Hurricane Harvey’s historic flooding has brought out the best in many people. They have put their lives in danger to save strangers, shared their food, and offered their homes. Citizens across the country are contributing to the United Way, Red Cross, community foundations, and churches. Race, creed, and social status seem to make little difference, and the political issues that divide us suddenly seem petty, almost separated from the real world in which we live, suffer, or thrive.
But because charities and individuals can do only so much, we have turned to government to act on our behalf. But even as we ask government to coordinate efforts and bear a large share of the cost of repair and rejuvenation, a question lingers: Who should pay for those costs? Or to ask another way, who should feel entitled to claim they are exempt from the social compact that says we should use our tax dollars to assist victims of an historic flood they could not predict or plan for? Once one broadens this question to include helping victims of poverty or poor health, or paying some share of the cost of our national defense, it lays bare the issue of who should pay taxes.
Join me, therefore, in speculating about who should be exempt from sharing in the tax burden for helping victims of Hurricane Harvey.
How about owners of capital? They claim they benefit society by building and holding onto wealth and promoting growth by investing that wealth. Though often exaggerated, their case has enough merit to support economic and legal arguments for converting the income tax to a tax on consumption. Indeed, our current tax system combines features of both and reflects the divisions over the role of savings and investment in enhancing our well-being.
Many owners of capital even claim they should pay “negative” tax rates, at least on returns from new investments through generous tax depreciation or expensing of debt-financed physical assets. Should the tax system exempt owners of capital who consume only modest portions of their income from helping to finance assistance for the victims of Harvey?
How about the poor? We exempt low-income households from income tax (though the poor often pay sales, excise, and payroll taxes), a choice that also has some merit. After all, how can one expect the poor to pay taxes when they can’t afford adequate food or housing? Of course, that issue is complicated because low-income people often receive more in government support than they pay in taxes.
How about the middle class? We’re running huge federal deficits today largely because no one wants to raise their taxes or cut their benefits. Democrats are willing to tax the rich and Republicans will take away benefits from the poor, but both parties appear to coddle the (very large) middle class. It is true that middle-income workers have seen little wage growth or upward mobility in recent years, but does that mean they should not do their part to help government cover the costs of floods or other public goods and services that otherwise would add to deficits?
How about the elderly? Yes, many are retired and on fixed incomes. But many are reasonably well off and enjoy a permanent tax exemption on income from sources such as Roth retirement accounts. Can we as a nation go back on that deal? How about those who die with large estates? They could have realized income by selling assets and consumed that wealth when alive. But if they did not, should they be subject to an estate tax upon death? How about companies that get special business tax breaks? Don’t they need tax help to ensure their competitiveness with firms in other countries?
And, finally, how about you and me? Why should we have to pay taxes when it appears almost nobody else does? But then there are those people suffering in the wake of Hurricane Harvey.
