Income Tax the Most Egregious Moral Hazard
Last Update: Apr 19, 2017
At this time of year, American citizens are breathing a sigh of relief. They have just completed their income tax returns and are thankful that the most onerous process of that citizenship in the “land of the free” is over for another year – that is, unless they are called for an “audit”.
For many years in my ethics lectures, I have posited the notion that not only is personal income tax oppressive to citizens but that it also presents the most profound of moral hazards in the entire American economic landscape as well.
For those who are not certain of what “moral hazard” means, it is presented well in The Economic Times with the following definition: “Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.” Does that sound familiar?
When it comes to one party engaged in “risky” events and another party absorbing the “cost”, has a bell rung in your heads yet?
I am not trying to paint this in broad strokes here, but “we, the people” are incurring the costs – all of the costs – and our government spends the funds we surrender in fashions which not only appear “strange”, but obviously are done so without our input.
Do not misunderstand me. We need taxation for our government to work at all. Then, it is important to consider what our perspective on just what a government has the obligation to do for its people.
In a very simplistic case, I borrow from the American Declaration of Independence and the Preamble to the U.S. Constitution.
The Declaration cites “self-evident” truths: “all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. – That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”
This gives us the reason for governments to exist. The Preamble to the Constitution, in my perspective defines and delineates the obligations of the government to its constituents: “…in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence [sic], promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.”
But some form of funding must be secured to allow the government to perform these Constitutional obligations.
At this point, it serves little function to engage a discussion of the definitions of the extensions of those obligations. My focus here is the morality of “taxing” the sweat of a person’s brow so that a government will be able to fulfill its duties.
Obviously, I am opposed to income taxes precisely because in so doing our government blatantly steals elements of the souls of its constituents. A person’s abilities should NOT be the object of taxation precisely because those abilities are gifts from God. Are we to tax God? Sorry that this may seem blatantly sacrilegious, but our gifts which we use to create a better social structure come from the Almighty, no matter how expanded or limited they may be.
My point is, when we tax a person’s abilities, we are stealing a portion of that person’s soul, of that person’s being, and, as a consequence limit the fullest possible expansion of that person’s gifts and abilities.
In short, it is an immoral action committed on a grand institutional level.
O.K., Ogden, how does a government get the funding it needs to protect and provide for its constituency? My position is really quite simple – perhaps too simple. Our economic system is “capitalism” and, as such, participation in that economic system should serve as the tax base. In effect, it becomes a “use” tax. In other words, we are taxed as we use our capital (money).
This solves the issue of governmental funding and avoids the immorality of taxing a “person”. And to those who would charge that income tax gives us “skin in the game”, well if the “game” is “capitalism”, when we participate in it by using our resources, there is no better evidence of having “skin in the game” than to “play” the game by using our resources in the system.
These proposals I offer are, obviously, over-simplifications, I know, but we must start somewhere. We have been saddled with the first income tax since the Revenue Act of 1861 which was designed to pay for the American Civil War and had rates of 3% on income over $600 and less than $10,000 and 5% on income over $10,000.
Since then, we have gone through several renditions of income tax until we got to the 16th Amendment to the Constitution, which was passed by Congress in 1909 and ratified by the required three-fourths of the States in 1913. This led to the Revenue Act of 1913, which still serves as the basis for our present form of income taxation. But the rate then would be far more palatable today – 1% on income exceeding $3,000 to 7% on incomes exceeding $500,000.
An even more interesting fact is that the IRS Code defines “income” nowhere!
I find this very suspicious and even spooky. The closest we come to finding anything regarding what “income” is comes in Section 22(a) of the Revenue Act of 1913:
“‘Gross income’ includes gains, profits, and income derived from salaries, wages or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatsoever.”
Forgive me for belaboring the point, but I am still convinced that the taxation of a person’s sweat and effort is a violation of the basic moral codes resting on “Natural Law” upon which I rest my case. The best definition of “Natural Law” comes from the Encyclopaedia Britannica: “in philosophy, a system of right or justice held to be common to all humans and derived from nature rather than from the rules of society.”
Forgive my loquaciousness, but this is something about which I feel very strongly.
