The Incentive: Taxes

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Super fast gigabit Internet access: It is something all consumers want or it is something consumers really have little interest in. I’ve decided to start this piece here because as I write this both of those statements appear to be true. Or at least according to some of the biggest tech companies in the US they are true. Seeing as they are pretty much mutually exclusive it’s probably important to know who said what to see if they may not be saying these things out of personal motivations. The first is Google, who recently launched such a service in Kansas, the second is Time Warner Cable one of the nations largest internet providers. Google of course makes its money off of search ads, while Time Warner makes money by selling access to the internet access to Cable TV. Given the two though, Time Warner obviously has more experience in the area of providing internet access so it would seem obvious to grant deference to the obvious experts. The problem naturally is that Time Warner isn’t truly an honest broker in this affair they make money by charging people a lot to get on the internet. So while Time Warner does offer gigabit internet they charge twice as much as Google does, as a result they see lots less demand for the service. So from their perspective consumers aren’t that interested. Google is no saint in this either, Google makes its money by knowing more about you and selling that information to advertisers. So it’s in Google’s best interest to have you online giving them more and more data, a faster internet connection facilitates this. The reality is there is significant demand for faster internet but it is not great enough to be worth the premium Time Warner is interested in charging. So in a way both are right. Neither company is really lying, but from the perspective of building a better internet only one is particularly useful. If we as a society want a better internet, which itself is a totally subjective goal, then making it a priority for everyone to have faster access would improve it. In this case Google’s business model of making more money by people being on the internet, is more likely to improve the internet, while Time Warner’s business model which charges you more the more you use the internet probably will not. The point is the personal motivations of these companies matter, but the societal goals matter more. Both are motivated by earning money, and as such both will advocate for the goals that will make them more money. But one companies goals are in line with the subjective goals of the society. As a result if we as a society wanted to achieve those goals we should probably see what we can do to encourage one, and or possibly discourage the other.

This of course brings us to the topic of the day: taxes. I’m going to say something that most people will never say, I love taxes. Don’t get me wrong, I hate paying taxes just like everyone else and I do everything I can to reduce the amount of taxes I pay at the end of the day. Still taxes are a pretty good thing. Why? Because taxes are a good way of showing what we as a nation value. It is an indication of our goals in two ways, what we spend taxes on indicates things we want more of, and what we tax are generally things we want less of. This however is a very simplistic view of the situation, and we live in a world of nuance. For example one of the largest tax expenditures we have is national defense, which is often used to make war; Something I can pretty safely say is not something we want more of. Does this mean that if we stop spending money on defense we’ll have less war? Not necessarily, correlation is not causation and external elements play a crucial role in that process. The same is true for the other side of the ledger with the things we decide to tax.

Most people who have spent five seconds learning economics will tell you that taxing income is generally a bad idea, for the perfectly rational reason that income is something you want to promote in society. They will also tell you that consumption taxes is the preferred method from a purely economic standpoint. So there we go Bobby Jindal of Louisiana is right in proposing to eliminate the income tax and make up the revenue by raising sales tax. The only question is why has it taken our country this long to realize this seemingly obvious brilliance? What did I just say just a few minutes ago– oh right we live in a world of nuance. You see the problem is consumption taxes are extremely regressive. The poor generally end up paying a greater and much more debilitating proportion of their income than the wealthy. There are ways you can avoid this, for example you can offer vouchers to people of certain incomes, or you can limit consumption taxes to certain items that you deem luxuries. I’m sure there are others but most will fail to address the problem with consumption taxes, their method of implementation. By their nature consumption taxes have to be done per consumption. In order to avoid their regressive nature you have to authenticate that the person doing the consumption should not pay as much. This is not easy to do without the government monitoring pretty much every transaction and identifying the buyer, which is pretty invasive.

Throughout the history of this nation we’ve played around with the mix of consumption and income taxes. Not only that we have played around a lot with how each were collected. The system we have didn’t come about through accident it came about because it was effective. How effective? IRS…. did you just get a chill? Yeah our tax system is so effective at collecting taxes from the average citizen winces at the thought of doing anything that will have them run afoul of the Internal Revenue Service. In reason #978,326 of why we are not Greece we have a very effective tax collection system that is difficult to avoid even if you leave the country and try to make a living elsewhere. I point this out because this whole consumption or income tax debate is stupid. We need consumption and income taxes.

