17 April 2011

A Fear of the Known: The Link Between Debt and Taxes


What seems to be the matter in the United States today?  It is likely many things, depending on whom you ask.  Most agree that a particularly urgent challenge is our dangerous and potentially crippling debt.  We seem poised between Scylla and Charybdis, yet this is no myth: without continuing credit, we stand to lose the way of life we’ve come to expect; but by amassing ever more debt, we move away from independence and closer to insolvency---or worse.

How might we begin to address this problem?  What direction should we take, and what role should the government play, if any?  Quite often, those with an opinion invoke the Constitution, and this is a sensible place to start.  In political debate today we often hear the refrain, “It is time to return to constitutional principles.”  So what does our Constitution say about debt?

The first mention of debt in the Constitution is in Article I, Section 8, which enumerates most of the powers of Congress.  It provides, inter alia, that “The Congress shall have Power To lay and collect Taxes . . . to pay the Debts . . . of the United States.”  In all, the Constitution identifies three reasons for taxation: the common defense, the general welfare, and the payment of debt.

Notably, the Articles of Confederation did not provide any central authority for taxation.  The natural conclusion is that it was deliberately added to the Constitution to cure a defect in the Articles, as revealed by our experience during the ten years following 1777.  By 1787, a clear power to tax was built into our founding document and specifically coupled with the issue of debt.

Taxes are a constitutionally provided means of dealing with debt; but who is responsible for paying?  To be fair, anyone reasonably able should contribute.  Currently, some wealthier members of society pay less in taxes than others, either in absolute or proportional terms, due to favorable rates (e.g., capital gains) and other loopholes.  A recent article from the Associated Press observes, “The super rich pay a lot less taxes than they did a couple of decades ago, and nearly half of U.S. households pay no income taxes at all.”

It is now fashionable, again, to justify this special treatment with a theory called supply-side economics: reduce taxes on the rich and they will, as if by instinct, use the surplus to create new jobs and businesses.  The theory's cheerleaders maintain that doing otherwise is un-American: it is un-American to raise taxes, and it is the same to oppose tax cuts, particularly when they benefit the well to do.

But this is not necessarily consistent with the intellectual origins of the United States.  Take, for instance, a thinker like Adam Smith, the eighteenth century social philosopher and author of The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776).  In Book V, Chapter I, of The Wealth of Nations---on the costs of defense and supporting the sovereign---Smith states, “It is reasonable, therefore, that [these expenses] should be defrayed by the general contribution of the whole society, all the different members contributing, as nearly as possible, in proportion to their respective abilities” (emphasis added).  That is, those who have more should pay more, particularly with respect to the costs of defense.

A bit later, in a section entitled Of Taxes (Book V, Chapter II), Smith writes: "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.  The expence of government to the individuals of a great nation is like the expence of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate" (emphasis added).  Those who benefit most from society are responsible---indeed “obliged,” in Smith’s words---to contribute to the commonwealth in an amount corresponding to what they enjoy.  In short, the price of civilization is taxation.

Taxation alone will not solve our problems; we must also substantially cut and control spending, in many areas of the budget (including defense and subsidies).  But the most effective way to address our debt is to attack it from both sides: by reducing spending and paying more towards it.  Cutting spending is a necessary but insufficient approach to our debt; tax revenues, as provided in the Constitution, must be a significant part of the solution.

The idea here is not to punish the wealthy or necessarily have them pay a greater proportion than others in taxes.  Rather, the point is that we should not endeavor to lower taxes on the wealthy while we are deep in debt, and we ought not use tax policy to unfairly privilege those types of wealth traditionally held by the elite (e.g., estates and capital gains).  This is not a case of “us against them.”  To the contrary, it is about all of us shouldering our financial responsibilities under the debt.  To argue that taxation is off the table in the budget debate is to shirk our obligations as citizens---and lawmakers---and conveniently ignore a significant part of the Constitution.

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