Is Cutting Taxes Really a Good Idea?


Stockton California is filing for bankruptcy, the seventh U.S. city to do so this year.  The principle of bankruptcy is a very simple one: your debt load far exceeds your ability to pay it off in a timely manner at the very least but usually means your income goes to zero before you are able to pay the minimum of your debt service.  Such is the plight of Stockton and many other U.S. cities are on the brink.  By law, government has a single source of income, taxes.  The law also requires that they annually construct a budget, bring it before the town meeting or city council, and then vote on it.  If they have done their work properly, town and city leaders have done the homework properly in balancing their income against their outlays, and leave a little in reserve for emergencies.  States and the Federal Government must do the same thing but public discussion of those budgets is generally limited to elected officials and their appointees.  Still, government’s income at all levels is derived from the single source, taxes.   Stockton probably got into trouble, in part, from poor management of its debt load but had there been a tax reduction initiative earlier, this certainly would have happened all the same, just earlier.  Is this what we want for the United States in general?

Every level of government so has the ability to carry a certain level of debt.  Usually this debt arises from the issuance of bonds.  Bonds are usually issued to cover the cost of major construction programs, such as schools at the local level, and large transit projects at the state level.  These bonds can be found in the Moody’s Investment Guide and are rated according to the entity’s credit worthiness.

The Federal Government is a whole different story, however.  It too sells bonds on the U.S. market.  But it also sells its debt and that is usually to other governments of the world.  Right now, China is one of the largest holders of U.S. debt.  This worries a lot of people.  China could, for example, say, “We want all our money, now.”  It is a “demand” kind of debt.  But this is unlikely to happen simply because the adverse hit on the U.S. economy from such a move would have world implications what would, of course, affect China negatively.

The amount of debt the U.S. is carrying now is well over one-trillion dollars.  People worry about this, as they should.   The ways to reduce debt are to reduce spending or increase income.  In the case of governments you can reduce spending by reducing the government’s size.

Mitt Romney is running a campaign, as so many Republicans have before him, George W. Bush included, of tax reduction.  Their logic says that it will put more money in the pockets of the average American and therefor stimulate a sluggish economy.  They say this with great certainty, strongly enough that their message is “you should absolutely believe them.”  There is one problem with their hypothesis.  They are projecting into the unknown and this is what Americans with actually do with that extra dollar or two.  Personally, I’d pay down some of my own debt but I certainly would not be out on a spending spree, and  think that is the same thing many Americans would do.  This act is neutral with regards to the national economy, it neither grows nor shrinks the economy.

Now if you listen to Ron Paul, he will tell you that the way to deal with lowering taxes is reducing the size of the government.  And on that point he is exactly correct.  Government is expensive at all levels.  But government is also necessary at all levels.  If you take away the aspect of national defense from government and international relations, pretty much every other government entity exists, in some form, at every level.  All levels have police forces, fire fighters, lawyers, road maintenance people, tax collectors, land assessors, and so on.

Let us say, for example, that the city of “Big” one day declares that it can no longer pay for all the services is supplies.  The Mayor of Big, after long and arduous discussions decides his city has to cut back immediately on at least one of his city’s services.  He sees that maintaining the city’s streets is one of his biggest expenses so he declares that hence forth the people who own property along a street will be required to pay for its maintenance at the level required by state law.  The people of that street must pool their money and see to the street’s maintenance which includes its repair, snow removal, and resurfacing as called for.  He then dismantles the city’s highway department and not only is his budget in balance, but now he has extra cash on hand to pay down the city’s long festering debt.  He tells the voters that their property tax is immediately reduced by 5% because of this.

With this initial success under his belt, and people all over Big declaring him their savior, he announces that he can low property taxes by another 5% just by eliminating the fire department.  When asked how, he says it requires a simple principle that was actually used in the U.S. in the early 19th Century.  People would support a local privately owned fire department.  They pay their annual dues and their house or business would have a placard placed upon it saying the owner was a member in good standing of the local fire department and fires at that address will be attended to.  Even better, he announced, you are not required to buy into the program!  You can save even more money.  But, if your house does catch fire, then you are personally responsibility for putting out the fire, and are responsible if the fire spreads to other houses and businesses.

The people are so excited after a year, and paying hundreds of dollar less in taxes, that a man from West Big, suggests to the city council that all parks and recreation areas be maintained by the neighborhoods in which they exist!  The people of West Big, where most of the population exists, love this idea because most of those parks are located in East Big where the rich people live.  Their thinking is, why should they have to pay for something they don’t use very much, if ever.  The people of East Big like the idea because not only can they afford to pay for the parks but it gives them the right to say who can and who cannot enter into “their park.”  They have long groused that a “certain element” seems to come to their neighbor which they find unsavory.

Until this point the people in South Big haven’t had much to say about anything as they are all farmers who own large tracts of land and have been relatively unaffected by all the new smaller government ideas, and they of course have benefited greatly from the greatly reduced property tax.  But South Big is where the town’s lake exists and this is the summer escape for all the residents of Big.  But the few residents of South Big decided, in accordance with the latest law, to put up a fence around the lake and declare it closed.  They promise to maintain it, as required, but since they do not have the resources to run a public beach, nor to the desire to run the beach even if they did, they simply close it down.  Suddenly the city of Big is at odds with one-another.  The time-honored right to enjoy the summer on the shores of their lake has been taken away by four farmers who simply are not interested in keeping the tradition going.  People all over Big are asking each other how it happened that so much power fell into the hands of so few people.  The farmers replied to them that they were simply using the new laws, and besides, most of their families had lived in Big as long as anyone else, if not longer.  Weren’t they entitled as much as anyone to exercise their rights under the existing laws?

The basic tenant of government is to provide services to its constituents that cannot be reasonably, or equitably, provided by private organizations.  There was a time in its early history that the United States was a morass of private highways and bridges.  To leave Boston, for example, you had to pay a toll to cross one of the few bridges over the Charles River.  Towns and private citizens set up toll booths along public and private ways to collect monies for their upkeep and for the right to use them.  Philadelphia is renowned for its private fire companies in the 19th century who actually had wars between companies over who would cover which houses.

The point is a simple one: if you want a continued level of service you now enjoy in your city or state, or at the national level, then you have to pay taxes because they simply are not free.  If you think government is inefficient then you must offer solutions in how to make it more efficient.  It is not enough to point at some government entity and declare that they are very inefficient.  You must provide both the proof of the inefficiency and the method of improving its efficiency.  In the mean time you must accept the level of funding just to maintain what you have.

My suggestion is that there needs to be a major revision in the tax code.  Although I never liked Ronald Reagan as a President, he did come up with the idea of a “minimum tax” that he thought everyone, particularly the rich, should pay.  Somehow that has fallen into disfavor by today’s Republicans.  Personally I think a national sales tax, together with the elimination of all personal income tax, would solve many tax problems and reduce the size of one portion of the government greatly.

The bottom line is, every American has to ask himself what level of service he expects from the government and at the same time, he must realize that it will cost him something.  He must also recognize and accept that everyone is going to have their own idea of how much government we need to have.  But in the end, regardless, we will have to pay taxes to pay for that government.  Highways, fire departments, police departments, national defense, airports, and so forth are things we all have to pay for.  They are not cheap.  If you want your highways to be as good as they are now, or better, then you must pay for that.  This is not the time to cut taxes.  It might be the time to reorganize government at all levels, but it is not the time, yet, to reduce taxes.

 

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