Month: January 2025

A Debate on a VAT tax

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January 26, 2025

by Stephen Stofka

This is 11th in a series of debates on various issues. The debates are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

The notes at the end give more context to the arguments.

Cain began this week’s conversation. “We left off last week discussing alternatives to the income tax. Before we entertain alternatives, can we agree that the income tax should be abolished at the same time the country adopts a new scheme of taxation?”

Abel cleared his throat. “I’m not so sure about that. Can an alternative tax scheme raise the same amount of revenue?”

Cain raised an eyebrow. “If it didn’t, that would be more money for private consumption and investment.”

Abel grimaced. “That’s playing with fire. The country is already running persistent deficits. If there was a significant difference in revenue, it could seriously weaken the dollar.”

Cain said, “Our group favors a consumption tax to replace the income tax. They were the main source of federal revenue until the passage of the 16th Amendment in 1913.”

Abel shook his head. “Consumption taxes didn’t raise enough money to pay off Civil War debts and the pensions promised to veterans and their families. In the early 20th century, society was becoming more complex. There was a greater role for government. The greatest improvements in health and life span came in those decades. Public sanitation measures and vaccines reduced water borne illnesses and contagious diseases.”

Cain argued, “I agree that there was a greater role for government. It’s just gone too far. Particularly the role of the federal government in our lives. A consumption tax broadens the tax base. Gives voters a stake in the government’s spending.”

Abel nodded. “There are several types of consumption tax. Many developed countries use a VAT or value added tax, but it is a supplemental to an income tax.”

Cain’s displeasure was obvious. “Our group would not support another tax. Also, with a VAT, politicians are tempted to fiddle with the type of items subject to the tax. It invites interest groups to lobby for exclusions from the tax. That’s what goes on in Britain and many European countries. We advocate a tax that reduces favoritism.”

Abel argued, “Any tax scheme invites favoritism. For instance, Colorado has a flat income tax but many exclusions from income that are not included in federal income. Pensions, social security and charitable contributions are just a few examples.”

Cain shook his head. “A credible alternative would have to make alteration as difficult as possible for Congress – just like the Constitution is.”

Abel sighed. “Specific language makes compromise difficult. The law is full of words that are open to interpretation like ‘reasonable’ and ‘appropriate.’ Section 8 of Article 1 of the Constitution stipulates that the Congress provide for the ‘common Defence and general Welfare.’ What does the word ‘general’ mean in that context? It’s clearly not the common welfare or the founders would not have agreed on the insertion of the word ‘general.’ To this day, our two groups have been arguing about the scope of powers authorized  by those two words.”

Cain tilted his head slightly. “Ok, granted it’s not easy. We are not striving for perfection, only clearly defined terms and transparency. No more backroom deals in Washington.”

Abel frowned. “Look, people and the institutions they create are too complicated for simple solutions. The only reason that the Constitution exists in a difficult to alter form is the small number of people who had a hand in its creation.”

Cain scoffed. “Each state had to ratify the Constitution and the Bill of Rights. In 1787, the Virginia legislature had 168 Senators and delegates. Today Virginia has only 140 members to represent a population that is sixteen times as large. Believe me, there was plenty of vociferous debate. The Constitution is a series of compromises hammered out in Philadelphia but reflecting the sentiments of those in the individual states.”

Abel interrupted, “The few who could vote. Men with property. The sentiments of the Declaration of Independence were noble and democratic, but this country’s Constitution was founded on governance by an aristocracy. After a bitterly fought Civil War, the passage of the 14th Amendment expressed the democratic sentiments that the founders could not embody in the original Constitution.”

Cain laughed. “Once again, we are getting off the topic. Our group wants specific, not broad, taxation powers that limit Congress and the President. It’s a principal-agent problem. We have to keep our elected representatives, our agents, on a short leash, or they will satisfy their own interests more than they do the people they represent. The text of the 16th Amendment was too broad and invited the corruption and complexity the tax code has become after more than a hundred years.”

Abel looked puzzled. “Your group wants an amendment with specific language?”

Cain nodded. “Yes, an amendment revoking the 16th Amendment and installing a consumption tax of some sort.”

Abel asked, “What about new home sales? They are included in GDP, but the consumption happens over years. The Bureau of Labor Statistics calculates an ‘imputed rent’ that a homeowner pays and collects each month. It’s based on market rents in that area.”

Cain shook his head. “It can be simple. The language of the amendment would target the revenue as a percentage of GDP. The means to get to that target would be left up to Congress.”

Abel looked interested. “Go on, tell me more about that.”

