It is likely that we will see a tax reform law of some sort in the next few days or weeks. That raises an interesting question for economists beyond the accounting issues of who benefits most. What is the purpose of taxation? Even if we subtract politics, cronyism and corruption from the reality of taxation, it is still a valid and important question.
In feudal times a local noble would extract money and grain from nearby farmers, supposedly in exchange for protection from raiding soldiers or tribes. As the late historian Eugen Weber pointed out, though, that there wasn’t much actual protection provided since the noble and his soldiers would take refuge in his castle and pull up the drawbridge … leaving the unarmed peasants to fend for themselves. He described the system as a medieval protection racket.
The cost of military defensive and offensive systems has been borne by societies since civilization began. Over time, though, and especially as economies developed, some identifiable types of taxes began to show up. One of these was the user or beneficiary tax.
This type of tax has its origins in things like import duties, which were justified by the need for a naval force that could protect a nation’s merchant shipping. As we know, import duties were found useful in other areas, too, including domestic industry protection and furthering political objectives.
The user fee type of tax is applied to offset the cost of developing and maintaining some service, and is usually structured so that it is paid by those who use the service most or benefit from the service most. Admission fees for national parks are an example of this kind of tax.
A larger example of the user fee tax is the use of tolls on bridges and, more recently, on freeways which, of course, will have to be renamed more accurately. The Seattle area had a classroom example of that in the now-replaced Evergreen Point bridge. When constructed, bondholders put up much of the money, and by agreement users of the bridge paid 35 cents a trip until the cost of the bridge was paid off. And, sure enough, in 1979, when the bridge was paid off, the toll plaza was abandoned, and bridge crossing were free. (Tolls of over $3 were reinstated to help pay for the bridge’s replacement, but that is another story.)
Those were simpler times, presumably, for few today believe that the tolls on the replacement bridge will ever go in any direction but up, let alone disappear. Costs of public projects have become startlingly high, and a matter for only experts to understand.
User taxes can backfire, though. King George III of England thought that the American colonists would understand the need for import duties and trade monopolies to underwrite the costs of maintaining a standing army to protect them from raiding Indians. The colonists, however, believed that the Indians would be just fine, thank you, if England and the French weren’t constantly stirring them up to fight a proxy war for the two countries’ European conflict.
We all know how that tax issue was resolved.
In modern times, user fees and excise taxes live on, big time, in things like the gasoline tax and the tax on alcoholic beverages. The gasoline tax is supposed to underwrite the costs of building and maintaining public roads. The taxes on alcoholic beverages are revenue generators for the government, surely, but they are often introduced to affect consumer behavior. This has proven to be difficult with alcohol, but is a powerful factor in tobacco consumption.
Every tax has a purpose under the sun … except the biggest one of all. The treasure trove for insatiable government revenue seekers, the income tax, has a soap opera-like past that includes an illegitimate birth and enough deceit and complications along the way to present a formidable barrier to understanding.
Despite the absence of a specific purpose, we ask a lot of the federal income tax system. It is supposed to effect fiscal policy, as well as redistribute income, promote home ownership, preserve family values, underwrite a dominant defense force and provide stability to key industries such as agriculture, energy, and transportation while disrupting these same industries by promoting innovations.
The list of demands on the income tax system is long, but what is important is that the public has no direct access to it. Legislators do. And lobbyists do. This year’s tax reform is a good idea, and we shall soon see if it meets our expectations. Now that it is done, though, the next tax reform should be to find a better system for the public to be heard on the tax system’s purpose and priorities.
James McCusker is a Bothell economist, educator and consultant.
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