I would only request that the next time you are working on a project which requires some “sweat” – actually or figuratively – you reflect on the fact that you are being taxed for doing it...merely for doing it.
Good evening Arthur,
As I am not an American citizen and neither live in the US I look at the picture you painted of your current situation from the outside so to speak.
The idea to have a tax on the goods you buy instead of taxing the sweat of your brow I find interesting.
Greetings from the south of Spain, Taetske
Wow! That was educational and an eye opener.
Most days I just sail through life doing what I am supposed to do.
Canadian tax payers get until the end of the month to pay their dues. As I complete my return, I will have your message in the back of my mind! I will likely be a bit more agitated as I complete the process.
I anticipate choppy waters ahead!
Your post is a good reminder to take my blinders off and, every now and then, question why I do what is expected!
Thank you for that wonderful reflection on taxes!
Thanks, Arthur, you brought up a subject that is close to my heart. Taxation should not be based on income but on consumption. A sales tax, in other words. When you buy stuff you use up resources; that should be taxable, not the fruits of our labors. We should be allowed to keep all the money we make. That way, the frugal will score and the spendthrifts pay more, as they use up more resources. It makes sense to me.
Moreover, the federal government (through the IRS) has no business leaning on individuals like that. They should charge the states with collecting the taxes (most states already collect sales taxes, so we don't need the IRS) and leave individuals to get on with their lives.
I expected this to be somewhat dry reading (sorry), but I actually found it interesting.I wouldn't presume to say that I have an answer for this dilemma, but it bears consideration.
I hadn't really expected a religious component to come into the discussion (despite the title), and I don't want to go too in-depth given the policies against religious and political discussion here, but when you say "A person’s abilities should NOT be the object of taxation precisely because those abilities are gifts from God. Are we to tax God?" I find myself wondering how you compare/ contrast the concepts of income tax vs tithing to the church. Some would say that it's apples and oranges, but both are in essence a way for an institution (government or church) to gain money through the efforts of others.
No argument or suppositions being made here. Just simple curiosity and wanting to have a fuller understanding of your views.
Great article Arthur.
Why is the US among the least socialist of all developed countries, yet taxes it's citizens at one of the highest rates? Very perplexing to me.
Our Government has become an industry unto itself, unfortunately they are spending other people's money, earned with our sweat.
The progressive tax code must be abolished if our country is to ever be the economic powerhouse it once was.
Just my opinion.
As a former tax practitioner, I've used the "sweat" Income analogy numerous times. I ask why does a person who "sweats" to earn income (get up, commute to a job) pay more (percentage) than a person earning passive income by walking to their mailbox to get their dividend/interest check?
I have always proposed we do away with the income tax and go to a national sales tax. Tax consumption not revenue production.
As we just finished writing out our payment check, I'm still reeling from the simple fact that we pay taxes on our income(s) and then still have to pay more taxes because it apparently wasn't enough. When is enough, enough?
The task of "preparing" our taxes is time-consuming and "taxing" on each of us emotionally and physically. (Pun intended.) If we pay someone to prepare our taxes for us, then we are still paying out even more. It's a vicious cycle.
Great post, Arthur.
Great post Arthur! I agree with you that we really need to address and revise the current system of taxation in the US. We also need to address the huge problems we have in how those tax dollars are spent.
I believe like you that income tax as we know it today is punishment for hard work. The harder you work, the more you have to pay.
A tax based on what you spend, regardless of what you earn, would be more fair. Those with the ability and desire to spend more would automatically contribute more.
To where society could we go? Anywhere around the world citizens are obliged if not automatically taxed. All commodities are on price hikes.
When will the citizens really feel they have a pro-poor government, have a government for the people, and a government by the people?
Not only systematized and automated tax is now sucking people but even the legalized percentages from projects implemented by the government itself.
They are receiving salaries and still looking for some tricks to exploit the people.
This is no longer service.
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I wanted to read this when I could give it the required time to understand it. I totally agree but how do we get the powers to be to make the switch. Would a usage tax provide the same amount of $ to the government? If so, why would they object...unless it's one of the many ways the government has to control us and they are not willing to give that up. It's talked about a lot but never goes anywhere. Maybe you should run for office! Thanks for the serious discussion. Debbie