Cain continued, “Our group supports a national sales tax or VAT to replace the income tax. In 2023, the federal government collected $2.56 trillion in individual income taxes on a GDP of $27.2 trillion. That’s 9.2% of GDP. Let’s say a thirty-year average is 10% to make the math easy. A VAT or some other consumption tax rate could be adjusted each year based on quarterly GDP estimates that the government already does. That would not be cumbersome wording.”

Abel showed concern. “Your group strives for simplicity like it was the Holy Grail. In 2018, the Congressional Budget Office estimated the revenues from a VAT over a ten-year period. They noted that a broad tax base includes only 66% of personal consumption expenditures and those account for only 67% of GDP. Multiply those together and the tax base is only 44% of GDP. To collect the same revenue as individual income taxes, the tax rate would have to be 21% or so, not 10%.”

Cain counted on his fingers. “One, it would broaden the base so that more voters have skin in the game. Two, it would protect everyone’s privacy. Three, it would set clear and transparent limits on politicians in Washington. It’s well worth the price.”

Abel shook his head. “To abolish all tracking of income, all of the states would have to agree to a VAT to collect their taxes. What about Social Security taxes collected? For the past 15 years, those tax revenues have been 6.5% of GDP. The tax rate would have to be 36% to account for Social Security taxes. Add in state income taxes and the tax rate would be over 40%. Adding in state and local sales tax could bring the total tax bite to 50%.”

Cain argued, “Look at Britain. It has an income tax rate that starts at 20% and a VAT rate of 20%. A middle-income person could pay 60% total tax. The average effective tax rate in the U.S. is 15%. Add in 15% for the employer and employee contributions to FICA taxes. State and local taxes can add up to eight or ten percent. The total tax bite under our current system is close to 40%.”

Abel frowned. “An analysis of 2021 IRS data showed that the bottom 50% of taxpayers paid an average of only 3.3% of gross income, not 15%. Voters will not go for a tax scheme that will place a huge burden on most taxpayers to reduce the tax burden on Elon Musk and the other 1%.”

Cain interrupted. “That’s one of the problems. Half of the voters have so little skin in the game that they let politicians get away with anything. That’s how the budget became so bloated with ‘gimmes.’”

Abel replied, “Well, that’s a discussion for another day. I just don’t think a VAT is a practical alternative as a complete replacement for the individual income tax. Sure, we all like simple but the burden of common costs and the distribution of benefits is too complex for simple policies.”

Cain pursed his lip. “The more complex the policy, the less transparent. In a democracy, transparency is crucial.”

Abel raised an eyebrow. “I agree but I don’t think your group can sell a tax policy that would  increase the tax bite for the lower half of income earners by at least ten to fifteen percent. It might throw the economy into a recession within a year.”

Cain objected, “I think voters can be convinced. This last election has shown that voters are tired of progressive policies.”

Abel smirked. “Trump won the popular vote by 1.6%. The House has a slim majority. The Senate has a 53-seat majority only because Democrats had almost twice as many Senators up for re-election as Republicans. It’s the luck of the draw. It’s certainly not a mandate as Republicans are claiming.”

Cain shook his head. “A lot of traditionally Democratic voters went for Trump. Voter sentiment is shifting.”

Abel smiled. “That’s a discussion for another time.”

Cain turned to go. “See you next week.”

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Photo by Mary Farrell on Unsplash

The Tax Foundation explains the difference between a value-added-tax (VAT) and a national sales tax. https://taxfoundation.org/taxedu/glossary/value-added-tax-vat/  The European Union has a quick explainer on how a VAT works https://taxation-customs.ec.europa.eu/taxation/vat/how-does-vat-work_en

This Investopedia article explains several types of consumption tax. https://www.investopedia.com/terms/c/consumption-tax.asp

Abel brought up Colorado’s exclusions from income as an example of the favoritism that exists even in simple flat tax schemes. https://tax.colorado.gov/individual-income-tax-guidance-publications.

The effective tax rate is the tax divided by the adjusted gross income. On form 1040, it is line 24 divided by line 11. Popular tax software programs usually note the effective tax rate on their summary page.

