our presumption is, of course, well, RIDICULOUS!

Why should we think for a minute that the evolution of governance has reached its pinnacle in the American system? On the contrary, any rational person looking at the matter objectively has to believe either that our American Democracy has failed us (Exhibit A: Congress?) and we’re doomed to the same destiny as the monarchies which preceded us or, for the glass-half-full types, that our system of governance is still evolving to meet and reflect the changing natures of humans and their modern lives. What they can’t honestly assert is that this system, at this moment, is already perfect.

If thought of in these terms, many Americans might be able to come together and agree that at a minimum we should be thinking hard about how today we could improve our system. For example, how can we make timelier and better decisions? How best to spend our national wealth (or deficit) and run our country? Where is our vision and foresight?

Perhaps we should look at some other countries’ systems and how they fared differently from ours and why.

For example, China has in the last 20 years apparently been able to make big decisions and loosen the reins on its citizens at the same time. They seem to be well aware and even nervous about public opinion. Still it is true that, to American eyes, the Chinese still look to be excessively centralized and oppressive; their system is very different from ours, to be sure, but has elements that we could benefit from knowing more about. At least, we should be open-minded to the possibility of learning.

While we invented our democracy in a world as it existed over 200 years ago, the Chinese are doing it in a different era, and thus may be able to shape their system to the modern world better than our 200-year-old system is able to do today.

What are the biggest failings of American democracy today? There are many. To name a few of the biggest ones:

  1. The perpetual stalemate in the legislative branch, and our consequent inability to reach compromises on major issues which require long term planning and perspectives such as spending, taxation and debt management;
  2. Improper distribution of voting power and rights, which has modified and distorted the competitive balance in our representative system. For example, Democrat candidates for the House of Representatives in 2012 received, overall, more than 1 million more votes than their Republican counterparts, but Republicans maintain a 33-seat edge in that chamber. The strict constructionists among us may prefer NOT to recall that our House of Representatives was intended to be the body that would most immediately reflect changes in public sentiment.

That has been turned on its head by both campaign finance problems, which ironically gives too much power to too few people despite the internet’s ability to attract millions of small supporters, and gerrymandering the borders of House seats to protect one party or the other.

The result is that the Senate has in recent years become more the indicative source of changing public sentiment despite the fact that Senators have six-year terms.

  1. Abuse of the filibuster process, originally intended to protect minority rights but now a bludgeon used to thwart any hint of progress the Senate struggles to find and display.

We do need to first admit to ourselves that we have systemic governance problems which appear only to get worse with time. If we face that reality perhaps we can find some consensus on how to begin to seriously to look for a path to solutions. That is simply how perfecting evolution occurs.

Our problems are not exclusively legislative. In the past 100 years — since the Interstate Commerce Commission became the first independent regulatory agency in 1905 — we have blanketed every level of government with a vast crazy quilt of regulation. Taken one by one, much of that regulation was well intended and even essential to the operation of a fair and balanced modern society. Taken as a whole, however, it becomes a mind-numbing morass most people would agree is stultifying innovation, growth and modern human functioning at large. We have to address that problem head on as well because, absent a rethinking of our approach, it will inevitably simply compound further and will only get worse.

Happily, various new ideas are beginning to emerge, including some innovative ones like Tri-Sector Governance, in which both the public and both private sectors work together in a pragmatic and organized way to address the management of many societal activities in which all sectors have important and vital roles and interests that further regulation can do little to help.

Regulation is a reasonable and rational approach to preventing many bad outcomes, but, with very rare exceptions utterly fails at making good things happen. This type of operational collaboration (as distinct from political collaboration) is beginning to show signs of helping to make parts of modern society work better.

From time to time presidential and/or Congressional Commissions of wise, grey heads, beyond political fear or favor, have studied big problems like social security and health in society and that type of non-partisan problem has occasionally bypassed endless political gridlock. Perhaps we should think about better institutionalizing that process and give it more significance in our whole governance system.

So back to Jared Diamond. He has done modern society a big favor in documenting how some past societies became extinct because they failed to observe and/or react to the forces driving them in that direction until they had already passed a point of no return. His Guns, Germs and Steel and then Collapse and most recently The World Until Yesterday are together an amazing warning about what lies ahead for our system and lives as well as pointing out in constructive ways what we can do about it.

He points the way to how society can learn from previous governance evolutions (or extinctions) how to adjust and further evolve in better directions. Just a quick look at what happened to ancient Greece (as well as today’s Greece) and Rome and most recently Great Britain should give us sufficient warning. While we today primarily focus on the Arab world and its revolutions including al Qaeda and terrorism, we have largely lost sight of the even bigger problem we have, which simply said is OURSELVES and our process of governance.

A word to the wise is said to be sufficient. The beginning of better wisdom today would be for all our public officials (for starters) to read Diamond’s books and begin to think about how we can go forward together and create a new governance future for our children and grandchildren and beyond.