Consumption taxes are beneficial in that they can be useful in modifying behavior. Smoking taxes are a great example of this. Consumption taxes are also useful for maintaining wearable goods, think of tolls to build and maintain roads and bridges. But consumption taxes are bad at social welfare lets go back to the toll example, In New York City tolls across bridges just went up. There is a constant argument amongst New Yorkers about why tolls rise, some say we are subsidizing upstate, some say it’s to subsidize subway fares, regardless the point is the same, using consumption taxes on things not directly linked to the specific consumption will upset if not enrage the consumer.

Income taxes on the other hand have always been a general pool of revenue for the government that we know is a part of the price we pay for the government that we elect. That general fund is used for government research, the police and fire department, protecting our food, national defense, diplomatic relations (which enables trade), and overall keeping the government running. In other words the general welfare.  The benefit of the income tax is everyone pays it. 1 Everyone uses the government to some degree and so everyone contributing to a general fund to make sure it works makes sense. It gets rid of that messy nebulous reaction to paying for things you don’t use. The problem is people have a hard time recognizing how much that actually use the internet in their day to day life. Imagine your typical morning, you wake up, use the restroom, flip on the tv get the latest news, traffic and weather, get dressed have breakfast and drive into work. From this example I can pull out three major ways that the government enabled your morning. The first is the water you used in the bathroom, next the satellites used to give you the weather, and finally the roads you used to get to work. But it goes deeper than that, the food you had for breakfast probably had label information telling you what was in the package just in case for instance you are one of the many people in the country who has a violent allergy to something as prevalent in our food as peanuts. There is no practical way to attach a consumption charge to uses such this.

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I’m sure we all want city landscapes to look like this

Once you decide how you’re going to tax, it is important to calibrate it so that it fuels a productive society. Which brings us back to the opening example. The example shows how each corporation is working in their own self interest. If we lived in a purely capitalist society Time Warner should probably win the day. They are an industry leader, and until demand rises to the point that it’s willing to pay the premium, or the costs decrease to the point where the premium Time Warner charges on top no longer discourages adoption gigabit ethernet it should remain a fringe market. But for the last time in this post, we live in a world of nuance, as a result we don’t have anything remotely close to a pure

capitalist society. Time Warner operates in a virtual duopoly because it would be extraordinarily disruptive to have a ton of disparate cable and internet services running throughout any town or municipality. Because most of life involves complicated and heavily fought compromises like this government often has to step in and decide for the common good of the citizens. How it makes those decisions is what governing actually comes down to. I’ve said this many times before, government doesn’t get involved because it is constantly expanding its influence. At least not our government. Government is largely a reactive entity and only responds to problems that market forces seem poorly suited at solving. Its role in this manner is not to decide what is best for the society in a paternal nanny state, but to provide the will of the majority. If the will of the majority is to create a better internet it should act towards that goal and set the rules to work in that direction. If industries fail as a result of these decisions, this is not because government stifles businesses, its because government should not have any interest in maintaining businesses that work against the goals determined by democratic majority.

This to me is why I can’t stand our discussions on how we can’t do anything about climate change because the costs would drive many people and corporations out of business. I’m sorry coal industry that implementing carbon taxes to fund clean energy means you can no longer be profitable while operating in a manner that strips mountains, systematically shortens the lives of your workers, and pollutes the entire planet. I will not play a solemn dirge when you close your doors because you know what I like more than cheap energy, not having my home destroyed by mega storms. And you know what coal industry owners if you don’t want to go bankrupt instead of spending money on preventing the most market based system available to tackle this perhaps you could use your resources to adapt your business from a coal energy company to simply an energy company. That way you can learn how to profit from what will inevitably be the dominant energy source in the next generation that way some of the money that you lose in one sector of your business is made up in another. Because you see one businesses “debilitating job killing tax” is another businesses incentive to enter a new market.

Notes:

  1. “but wait-” some of you may be saying “not everyone paid income taxes. 50% of Americans pay no income tax.” Um no. What you’re thinking of is “The Federal Income Tax” which is defined as income made from personal businesses. Income taxes are all taxes on earnings which would include the federal income tax, capital gains taxes, and payroll taxes. The percentage of people who do not pay any form of income tax is proportionally small and in general are people in real poverty or at extreme risk of falling into it.

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