Cain stressed the many legislative debates that ensued during the ratification process. This is a two-book set that contains the Federalist papers and arguments in several state legislatures. https://www.amazon.com/Debate-Constitution-Federalist-Anti-Federalist-Ratification/dp/1598534114/ref=sr_1_1

In response to Abel’s argument that the Constitution was a product of elite sentiments, Cain noted that there was far more representation of each district within a state than there is today. In 1787, the population of Virginia was 420,000 with the caveat that Negro slaves were counted as 3/5ths of a person. The actual population was about 532,000. Today the population is 8.7 million, sixteen times larger, yet the legislature is smaller. Counting Negroes as 3/5 of a person in the Constitution was a compromise about the amount of tax each state had to pay for the nation’s common expenses. Northern states wanted to share common expenses according to the population of each state. Southern states insisted that Negro slaves were property and should not be counted. Counting Negroes as 3/5 of a person was a compromise about money and the burden of taxation. https://csac.history.wisc.edu/2022/08/01/population-and-constitution-making-1774-1792/

Abel argued that a 21% VAT would be needed to replace individual income tax revenue. In 2023, individuals paid $2.56 trillion in income taxes. The CBO estimated that a VAT on a broad base of items would tax only two-thirds of personal consumption expenditures (FRED Series PCE) which was $18.8 trillion in 2023. 66% of $18.8 trillion equals a $12.4 trillion tax base. $2.56 trillion collected divided by a $12.4 trillion tax base equals a 20.6% tax rate. Here is a link to the CBO’s summary https://www.cbo.gov/budget-options/54820  

Taxes collected on Social Security is FRED Series https://fred.stlouisfed.org/seriesBeta/W780RC1Q027SBEA.

Cain compared a 50% tax bite with combined income tax rates and VAT rates in Britain. Income tax rates in Britain start at 20%. https://www.taxesforexpats.com/country-guides/uk/uk-vs-us-taxes.html#part1 The VAT rate is 20% https://taxfoundation.org/data/all/eu/value-added-tax-2024-vat-rates-europe/

A Debate on Income Taxes

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January 19, 2025

by Stephen Stofka

This is tenth in a series of debates on various issues. The debates are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

Unlike past weeks, Cain began the conversation. “Last week, we left off talking about taxes and the effect of taxes. First of all, I’d like to challenge your group’s support for the progressive income tax system.”

Abel interrupted, “Let me stop you there. If you want to talk about the progressive feature of the current tax system, fine. Neither you or I like the hodge-podge of policy goals and tax shelters that current tax law has become.”

Cain nodded. “That’s fair. Let’s keep our discussion confined to the progressive aspect where the more that a person earns, the higher the percentage of income tax the government takes.”

Abel sighed. “In principle, should every person pay the same percentage of federal income tax? Maybe. Fourteen states have a flat income tax rate. But practice and principle often conflict. Let’s use World War 2 is an example. Winning the war and defending the country was a benefit to every American. Who should pay the most? As a practical matter, the government needs to tap the pockets of the rich in greater proportion than the poor. That’s what the U.S. did for two decades after the end of that war.”

Cain tilted his head. “War is about the nation’s survival. That is the overriding principle that justifies some practical measures. Your group has used war funding as a justification for a progressive income tax since the 16th Amendment was ratified in 1913.”

Abel argued, “A nation’s sovereignty is even more important to rich people because they have more to protect, more to lose should the country be taken over by another nation. During peacetime, government institutions are devoted more to the haves than the have nots. The haves should pay proportionately more.”

Cain shook his head. “I don’t understand your reasoning. The majority of government agencies are dedicated to programs for the poor. In 2022, the federal government spent $592 billion on Medicaid. The states spent another $242 billion. That combined expense was 3% of our country’s entire output and almost as much as we spent on defense, the #1 priority of any country.”

Abel asked in an insistent voice, “Who benefits from all that spending? Investors in the stocks of the companies that supply products and services to the federal government. According to one analysis, investors in the stocks of defense contractors enjoy one of the highest risk adjusted returns of any industry. The government recycles tax dollars into the pockets of the better off. It’s only right that they should pay proportionately more taxes.”

Cain smiled. “The economist Paul Krugman recently posted a CBO graph showing that the effective tax rate on the top 1% is often more than 30%. An analysis of 2021 income tax data by the Tax Foundation showed that the top 1% paid almost half of all income taxes while the bottom half paid just 2.3%. That is nothing more than the government taking money from the most productive members of our country and giving it to the less productive.”

Abel scoffed. “During the Reagan revolution forty years ago, the top tax bracket was lowered from 70% to 28%. Since then, productivity growth has fallen by almost 20%. The data contradicts your favorite beliefs. Lower taxes on the rich does not promote increased investment. What are the rich doing with that extra tax money? Are they investing more in productivity enhancements? No. They are buying big mansions and more toys, spending that will promote stagnating economic growth and a more unequal society, a sick society.”

