A friend, the chair of an economics department, posted an article for comment. In it a woman complains about her increasing property tax bill. “I’m at the breaking point,” says the woman. “It’s not because I don’t like paying taxes. I have voted for every park, every library, all the school improvements, for light rail, for anything that will make this city better. But now I can’t afford to live here anymore. I’ll protest my appraisal notice, but that’s not enough. Someone needs to step in and address the big picture.” Another friend, also an economist, responded rhetorically to the woman, “Connect the dots.”
When we talk about economic issues and taxes, we long for a “big picture” ability to understand how everything fits together. Such was the promise of “Tax Justice: A Christian Response to a New Gilded Age – From the Advisory Committee on Social Witness Policy.” The report announces its charge from the 220th General Assembly (2012), “to provide a Biblically grounded witness for current discussions of tax reform.” After seven pages of recommendations, 17 pages of rationale and 124 footnotes, a curious reader is left wishing that someone could “connect the dots” for the report’s authors.
Lewis Weeks and William Fogelman have previously argued (“A Two Church Hypothesis, Presbyterian Outlook, 1990) that, “the PCUSA consists in two deeply related, but distinguishable denominations.” They designate these two denominations the Local Congregational Presbyterian Church (LCPC) and the Governing Body Presbyterian Church (GBPC). Using Weeks and Fogelman’s terminology, make no mistake but that “Tax Justice” is written by, to and for the GBPC. If you agree with this world view, you will find much to like in the report. If you disagree with this world view, you will find little in this report to persuade you. A missed opportunity is that this report could have been so much more. It could have defined terms on which the two denominations could have a conversation on the issues involved in taxation. Instead, it reads much like a political manifesto. As a member of the LCPC, I’ll try to enumerate areas where I find the report to be lacking.
Despite its promise to provide a “Biblical grounded witness” the report is short on actual Biblical references. I note on page 2 a non-specific reference to “St. Paul,” on page 7 a reference to Rev. 22:2 and Luke 12:48, on page 11 to I Corinthians 4:7 and I Corinthians 12:7, and on page 12 to Leviticus 25. That’s it: six Biblical references (if we’re generous and count “St. Paul” as one reference). By way of contrast there more references to ACSWP prepared Presbyterian General Assembly reports.
The main arguments of the piece are more political economics or philosophy than economics. However, the logic of these arguments is unsatisfying. “Tax Justice” argues for a collectivism which uses the economic tool of progressive taxation to achieve equality of outcome as a fundamental value.
Equality of outcome, however, should not be a fundamental value. Consider two alternative societies presented to me as choices for participation. For sake of simplicity these societies involve three people: myself, and my two neighbors, Fred and Barney. In the first alternative Fred, Barney and I each have a wealth of $1,000. In the second society my wealth is $2,000, Fred’s is $5,000 and Barney’s is $25,000. If equality of outcome is a fundamental value, then I must choose to live in the first society. That, however, is a silly choice. Freedom can be a fundamental value. Life, liberty and the pursuit of happiness can be fundamental values. Even as a relative value, equality has its challenges. Milton Friedman has argued that, “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” That’s a controversial assertion, but one that can be tested with a variety of empirical evidence. While the authors of “Tax Justice” treat that proposition as settled science (in their eyes, it has been definitively rejected), if we are going to develop a basis for conversations between the LCPC and the GBPC, that’s a proposition that the two “congregations” need to have a conversation over.
Suppose, however, that I find the authors’ arguments compelling, and that I accept the report’s proposition that the U.S. tax system should be “more progressive, taxing those with greater wealth at higher proportions of their income, wealth and inheritance.” There is no stopping rule to how much more progressive the U.S. tax system should become. Is a little additional progressivity enough? The arguments, if they are compelling, have no internal brake. There is no stopping point. Any increase in progressivity which leaves any inequality is subject to the same logic the report gives us for today’s economy. Until we achieve the collectivist dream of total equality of wealth, there is no reason to stop using the instrument of progressive taxation to redistribute income. This is no longer capitalism, this is Marxism. And all achieved with the internal logic of six Scriptural quotations. Can the world really be this simple and wonderful? Is this what the Scriptures call Christians to?
The report makes no distinction between Biblical calls for voluntary giving (charity) and involuntary giving (taxation). To the authors, these are the same activity. The report calls our attention to Luke 12:48, “From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much will be asked.” This is a Scripture that I turn to in stewardship season, and which challenges me to consider how to make a faithful pledge. The passage is a challenge to me to respond with charity to those who are less fortunate than I. However the passage seems to have a different message to the authors of “Tax Justice.” If my response is not faithful enough, then others (whose faith and charity exceeds my own) are entrusted with the duty to distribute my resources more charitably. But this cannot be the meaning of the passage, and this cannot be the call to Christians.
