Monday, April 26, 2010

Freeloaders and Taxpayers

-- Posted by Neil H. Buchanan

In my most recent FindLaw column (available here), I extend the analysis is my last Dorf on Law post (here) of the claim that nearly half of Americans do not pay taxes. Many mainstream analyses of that claim rightly called it out as a distortion, because it conflates federal income taxes with all taxes. The more interesting question is whether it would really be a bad thing if some people paid no taxes at all, a question that I raised at the end of my DoL post and focused on exclusively in the FindLaw column.

After pointing out the impossible line-drawing problem raised by assertions that all (non-poor) citizens should have a "minimal stake in financing the government," I offered the following analysis: (1) Some people receive benefits through the tax system, making them "nontaxpayers," while others receive benefits through other agencies of government, making them "taxpayers" who receive benefits in a formally separate way; (2) One response to this would be to capture all forms of benefits that people receive from government, then subtract those benefits from taxes paid, so that the only people who would count as "taxpayers" are those who pay less in taxes than they receive in benefits in any other form, thus making the relevant category net taxpayers; but (3) Unless we want to commit another form-over-substance error, we must include in "benefits received from government" not only cash payments (such as "cash for clunkers") but noncash benefits that citizens receive from the government.

I then concluded that everyone (and I am fairly certain that it is literally everyone) is better off, net, with the U.S. system of government than they would be without it, if you include all of the benefits that they receive from being a citizen of the United States. Because that is a fairly abstract claim, I want to offer a few examples here to show the broad nature of benefits that people receive from government, making the taxpayer/freeloader distinction completely meaningless. In fact, as I point out at the end of the article, the wealthiest people in the country are the ones who receive the most net benefit from being in a country that makes it possible for them to earn high incomes and that protects their wealth (even from generation to generation).

In the thought experiments that follow, I will follow the completely counter-factual idea that there is only one kind of tax in this country, the federal income tax. Herewith, some examples:

-- Anne earns enough money to owe $3000 in taxes. She is single, childless, lives in an apartment, has no student loan balances, and drives a well-maintained 2004 Ford Explorer. She thus pays $3000 in taxes, and is a TAXPAYER, not a freeloader.

-- Benny earns enough money to owe $3000 in taxes. He has children, and he qualifies for other tax benefits that were passed under Presidents Bush and Obama that reduce his tax bill to zero. He is a FREELOADER, not a taxpayer.

-- Cal is in nearly the same position as Benny, but (because he works full time and thus qualifies for the Earned Income Tax Credit) the benefits that he receives are "refundable" and add up to $4000; so he gets a check from the government for $1000. He is not merely a freeloader but a WELFARE RECIPIENT.

-- Daphne pays $3000 in taxes and qualifies for a benefit administered by the Department of Housing and Urban Development, paying her $3000 to rehabilitate the house that she bought in an at-risk neighborhood. Daphne is a TAXPAYER, because she pays positive taxes, even though she would be a FREELOADER under a "net tax" test.

-- Edwina owns a business that sells its product (information technology services) to the government. She pays $x in taxes after receiving $X from the government. She is, oddly, a TAXPAYER.

-- Frank works for an investment bank that received a bailout from the U.S. Treasury. He receives $Y in income and pays $y in taxes. He is also a TAXPAYER.

-- Gerry's company located in her hometown because the local government arranged for free infrastructure improvements, including a new off-ramp from the highway into the factory's parking lot, an exemption from some environmental restrictions, and subsidized box seats at the local major league baseball stadium. Gerry's job would not exist but for these government-provided benefits. She pays $z in taxes on $Z in income, and she is therefore a TAXPAYER.

-- Horace is Gerry's company's CEO. His company produces an item that was designed and developed at a state university, employing people who are able to do their jobs because of educations provided through direct and indirect government subsidies. Horace received $XXXX in income and pays $xxxx in taxes, so he is a TAXPAYER.

-- Inga moved to the U.S. from a country with an inept and corrupt police force, where she was forced to hire private security guards, to build a fortress-like villa in which to live, to buy a special bullet-proof car, and to pay handsome fees to hide her financial assets in overseas accounts. In the U.S., she pays (at most) reduced tax rates on her capital gains income, and some of her wealth will (possibly) be subject to the estate tax when she dies. She is a TAXPAYER, too.

Everyone can, of course, claim to "deserve to keep what I earn"; but it is a meaningless exercise to say that they earned money without the assistance of government. The people who earn the most income might be the most talented (although the evidence suggests that great wealth is largely inherited), but they certainly gain the most from the existence of a government that makes wealth accumulation possible. A person who currently has next to nothing is only marginally better off than if there were no government (and thus no economy), but a person who makes millions of dollars through, say, financial trades -- which are a source of wealth only if the government creates and enforces contract and property laws -- has much more to lose.