Cain shook his head. “You talk about ‘extra tax money’ as though the money belonged to the government. Income belongs to the people who earn it, not the government. If someone wants to buy a bigger yacht, that’s their business. Some politicians want to spend other people’s money on their favorite theory of social justice. In 1969, the poverty rate was 12.1%. In 2023, after trillions of dollars spent on means-tested social welfare programs, the poverty rate was 11.1%. The programs have benefitted bureaucrats more than the poor people they were meant to serve.”

Abel argued, “The percent of seniors in poverty is a third of what it was in 1969. The Medicare, Medicaid and other social welfare programs of the 1960s have dramatically improved the lives of the oldest generation.”

Cain replied, “Social Security has been the main contributor to the reduction in poverty among seniors. President Johnson’s Great Society programs to reduce poverty did have an effect in the first five to ten years. After that, the benefits have been negligible. Look, poverty has many causes. Cultural, economic, geographical, political, historical. Politicians can’t just throw money at a complex problem like poverty and expect sustained results.”

Abel nodded. “Understanding a complex problem requires a complex analysis. When economists consider the effect of tax, educational and social programs, they estimate a reduction in poverty of 33% .”

Cain sighed. “Let’s stay focused here on the progressivity of the income tax system. Before these programs were enacted into law in the mid 1960s, tax rates were extremely progressive. They were still strongly progressive for another twenty years. Minor changes in tax law had little effect on poverty during those years. The dramatic reductions in poverty during the 1960s can be attributed to those social programs and a change in the political and social culture. Those short-term benefits have been overwhelmed by the long-term ill effects on our families and our society.”

Abel asked, “Since that tax revolution in 1986, the government has had less revenue to pay for programs. Except for the Clinton years when taxes were raised on the rich, the deficits only get more persistent. Those with higher incomes have the money to support the programs and agencies that form a crucial financial support for many families.”

Cain interrupted, “Whatever those programs do, they don’t alleviate poverty. That’s what the Census Bureau data shows. A progressive income tax system mainly supports the huge political infrastructure in Washington. Congressional subcommittees and a plethora of executive agencies. The government takes more taxes from the rich and the rich fund think tanks and hire lobbyists to get some of that money back or construct the policies they favor.”

Abel shrugged. “So, what’s the answer? A flat percentage for rich and poor alike? That will have a much greater effect on consumption for families in the bottom half of incomes. Is that fair? What should be the measure? The percentage of the tax or the percentage of misery that the tax has on a family?”

Cain smiled. “What’s the alternative? That’s a discussion for another week, I think.”

Abel returned the smile and waved goodbye. “See you next week.”

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Image generated by ChatGPT

The Peter G. Peterson Foundation has an analysis of the federal government’s budget here. https://www.pgpf.org/article/budget-explainer-medicaid/ . Combined state and federal expense was $834 billion, 3% of the $26,006 billion in GDP https://fred.stlouisfed.org/series/GDP Defense spending and investment was $930 billion https://fred.stlouisfed.org/series/FDEFX

FRED Chart on productivity https://fred.stlouisfed.org/series/OPHNFB In the period 1948 – 1984, productivity growth averaged 2.35% per year. Since 1985, it has averaged 1.93%, a reduction of 18%.

Census Bureau tables on poverty from 1959-2023. https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-poverty-people.html Table 3 contains data on people by age. From 1969 to 2023, the poverty rate for seniors fell from 25% to less than 10%. For those aged 18 to 64, the poverty rate has actually risen from 8.7% to 10%.

This 2011 NBER article summarizes a paper by economists Gary Englehardt and Jonathan Gruber analyzing the reduction in poverty among seniors in the 20th century. https://www.nber.org/bah/2004number2/social-security-and-elderly-poverty

This Washington Post article examines the long-term effects of the Great Society programs. This section is the war on poverty. https://www.washingtonpost.com/wp-srv/special/national/great-society-at-50/#war-on-poverty A more conservative outlook on the social and moral effects of those programs can be found at https://hc.edu/news-and-events/2017/02/28/great-society-wrought-fifty-years-later-marriage-family-poverty/

A Debate on Subsidies

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January 12, 2025

by Stephen Stofka

This is ninth in a series of debates on various issues. The debates are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

After a few pleasantries, Abel began, “Last week, we finished talking about the government’s role in the social contract. The scope of that role is the key difference between your group and mine.”

Cain nodded. “Your group thinks of the federal government as an insurance company. Our group tries to keep your group in check. It’s not easy.”

Abel replied, “Your group may believe in a more limited role for government as a general principle, but you advocate policies that contradict that principle. Take housing as an example. It is a private good that is heavily subsidized by the federal government.”

