The psychology of debt and taxes

I just wrote a piece about the non-Anthony Lawpsyc news of the week, but in fact, this week’s news has been dominated by negotiations between Congress and the President about raising the national debt limit, allowing the country to continue borrowing money when we already owe over five times what we take in annually.  Now I know you’re used to hearing and reading what I think about crimes, celebrity misbehavior, etc., but along with my psychology and law degrees, I also have an MBA, so every once in a while, I take all three and give some thought to the psychology of debt and taxes.  No, don’t stop reading — it may not be as riveting as the Anthony case, but in the grand scheme of your life, it’s actually more important, and it won’t take me long to make the point.

Over many decades, with both political parties to blame, our federal government has taken on far more responsibilities than it was ever intended to handle, and even though that has helped many people, they’ve been responsibilities that I think really belong to society, to us, one another, looking out for ourselves and our families and our friends and our local communities in personal, voluntary ways, rather than to an impersonal government that’s ill-equipped for the tasks and funded by taxation.  Whether you agree with me on that or not, the bottom line is this:  the spending that the federal government is doing is simply unsustainable.  Our ability to continue spending at today’s levels will end, whether it’s now, on our terms, or in the relatively-near future, on our creditors’ terms.

One of the suggestions under consideration is to raise taxes on higher-earning Americans to generate additional revenue for the government so that it won’t have to borrow as much.  That’s not going to work, and here’s why:  The higher-earning Americans who would pay these proposed higher taxes already kick in a percentage of the federal government’s revenue that’s massively disproportionate to their numbers in the population (i.e. a relatively small number of citizens are already contributing the majority of the government’s total revenue).  But more importantly, roughly half of all wage-earners in this country are currently paying no federal income taxes whatsoever.  That means that the majority, who don’t pay anything, can elect to maintain all current government expenditures and benefits and try to pay for them with the minority’s money.

Forget the fact that even if we taxed these higher-earning Americans at Communistic rates, let’s say 90% of their incomes, there still wouldn’t be enough revenue to fund all current government expenditures; we’d still have to borrow unsustainable amounts.  The psychological effects of even attempting that could destroy the country, economically (by diminishing the current high-earners’ incentives to be productive), and maybe even existentially (American life as we know it could change drastically if our global competition overtakes us economically, technologically, and influentially around the world).  When we instituted a “progressive” income tax, whereby tax rates increase incrementally as income increases, we set up a system in which a majority of Americans could raise taxes on the incomes of a minority of Americans without raising taxes on the majority’s own incomes.  Behaviorally speaking, it gave lower-earning citizens a powerful incentive to demand more and more from the federal government because it created the illusion that they could reap additional benefits at no additional cost.  Allowing that to happen was a profound behavioral oversight; it vies for the title of “most ruinous error” in the history of our nation’s governance; and it must now be reversed.

No American should be able to vote to raise taxes on another American without simultaneously voting to raise taxes on him/herself.  The value of the privilege of living in this country doesn’t differ from one American to the next.  We all get the same defense, same highway system, same postal system, same federal courts and law enforcement, etc.  True, some citizens do get extra payments and services from the federal government, and rather than paying extra, they’re mostly among the citizens who don’t pay any federal income taxes at all (understandably so, because they don’t earn much income).  If you think about it, the fairest system of taxation would be if every citizen in the country paid the same fixed fee, say $10,000 per year, for being a “member” of the American People, with those who get extra payments and services from the federal government paying “surcharges” for those extra benefits.  A system like that isn’t practical, though, because too many people couldn’t pay a base fee large enough to fund even today’s existential priorities like defense, let alone pay surcharges for any additional services that they received.  So, if we must use a percentage-based taxation system whereby people pay more as they earn more, then that percentage should at least be the same for all Americans across the board, whether it’s a percentage of their incomes (the so-called “flat” tax), a percentage of their purchases (a national sales tax), or a percentage of anything else.

If we implement a fixed, uniform percentage across the board, then when someone votes to raise your taxes, his/her taxes will have to go up, too.  That’s the only way we’re ever going to be able to get hundreds of millions of people to start making personally-responsible choices about what they really need and want from their federal government and what they can live without.  As it is now, if a guy who earns $20,000 a year wants a benefit from the federal government, he can vote to raise taxes on a guy who earns $200,000 a year in order to fund the benefit.  With no perceived cost to the $20,000-a-year guy, no “skin in the game,” the incentive is to vote for the tax and benefit increases.  If, on the other hand, the $20,000-a-year guy had to fork over the same percentage of his income in additional taxes, think about how often he’d probably conclude that he could in fact find a way to live without the benefit.  Allowing one American to tax another American without proportionally taxing him/herself will simply “sustain the unsustainable” — temporarily — keep chipping away at the foundation of our economy — productivity — to the point where we end up with a structural collapse instead of a repairable structural settling.  One of those two eventualities is coming, and in determining which one it will be, the psychological/behavioral factor cannot be underestimated.

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