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Thurman Hart

The morality of taxation

A budget is a moral document because it is built on the values that guide each decision. What expenditures will be prioritized? Who will be exempted from the destructive power of taxation? Will we meet our current obligations or will we push them off onto future generations? The answers to these questions are found in the details of our governmental budgets, and they point to the values we actually put into action, rather than the ones of which we like to speak and pontificate.

Earlier I said that taxation is a fundamental social contract. But it is also a tool that we can use to determine the moral direction of our country. It can be as blunt and brutish as a club or as precise as a surgeon's scapel. The decision is ours, but to understand how to make that decision, we have to understand some fundamental principles of taxation.

First of all, there are basically two ways to assess a tax. An occassional assessment is paid periodically for as long as you own a taxable asset. The other type of taxation is a transfer tax, which is assessed whenever possession of something of value is transferred from one person to another. Property taxes are generally an example of the first type of tax. Sales tax is an example of the other.

Conservative rhetoric would have us believe that all taxation is of the former type. Estate taxes, for example, are opposed as "double taxation" because one generation has already paid a plethora of taxes before they pass it along to their heirs. A moment's worth of reflection, however, will show that what is being taxed is the transfer of property, not the ownership of property. It isn't a "death tax", but rather a tax on excessive inheritances.

The rhetorical trick is important, because it changes the morality of the decision being made. Being taxed for the human fact of death or being taxed twice seems inherently unfair - and the intention is to weaken the social contract that binds these transfers of wealth to the common good. It puts proponents of fair taxation at a rhetorical disadvantage to engage discussion on this level. It also hides the immorality of transferring enormous sums of wealth to a very small number of people without having to chip in their fair share.

In 2001, for example, estates worth more than $20 million paid almost $4.9 billion in federal estate taxes. But don't feel sorry for the heirs of the 469 estates that racked up this level of wealth - the combined taxable estates of these families was just over $13.1 billion. Even after paying taxes, this represents a transfer of wealth from one generation to the next of $8.2 billion - a type of transfer that Andrew Carnegie denounced as destructive to the morality of its recipients. If "death tax" activists had their way, 469 families would have increased their unearned wealth by an average of just over ten million dollars each.

The exact amount paid by the wealthiest families changes from year to year - it is entirely dependent on who dies during what year. But there is no way to discuss the morality of taxes without dealing with this phenomenon. It isn't going to be enough to balance our record budget deficits, but it is a large enough chunk that we should ask if it is morally right to let 469 families keep an additional ten million dollars each that will be financed by federal bonds that, in turn, will be paid off with higher taxes on everyone - including those who will not make ten million dollars in their entire working lives.

The power to tax, as stated by John Marshall so long ago, is the power to destroy. We should make every effort to ensure that families are not destroyed by their tax burden. However, it is hard to make a legitimate case that we are destroying our wealthiest families. I think it is also important to discuss the manner in which withholding legitimate taxation power can be just as destructive - for the individual recipients of windfall transfers as well as for society as a whole.

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Posted at 7:00 AM, May 20, 2008 in Financial Justice
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