Cain tilted his head in an equivocating manner. “Let me stop you there. Are you asking whether our group supports federal underwriting of thirty-year mortgages? In principle, we shouldn’t. The federal government should have a minimal role in the exchange of private goods. As a practical matter, the entire housing market would collapse if the federal government did not underwrite most mortgages in the U.S.”

Abel interrupted, “But your group doesn’t support the federal government’s student loan program.”

Cain nodded, “That’s right. An education is a different type of good than a house. An education can’t be separated or alienated from a person. A house can. I would prefer that the federal government not be involved in the mortgage market, but few states have the resources to underwrite mortgages. Private banks prefer not to underwrite 30-year mortgages at low interest rates. Only the U.S. and tiny Denmark have 30-year mortgages at fixed interest rates (source).”

Abel said, “But the higher education market would collapse without federal student loans, grants and subsidies. That same practical reasoning supports the federal involvement in underwriting higher education loans.”

Cain shook his head. “Housing has a concrete public aspect to it. Education doesn’t. The Constitution specifies a role for the federal government. It is to provide for the ‘general welfare,’ not private welfare. An education is inseparable from a person’s private welfare.”

Abel objected, “But private welfare contributes to the general welfare. This is a sticking point between our two groups. Your group regards the general welfare as only those goods or services that are available to all. The sum of individual welfare is the general welfare.”

Cain replied, “Look, everyone who wants a subsidy claims that their private welfare will contribute to the public good. Car manufacturers want protective tariffs and subsidized loans, claiming that it will help preserve jobs. Ranchers want below market rates on grazing land for their catttle, claiming that they will be motivated to act as good stewards of that land and help preserve it. College students want subsidized loans and grants on the premise that their improved skills will contribute to a better society, a more productive work force.”

Abel argued, “But your group is more likely to support subsidies for ranchers and farmers.”

Cain shrugged. “The subsidy for grazing fees is about $100 million, according to one estimate. Americans have $7.5 trillion in federally backed mortgages at an interest rate that is at least 5% below market. That’s an indirect annual subsidy to homeowners of $350 billion, with a ‘b.’ Subsidies to farmers and ranchers are like drops in the bucket compared to the subsidies to homeowners. Divide that $350 billion by approximately 50 million federally backed mortgages and each mortgage holder gets an average annual subsidy of $7000. The federal government looks like it has deep pockets. Everyone wants to stick their hand in those pockets. It’s the road to ruin.”

Abel argued, “But the federal government has a long history of handing out subsidies. In the 19th century, they gave out vast tracts of western lands to the railroads for pennies an acre. After the tracks were built the railroads sold the land to developers for many times what the railroads paid. Then the developers sold the land for many times that to homesteaders. Subsidies are a tool of government.”

Cain interrupted, “Tools to achieve what? Policy goals. Who sets those policy goals? The politicians in Washington. What is their policy goal? To get re-elected. How do they get re-elected? By gettting subsidies of some sort for their constituents. What is the sum of those individual efforts by elected officials? A government whose main purpose is giving out subsidies. There has to be some principle in place to limit that kind of largesse.”

Abel asked, “So what? End all subsidies? That is not going to happen. America binds all these regional interests together by handing out subsidies to homeowners, students, farmers, ranchers, people of every business type. In an earlier era, Senate leaders inserted earmarks for those senators who held crucial votes. Former OMB director George Shultz quipped, ‘the budget process was a fight of the parts against the whole and the parts always won.’ (Behn 1977, 109).”

Cain interrupted, “That practice promoted increased spending and deficits. When the government borrows money, that increases the money supply and inflation. Then the Federal Reserve has to fight inflation by adjusting interest rates. Higher interest rates causes a drop in investment which can raise unemployment. There’s just a whole cascade of economic effects.”

Abel argued, “In 2006, John Boehner, the former Speaker of the House, ended all earmarks in the House. Have deficits decreased? No, they have gotten worse. So has the polarization in the Congress and in the country. The public is like a pack of hungry dogs. Give each of them a little bit of meat and they won’t tear each other apart.”

Cain shook his head. “Tell the voters on the campaign trail that they are a bunch of dogs. The problem with your group is a lack of respect for the public and way too much respect for politicians and experts.”

Abel conceded, “Ok, maybe the hungry dogs imagery wasn’t the best, but look at the defense industry. It wields a lot of influence on Capitol Hill and your group is a big supporter of defense contractors. Defense is one of the few legitimate constitutional duties of the federal government, you say. Each individual representative in Congress votes for more defense spending if it will mean more federal tax dollars coming into their state. Each representative competes for defense dollars even if it is wasteful. It’s pork barrel politics.”