The government provides net benefits to everyone, especially the wealthiest members of society. There are legitimate political debates over how to distribute the tax burden, but the freeloader/taxpayer distinction is meaningless -- and ultimately mean-spirited.

15 comments:

egarber said...

As a tangential issue, I find it interesting that many people characterize tax subsidies as a different *kind* of thing, when from an accounting standpoint, the only distinction is the means of execution.

For example, we all get to write off our mortgage interest at the end of the year on our taxes, but ask the average mortgage payer whether he thinks the federal government is helping pay the bill, and you might hear a pride-laden reply that goes like, "no way, I don't need government help to own my house."

In the end, the effect is no different than if the government 1) collected taxes, and 2) cut you a check in the amount of your mortgage interest deduction. Yet this basic reality seems to elude so many people.

A related example is the phony argument that the new healthcare delivery system is some sort of new bureaucratic entitlement program. Often the people yelling the loudest about that are those who are comfortable with their employer-based (cafeteria plan) coverage. Well guess what? The largest annual federal subsidy on the books today is the tax support for employer-based coverage, whereby premiums are pre-tax for both the employee and employer.

That tax credit is no different than what individuals will leverage on the new competitive exchanges starting in 2014, yet you'd think we've just embarked on something radically different.

In the end, I think much of this results from the delusional notion that individuals are *fully* responsible for the success, and entirely to blame for their failures. The real world is way more complicated than that.

egarber said...

Two quick fixes:

>>) cut you a check in the amount of your mortgage interest deduction.

I should say the amount of your tax savings from the deduction.

>>notion that individuals are *fully* responsible for the success

for their success, I mean.

Yes Neil, OCD is a problem for me :)

Musing Marxist said...

Doesn't the complaint about free riders hold that some pay for the public goods they consume plus some public goods consumed by others, whereas (those) others do not even pay for the public goods they consume (and this is unfair)? Nothing you say in this post contradicts that. It could be both that (a) everyone gets a good deal from government - everyone pays less than they ought to be willing to pay for the goods government supplies them - and (b) some unfairly underpay (relative to others).

(Maybe (a) seems like the sort of thing that would by itself undermine (b). But consider this analogy: it might be that I ought to be willing to pay more than I do for an entire pizza (in order to get a couple of slices of it), but it would be unfair for my buddies to exploit that willingness and free ride.)

The "free-rider complaint" needs to be attacked by denying (b) for reasons other than that (a) is true. We're thrown back onto familiar territory: egalitarianism, etc.

egarber said...

Hi Miles

>>whereas (those) others do not even pay for the public goods they consume (and this is unfair)?

One way I think about it is to assign a cost that would otherwise be realized without the resulting investment. In other words, in the aggregate it's a false choice on some level to think we have the option to provide or not.

If a poor kid in poverty isn't able to attend school, that will undoubtedly affect the ability of the very wealthy to earn high income, in that widespread blight poisons the general economic environment. A guy making a bazillion dollars can't likely reach that pinnacle without an educated workforce or stable demand within the larger economy.

It's sort of a play on healthcare cost shifting. Folks like to say it's a choice between paying for the uninsured or not. Well, we pay regardless; it's really a matter of properly allocating the cost. And if done well, that upfront cost is much less than what it might be without the attention.

Musing Marxist said...

Egarber,

I think your reply shows why the very wealthy should be willing to pay more than their fair share. It does not show that they aren't paying more than their fair share. (That is: you haven't shown that, as soon as the contingent facts-on-the-ground change, we shouldn't revert, due to considerations of fairness, to a system that does not countenance some people paying for the public goods they consume plus those others consume. To do that you need to question the claim that the very wealthy aren't obliged to pay for more than just the public goods they consume.)

Gnash said...

Libertarian ideas have obscured our thinking so much that even left-of-center economists like Neil Buchanan write posts about taxes that are waaay more complicated than they need to be.

The fallacy is that the pre-tax income is the individual taxpayer's property. From it follows the (false) conclusion that paying taxes is parting with something one owns (and hence deserves to own). This creates an illusion of economic conflict between the individual and the government.

However, property is only possible due to societal institutions, which in the modern world means the state and its legal infrastructure. Thus, property is what law makes it to be, and if the law determines that x% of your income belongs to the state, then only (100-x)% is your property. You never really owned the other x%.

And, of course, try to imagine anarchy: in a Mad Max world, you'd be happy to be alive, and you'd probably never own a tiny fraction of what you own after-tax in a well-organized state. This I take is the central thought of the post, but it can get lost in the complicated examples.

P.S. Miles' statement that egarber's argument "shows why the very wealthy should be willing to pay more than their fair share" strikes me as absurd. If they should be willing to pay something, than that can't be more than their fair share - why would anyone be willing to pay more than their fair share??? So, in Miles' view, egarber must have actually shown that the wealthy are not paying more than their fair share.