Another argument of “Tax Justice” is to “test the overall United States tax burden [by looking] at our tax obligations in relationship to other nations. The authors present a graphic comparing the U.S. percentage of taxes to Gross Domestic Product with other countries in the OECD. The conclusion is that because other European countries have a higher percentage of taxes to GDP than the United States, that the United States is not “heavy laden” with taxes. If that logic is compelling, then consider the following argument. Compare the political freedoms in the United States in 1850 to those in Europe in 1850. One could only conclude that there was “too much” freedom in the United States, and that the installation of a king or ruling monarch was desirable. Of course, you probably learned the same lesson in first grade when your mother asked you, “If everyone else jumped over a cliff, would you jump too?”
Moving from political economy and philosophy to economics, the report has methodological problems. The report presents a chart of marginal tax rates in 1954 and in 2013, “to show the changes in sense of public obligation.” The chart has an eye-popping difference that in 1954 the top marginal rate was 91 percent while in 2013 the top marginal rate was 39.6 percent. “Wow,” one is prompted to ask one’s self, “where has our sense of public obligation gone?” What the chart doesn’t report is the tax base to which those rates were applied. Almost no one paid the top rates in 1954, employing an array of tax lawyers to shimmy income into tax shelters. The tax reform of the Reagan administration (incorrectly labeled by some as “tax-cuts”) was to change the tax system so that approximately the same tax revenue was generated by applying lower marginal rates to a larger base. For a variety of reasons, unexplored or unexplained by the authors of “Tax Justice,” economists generally agree that this is a better way of collecting tax revenue.
The side effect of this tax reform is that it leaves the unrepentant collectivist to pipe dream about “what might have been” if the higher marginal rates could be applied to the large tax base. This pipe dream violates a fundamental axiom of economics – that if you tax something you get less of it, and if you subsidize something you get more of it. People adjust their behavior to the system of incentives they live in, and if tax rates are changed people will accordingly change their behavior to adjust to higher (or lower) rates.
This fundamental axiom is also a reason for a difference in tax rates on earned (labor) income and unearned (capital) income. Providing individuals an incentive to invest (save – provide resources to capital markets) supports a socially desirable activity. “Tax Justice” recommends to, “work to eliminate the application of lower tax rates on unearned as opposed to earned income.” There is no acknowledged awareness of why there is a difference in these rates. Somewhat bizarrely, “Tax Justice” argues that, “progressivity … promotes economic growth, keeping money in the hands of lower- and moderate-income people who spend proportionately more of their income.” This idea – that consumption (spending) and not saving promotes economic growth is not connected to any generally received economic theory. In the classical (Solow) model, economic growth is driven by saving. If “Tax Justice” is going to generate new economic theory, at least they should provide a footnote for why their alternative model is a preferred one.
Analysts of lower rates of growth in the American economy in recent years have developed a variety of hypotheses. None of these are explored or acknowledged by “Tax Justice.” If the PCUSA is to have an understanding of issues in taxation, a worldview beyond the liberalism of the GBPC simply has to be acknowledged. A flavor of an alternative view comes from Gary Becker:
“The biggest problem for the American economy currently is not the level of redistribution, but the slow rate of growth because of depressed investments. Greater investment in technology and capital is a necessary ingredient of better growth. Some of these investments may reduce the demand for less skilled labor. This indicates that the best policies are those that increase investments and at the same time add to the earnings of lower income individuals and households. Greater investment in education and other human capital of those who do not invest a lot in themselves would be a prime way to do both.” (“Redistribution and the Well-Being of the Poor” – BeckerPosner Blog).
In “Tax Justice” there is also no acknowledged awareness that taxes on unearned income are a “second bite at the apple.” Income is often first “earned” as a return to labor (taxed at the higher rates) and then invested as capital (with its returns taxed a second time).
The ultimate myopia of “Tax Justice” comes in their rhetorical question, “If the Presbyterian Church (USA) is a ‘middle class church,’ how do we adapt when the middle class declines?” The authors’ answer is to “tax the rich!” Going back to the woman at the beginning of my paper, we’re often for raising taxes, as long as they’re someone else’s taxes. When OUR taxes are raised, then we demand that someone look at the “big picture.” The question of whether “taxing the rich” can provide enough to pay for the panopoly of social programs the authors endorse is left unanswered. Most analyses suggest that it cannot.
The economic challenge to which we have not found a political answer is that in looking for additional tax revenues the only practical solution involves looking in the mirror. A quote attributed to Margaret Thatcher observes that, “The problem with socialism is that eventually you run out of other people’s money.” The authors of “Tax Justice” would have us believe that we have not yet reached that point. In reality, we have long passed it. The conversation which the denomination should be challenging us to undertake is to make an accounting of how much of OUR tax revenue we’re willing to sacrifice. Selling “tax the rich” solutions is political snake oil which our economy cannot long endure. Reaching across the denominational divide to find a language in which to have that conversation would have been a study worth undertaking. Sadly, the authors of “Tax Justice” provided a badly focused analysis which should be soon forgotten.
John McMillan is an economist with a PhD from the University of Chicago. He has held positions at Iowa State University and the Institute for Policy Reform in Washington, D.C. He has also consulted many Fortune-500 companies. Currently, he resides in Empire, Mich., and is a ruling elder and clerk of session at St. Andrews Presbyterian Church in Beulah, Mich.