Cain said, “The saying goes, ‘something that can’t last forever won’t.’ The country can’t keep running deficits and borrowing money from the private sector. The interest on that debt keeps getting larger every year. It’s unsustainable. Deficit spending is a security issue. If and when a large war breaks out, the country will not be able to muster a strong response.”

Abel nodded. “Our group agrees that deficit spending is a problem. Your group thinks that earmarks are a big part of the problem. We don’t. Pork barrel politics joins people together. All the different constituencies in the country gather together to pull one of two ends of the rope. What we need is higher taxes on upper income households to afford those earmarks.”

Cain shook his head. “Higher taxes reduces investment.”

Abel interrupted, “So your group says. During the 1990s, both taxes and investment increased. In fact, investment increased at the highest pace since World War 2, and we had budget surpluses by the time Clinton left office at the end of the decade. Higher taxes do not reduce investment.”

Cain argued, “Look, the birth of the internet and the computer age was a special case. That exception does not support your case.”

Abel smiled. “Taxes and the effect of taxes is a whole other discussion. See you next time.”

Cain nodded and turned to leave. “Until then.”

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Photo by Anna Samoylova on Unsplash

A 2010 analysis by the Congressional Research Service found that few developed countries offer 30-year mortgages at fixed interest rates. https://crsreports.congress.gov/product/pdf/R/R41432/3

An analysis by the Center on Biological Diversity estimated an annual subsidy of $100 million to ranchers in below market rates for grazing fees. https://www.biologicaldiversity.org/programs/public_lands/grazing/pdfs/CostsAndConsequences_01-2015.pdf

Federally backed mortgages rose from $707 billion in 2009 to $5 trillion in 2010 and have risen steadily since then. https://fred.stlouisfed.org/series/BOGZ1FL403065005Q

Behn, Richard. 1977. “The False Dawn of the Sunset Laws.” The Public Interest (Fall): 103-118. doi: https://www.nationalaffairs.com/public_interest/detail/the-false-dawn-of-the-sunset-laws.

The Federal deficit as a percent of GDP https://fred.stlouisfed.org/series/FYFSDFYGDP

Tevlin, S., & Whelan, K. (2000). Explaining the investment boom of the 1990s. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.221415 In the seven-year period 1992-1998, investment growth averaged a record-breaking 11.2%. A copy of the paper can be found at https://www.federalreserve.gov/pubs/feds/2000/200011/200011pap.pdf

A Debate on Vulnerability

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This is eighth in a series of debates on various issues. The debates are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s  welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

Hope everyone enjoyed their holidays.

Abel began the conversation. “Last week neither of us were happy with the present structure of our government. I thought we could discuss a more fundamental issue, the duty of a government and the duties of its citizens.”

Cain nodded. “At  the Constitutional Convention in 1787, the founding fathers fought bitterly about the duties of a federal government. Over two hundred years later, I don’t think we have come any closer to an agreement on this point.”

Abel said, “The scope of the federal government’s duties have expanded since Roosevelt and the Great Depression.”

Cain argued, “For decades, our group has been fighting that expansion. We have compassion for the vulnerable but caring for them is a proper function of state governments.”

Abel shook his head. “The Jim Crow era and the Depression taught us that state governments may be unwilling or unable to help the vulnerable. During the hundred years after the Civil War, southern states lacked any compassion for their black residents. During the Depression, the ranks of the vulnerable increased beyond the capacity of state governments. FDR and the Democrats recognized that and instituted job and relief programs to lessen the suffering and reassert some moral order.”

Cain replied, “It is still not clear that most of those programs did much good. The economy continued to flounder until this country entered World War 2. The federal government may be able to borrow the resources for relief programs, but Congress and the President try to design a one-size-fits-all solution. Only the states can design programs that are suited to the population, resources and economy of each state. Texas and New York have entirely different resources, cultures and economy.”

Abel argued, “But that variety produces a fragmented policy response. State representatives are easily influenced by well-funded interest groups and dominant voting constituencies that want to bend the rules in their favor. Minority populations can become severely disadvantaged.”

Cain argued, “Because of that fragmentation, it can be costly for interest groups and lobbyists to fund a campaign that encompasses more than a few states. Instead, they consolidate their resources in Washington where they hope to effect a centralized policy. Centralized policymaking promotes more lobbying. As the saying goes, ‘The road to ruin is paved with good intentions.’”