Musing Marxist said...

Bullfighter,

"If they should be willing to pay something, than that can't be more than their fair share - why would anyone be willing to pay more than their fair share???"

If a thief says to me "your money or your life" (or a grocery store says, "the money you were going to use to pay the rent or no food") I will pay my money willingly (in the sense that I do it because I judge it the best thing to do under the circumstances - just like, in egarber's hypothetical, the best thing for the very wealthy to do is pay more than, according to "free rider complainants," their fair share). But that doesn't make it fair.

Just to avoid confusion, what I'm not saying is that the thief case is analogous to the case of taxation. There are plenty of good arguments to the conclusion that the very wealthy have an obligation to subsidize the poor, and that it would, in point of fact, be unfair for them not to. It's just that neither Buchanan's nor egarber's argument does the trick.

Neil H. Buchanan said...

I agree with bullfighter that my examples are waaaay more complicated than they need to be -- but only if you already understand that pre-tax income is an incoherent concept. Since I do already understand that, I also agree with bullfighter's larger argument.

Here's another attempt to make my point: There are legal rules under which egarber's pre-tax income would be $200,000 and his post-tax income would be $160,000, making it seem as though he has "contributed" $40,000 to fund the government. Under those legal rules, I might have pretax income of $100,000, pay $0 in taxes, and have $100,000 in post-tax income. If so, egarber might say: "You're not contributing, because the government took $40,000 from me and nothing from you."

This is meaningless, however, because there is an alternative set of legal rules under which I have $130,000 in pre-tax income, pay $30,000 in taxes, and end up with $100,000 post-tax, whereas egarber has $160,000 pre- and post-tax. In that scenario, he has "not contributed to financing the government," and now I'm ticked off.

In neither case do the complainants have a legitimate gripe, because there is no consistent way to say that what I had pre-tax was "mine," because the legal rules and tax rules determine my pre-tax income as well as my post-tax income.

All we know is that everyone is richer than they would be if there were no government, and that people's post-tax incomes can be arrived at through manipulable combinations of rules. Looking at my tax return (even enhanced by how much I received from public goods) does not tell me how much having a government has "cost" me. Because I could have ended up in the same net position with a different pre-tax income and a different "net tax due" figure, it means nothing to say that I've spent more or less than egarber on the financing of government.

Charles T. Wolverton said...

I would like to second Neil's observation that his "examples are waaaay more complicated than they need to be ... only if you already understand that pre-tax income is an incoherent concept". Or put less sensitively, only if you are willing and able to actually give taxation some thought rather than parroting sound bites.

That does put Neil in a bit of a double bind. This forum presumably is populated by those who are so inclined and equipped, so on one hand he's "preaching to the choir". On the other hand, IMO one reason the sound-biters are so successful is that their opponents are typically bereft of responses more-or-less in kind. It wouldn't be accurate to call Neil's examples sound bites, but they are succinct and it is likely that at least one will apply to any sound bite spouter.

The alternative of trying to cite or summarize "The Myth of Ownership" (or equivalent) obviously doesn't cut it as a response to sound bites. So, IMO the examples represent a useful contribution to those on one side of the (unfortunately debased) debate.

Gnash said...

Neil - thanks for the reply to my comment. I really cannot find anything I'd disagree with in your reply. You make a good point that complicated arguments may be necessary if the audience (or some part of it) is deaf to the simpler, more direct statements.

Unknown said...


監視器


監視器材


手機訊號強波器


亂剪
 刺青

京王監視器
 大哥大訊號強波器  網站SEO

Stella新亂剪旗艦店


Uni新亂剪旗艦店

runescapeworld said...

Cool. I usually take pleasure in the interview. Appreciate your possessing blog


Sell RS Gold
Sell Runescape Gold

Unknown said...


Very awesome post , i am really impressed with it a lot


فوائد الزنجبيل
فوائد الرمان فوائد الحلبة فوائد البصل فوائد الزعتر فوائد زيت السمسم علاج البواسير فوائد اليانسون فوائد الكركم قصص جحا صور يوم الجمعه علامات الحمل تعريف الحب حياة البرزخ فوائد الزبيب

seoamine said...


thanks so much for that great blog and thanks also for accepting my links thanks
طريقة عمل الدونات طريقة عمل البان كيك طريقة عمل الكنافة طريقة عمل البسبوسة طريقة عمل الكيك طريقة عمل عجينة البيتزا فوائد القرفه

Unknown said...


thanks so much i like very so much your post
حلى الاوريو الفطر الهندي صور تورته حلى قهوه طريقة عمل السينابون طريقة عمل بلح الشام بيتزا هت كيكة الزبادي حلا سهل صور كيك عجينة العشر دقائق