Like labor, for example -- yeah, let's put a big fat tax on labor to get rid of it! But wait -- don't we want labor to be in high demand in our economy? Apparently not, because we see that 37% of the federal budget is funded by a direct tax on labor. The cost of Social Security and Medicare is borne largely by a tax on labor that equals about 15% of the income of an average American worker. The economic effect of raising the cost of labor is to reduce the demand for labor as substitutes such as automation and outsourcing are exploited. Increased unemployment is the inevitable result. A tax on labor makes no economic sense at all.
There is no comparable federal tax upon capital investment. To be comparable, machinery, equipment, and real estate would have to be subject to direct taxation, separate and distinct from the income generated by such assets. Although local authorities sometimes tax such investments, nothing at the federal level remotely approaches the scale of its direct tax upon labor.
Look closer at what is not included in the definition of commodities. Neither income nor wealth are commodities. You cannot directly buy, sell, or trade income on a market exchange anywhere in the world. You cannot directly buy, sell, or trade wealth on a market exchange anywhere in the world. Income is what you have left after subtracting your costs and expenses from your revenues. Wealth is what you have left after subtracting your liabilities from your assets. As such, neither income nor wealth are subject to the laws of supply and demand.
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Okay. So far we've agreed that it makes a lot more
theoretical sense for government to be funded by taxes on wealth and income
than it does to be funded by taxes on favorable commodities like labor. But let's test the concept with some "what
if" thinking. What would be the long
term result of
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But wait, there's more!! About 62% of the federal government revenue comes from taxes on income. Personal income taxes account for about 48% of revenues, and corporate income taxes account for about 14%. Nobody likes income taxes, everybody feels that others are exploiting the system to their advantage, and everybody's right. The income tax system is designed to appear progressive -- graduated to higher rates at higher levels of income -- but it contains within it significant elements of regressiveness.
Regressiveness
in our beloved progressive tax system?
Yes, by design. Income generated
from capital -- specifically dividends and capital gains -- is taxed at a lower,
more favorable rate than the same amount of income generated from labor. In what distorted universe does this make
sense? If there was ever a practical
reason for this, it's been lost over decades of our blind faith in the twin
deities of wealth and investment. But there is a valid political reason -- the
highest incomes in
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