The true measure of taxation is the amount one pays over and above the cost of the government services they consume—the dollars redistributed from one person’s pocket to another’s. We don’t consider it taxation when we buy food. We should think about taxation for government services in the same way. Taxes are what we pay over and above the cost of the government services we receive.
Interestingly, the Congressional Budget Office (CBO) has conducted the complex exercise of allocating the cost of federal government services directly consumed by the elderly—chiefly Social Security and Medicare—and then separately, for each of the income quintiles of nonelderly workers.[i] With a little more elbow grease, one can also allocate the indirect government services that everyone shares.
For example, military expenditures—60 percent of shared government services—can be allocated to households based on their income.[ii] By that, I mean the true measure of their income—not just their earned income, but their earned income plus the value of government services and transfers less taxes. That allocation scheme presumes rich families have more to protect and lowers everyone else’s allocation. . . .
From this perspective, the non-elderly middle class paid about $13,000 in taxes in 2006, including payroll taxes paid by individuals and their employers and allocated deficit spending, for the $14,000 of government services they received (see Figure 10-1, “Federal Government Expenditures and Taxes by Household Type”). They received nearly a $1,000-a-year stipend to supplement their nearly $60,000 a year of household earnings, plus they expect to receive $28,000 a year of retirement benefits in the future, for which, in truth, they contributed nothing.[iii] Nor did they pay any assistance to the poor or the elderly.
In 2006 non-elderly working-class households earning between the twentieth and fortieth percentiles of income paid about $7,000 a year in taxes, including payroll taxes, for $15,000 a year of government services. They received an $8,000 stipend on their approximately $36,000 of household income, not including their expected retirement benefits. In fact, they paid about the same amount of taxes as they received in direct government benefits. . . .
Figure 10-1: Federal Government Expenditures and Taxes by Household Type
Perhaps we have already seen what happens when we no longer ask people to feel responsible for setting aside some portion of their income for others (namely, for the poor and the elderly) or even to save for their own retirement, because they assume others will provide it for them. The moral fabric seems to fray when people no longer have fundamental responsibilities for others.
When political leaders insist that the handful of successful entrepreneurs—who took the risks and made the sacrifices necessary to produce innovation in an economy that would otherwise grow more slowly, and who serve their fellow man by serving customers—are nothing more than cheaters who succeeded at the expense of the middle class, moral obligations fray further. Advocates of redistribution insist that these successful leaders refuse to pay their “fair share” of taxes, despite their financing almost all of the aid to the poor and elderly. Rather than uniting society’s leaders and followers and calling for everyone to fulfill their civic obligations, advocates of redistribution claim middle- and working-class taxpayers deserve to pay less—when they are already paying less than zero.
And is it any wonder the moral fabric frays when we look to our elders and find that they take more than everyone else, no matter how high their income, when this money could be used to help the poor, lower the deficit, or fund research and development that improves the future? Doesn’t it fray even more when political leaders, especially advocates of redistribution, refuse to demand any entitlement reforms whatsoever? Don’t most people throw up their hands and justify looking after only themselves?
[i] “The Distribution of Federal Spending and Taxes in 2006,” Congressional Budget Office, November 7, 2013, https://www.cbo.gov/publication/44698.