Abel insisted, “Your group prefers a more federalist, splintered approach to policymaking. Historically, that has led to unequal treatment of the citizens who live in a state. That abuse violates the 14th Amendment as well as the principles of equality established in the Declaration of Independence.”

Cain nodded grudgingly. “Yes, there have been instances of abuse. Your group has used that unfortunate history to promote your vision of the federal government as the protector-in-chief of people’s welfare, animals, plants, the air and water. Social welfare programs embody the sentiment ‘From each according to his ability, to each according to his needs.’”

Abel shook his head. “That overstates our group’s position. We value compassion for the vulnerable, many of whom are victims of circumstance, heritage, and the bad luck of being a minority, a historically disfavored group to policymakers.”

Cain argued, “You absolve them of all responsibility for their choices.”

Abel insisted, “Their history as political pariahs and poor economic circumstances influence those choices. Our society bears a heavy burden there. Our group recognizes that.”

Cain said, “You want people to pay for policy mistakes a century or more old. You believe that white people are born with an original sin, guilty of the racist policies of bygone generations. Our group rejects that belief.”

Abel’s tone was more forceful. “Evidence illegally obtained is inadmissible in court. Evidence derived from that evidence is also inadmissible. That is the Fruit of the Poisonous Tree legal doctrine. Riches and advantages derived from property illegally obtained is tainted, yet many of us blithely reject responsibility. How many white people say, ‘Well, I did not steal my advantages or property. I was not yet born when some of these abuses were done. I bear no burden because I belong to a dominant racial, ethnic or cultural group.’”

Cain paused. “Ok, let me ask you. When is the debt paid? If there is a debt, it is finite, so when will it be paid? How much will have to be paid? Who will be assessed for that debt? If a person is 2% white, are they 2% responsible for the debt? Some racist policies were based on that same kind of thinking. A person of ‘mixed blood’ was treated as black and denied a loan or was excluded from buying a house in a certain area. We don’t want to repeat the sins of our fathers, so to speak, in making restitution for the sins of our fathers. The past is past. Let’s move forward.”

Abel argued. “It is not a debt. It is a duty to help the vulnerable, and those who have been wronged. Don’t you see? Some people move forward more slowly because they are weighed down by the policy sins of past generations.”

Cain scoffed, “We may recognize a moral, but not legal, duty to help the vulnerable. The parable of the Good Samaritan comes to mind. Should we legalize that duty and have the government enforce a charitable spirit on everyone? No. As to the abuses of the past, should the federal government give American Indians a lot of land back? Shall we have the National Guard evict a lot of American homeowners? No! The past is past. The Age of Conquest is over. We move forward.”

Abel said, “We can preserve areas like Bears Ears National Monument that is sacred land to an Indian tribe. We can enjoy it in its pristine beauty instead of drilling holes in the ground and installing bobbing black oil pumps.”

Cain shook his head. “Bears Ears is an example of a President overstepping his Constitutional bounds. Resources contained within a state are managed by the state unless Congress mandates otherwise. Congress, not the President. Congress passed a law that designated Yellowstone a National Park. President Grant signed the law that Congress passed.”

Abel argued, “In 1906, Congress passed the Antiquities Act, giving itself and the President the legal authority to designate national parks and monuments. Grand Canyon National Park was created under the authority of that act. Presidents are entirely within the bounds of their designated authority when they dedicate a section of land as a national monument.”

Cain smiled ruefully. “The focus of our argument is wandering. We began by discussing vulnerability and now we are discussing the scope of federal and Presidential authority.”

Abel returned the smile. “Vulnerable lands and artifacts on those lands, vulnerable Indian tribes, their cultures and beliefs. We are still talking about vulnerability.”

Cain replied, “Your group wants to take from those that have and give it to those who have not. Those policies do not raise the overall utility or the flourishing of a society.”

Abel said, “We want to improve the conditions of the least among us. Imagine two kids who have to decide how to divide some chocolate milk. The fairest solution is to have one child pour the milk into each glass, then let the other child get first pick of which glass they want. The child doing the pouring will try to make each quantity as equal as possible. A few decades ago, the philosopher John Rawls argued a similar proposition he called the original position. If we could choose the type of society we wanted to be born into without knowing what our place in that society would be, we would choose a society with a fairly even distribution of resources.”

Cain argued, “To implement those kinds of policies means that society has to take property from some individuals and give it to others. In trying to achieve one form of justice, society commits an injustice, a violation of the rights of private property.”

Abel replied, “Even though there is a violation of private property rights, governments can still attain a more just society. That is the principle behind a progressive income tax system. Take a higher percentage from those who have more and use those funds to help the least among us.”

Cain shook his head. “Not only are such policies a violation of property rights, but they are also a violation of individual privacy. To implement such policies, governments collect a lot of data on their citizens. That kind of personal intrusion is typical of totalitarian governments. George Orwell fictionalized such a government in his book 1984. When governments enact distributive policies, they commit many injustices in the pursuit of justice. The net gain is negative.”

Abel argued, “The U.S. is not the government portrayed in Orwell’s book. You are overstating the case. States and local governments collect much of the information on an individual. Why? So they can tax them. Water boards charge homeowners for the impervious area of their home. City governments regularly assess the value of one’s property for property tax.”

Cain held up his hand in a stop motion. “That’s information on property, not the individual. The amount of information gathered by the IRS is intrusive. Every aspect of a person’s life, including their work and family. It is  typical of totalitarian governments. If there was any doubt that we are living under a totalitarian regime, all we need to do is look at the Covid lockdowns during the pandemic.”

Abel said, “Well, the country needed a unified response to a rapidly spreading pathogen. And yes, I agree that the information gathered is a bit excessive. Taxes are an unfortunate component of the social contract.”

Cain said, “A person’s work shouldn’t be taxed at any rate. It’s immoral.”

Abel shrugged. “Whether it is immoral is a matter of opinion. It’s the law, an amendment that is part of the Constitution. Killing people is immoral. When political leaders perceive a threat to the country’s security, they authorize killing. As this country’s population expanded in the late 19th century, policymakers thought that the inadequacy of revenue from tariffs was weakening the government’s finances to the point where it could become a security threat. An income tax was ruled unconstitutional by the Supreme Court in 1895. Eventually, the states amended the Constitution.”

Cain returned to the totalitarian theme. “Lockdown policies during the pandemic scared a lot of people. They demonstrated the authoritarian reach of this government. Grandparents unable to visit with or care for their grandchildren. Scare tactics like ‘Little Johnny will spread the disease and kill Grandma.’ It was reminiscent of the Red Scare, the fear that left wing ideas would infect people’s minds.”

Abel nodded. “That’s a whole other discussion. Every year the Supreme Court hears cases that test the extent of the police power of the federal and state governments. We’ve wandered off topic again.”

Cain shook his head. “Many of these issues are interwoven or joined together like the threads in a spider’s web. What is fairness? How much control should a government exercise to protect the vulnerable? What should be the extent of the government’s role in the social contract?”

Abel smiled. “I like the spider web image. We pull on one thread and that affects the tension on the other connections in the web. Well, maybe next week we can look at the police power of government.”

Cain replied, “Or tax policy.”

Abel laughed. “I wished we could find something simple to talk about.”

With mock skepticism Cain said, “Like whether the toilet seat should be left up or down.”

Abel smiled. “See you next week.”

Cain waved goodbye.

///////////////

Photo by Ross Sneddon on Unsplash

In March 2009, in the depths of the financial crisis, historian Allan Winkler testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs on the effect of New Deal policies during the Depression. “The NRA alienated business, and never did encourage private expansion or investment. It may have halted the deflationary spiral, but it failed to create new jobs.” https://www.banking.senate.gov/imo/media/doc/WinklerTestimony33109TheNewDealSenateTestimony.pdf#page=5

In 2016, Barack Obama designated the Bears Ears National Monument in Southern Utah a national monument. Here is a video of some of the landscape from the Patagonia Company. You can read more about the controversy and legal skirmishes here https://www.npr.org/2022/08/24/1119310929/utah-sues-to-stop-restoration-of-boundaries-at-bears-ears-grand-staircase-monument

Exploitation as well as preservation were key motivations behind the passage of the Yellowstone National Park Preservation Act in 1872. https://www.nps.gov/articles/000/president-grant-and-the-yellowstone-national-park-protection-act.htm 

A list of national monuments. https://geojango.com/pages/list-of-national-monuments

In his 1971 book, A Theory of Justice, the philosopher John Rawls argued for a more equal distribution of resources in society. https://en.wikipedia.org/wiki/A_Theory_of_Justice

The precedent underlying the Supreme Court’s 1895 decision that an income tax was unconstitutional. https://taxfoundation.org/blog/today-history-income-tax-ruled-unconstitutional-pollock-v-farmers-loan-trust-co/

More on the Red Scare and McCarthyism. https://millercenter.org/the-presidency/educational-resources/age-of-eisenhower/mcarthyism-red-scare

More on the Fruit of the Poisonous Tree doctrine https://www.law.cornell.edu/wex/fruit_of_the_poisonous_tree