[1] The role of government is a broad topic. There are two general ways it can be addressed. One analyzes what the role of government should be while the other analyzes what the role of government is. In order to narrow the topic, I will discuss only what the role of government is in the United States. The sources that provide answers to this question include our founding documents such as the Declaration of Independence and the Constitution, as well as less official documents such as inaugural speeches and the Gettysburg Address. These sources need not be limited to government documents or speeches by politicians. Many would view Martin Luther King Jr.’s speeches as an important part of our national “canon.” Before getting to the role of government, we must identify the goal of government. The preamble to the Constitution is perhaps the most concise enumeration of these goals: to “establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty.” The role of government in the United States could simply be stated as “to act in such a way as to secure the above goals without infringing upon the individual and states’ rights laid out in the remainder of the Constitution.”
[2] While the Constitution lays out ways in which the government is prohibited from acting, there are also socially defined ways in which the government is considered limited. Capitalist economic theory, for instance, is broadly embraced in the United States and is seen as a boundary for government involvement in the market. Yet even the most libertarian economists (excluding those more aptly labeled anarchist) believe the government has a role to play in economics even if that role is limited to a police force and a court system to ensure property rights. While the extent of the government’s involvement is open to debate, it is generally agreed that the government has some role in the market, even if limited as above. Once this is established, it is necessary to spend money towards that end. This would also require the taxation of the citizenry to fund such spending. Fiscal policy address both the spending and the taxing side of the equation. I will examine just the taxation half of fiscal policy. So from the broad question of the role of government, we have now arrived at a narrower, yet related question: what is the most just method for taxation? If the current method is not the most just, how could it be reformed to better approach justice?
[3] Before looking at frameworks for analyzing tax reform, it is important to first decide what the goals of taxation are. Why should we tax at all? The Constitution lays out two reasons: to “provide for the common defense and general welfare of the United States.”[1] Much like Scripture’s assertion that all commandments derive from the love of God and neighbor, all tax policy should be directed towards these two ends. I believe we can extrapolate three criteria from “common defense and general welfare” that can help guide the discussion of tax reform. Two are positive reasons while one is negative. In other words, two establish the importance of taxation based on what good can come from it. The other considers how taxation can prevent undesirable consequences.
[4] The positive criteria of taxation are the most common – we tax, and are taxed, so that the government can (1) provide goods and services to its citizens and (2) invest in capital, research, and infrastructure that the private sector either does not do or is not as efficient at doing. The first criteria involves entitlement programs such as unemployment insurance, food stamps, and welfare, but there are other examples that we all benefit from regardless of income level. The second criteria includes investments in basic transportation infrastructure, military protection, and research such as renewable energy. These would be hard to envision without some level of taxation. Often it is the spending side of fiscal policy that proves so controversial: “Our taxes wouldn’t be so high if we didn’t spend so much money on . . ..” While we may disagree on exactly what and how much the government should provide in goods and services to its citizens, there is a broad consensus that some level of these public goods should be provided by the government.
[5] The third criteria of taxation approaches the issue from a different angle: what undesirable result can we hope to prevent by taxation? This is a much more abstract question. By taxing someone, we simply remove some of their money. The emotional response to this can be anything from altruism to affront. Some believe paying taxes to be patriotic[2] while others equate it to slavery.[3] In order to best explain this negative goal of taxation, it will be necessary to trace the relationship of money to political power.
Relating Money to Power: Reinhold Niebuhr and John Rawls
[6] Even in the digital age, money is a concrete object. We can hold it and smell it. We can see it when we check our bank account, 401k rate of return, or send money to family and friends in an instant. Power, on the other hand, is not something we can see or feel. It is abstract. There are many abstractions that we take for granted every day. As Christians, we may feel, taste, and see God active in our lives. Yet we must still admit that this is an abstraction. The idea of power is often enigmatic and controversial. What is it? Who has it? How does it “flow” from one person or group to another? The answers to these questions are best found in several 20th century thinkers including Michel Foucault and Jean Francois Lytoard.[4] To keep things simple, however, I will be referring only to a pair of well-known 20th century authors. They are Protestant theologian Reinhold Niebuhr and philosopher John Rawls.
[7] Niebuhr’s main work contributing to a concept of power is “Moral Man and Immoral Society.” In it, Niebuhr often focuses on specifically economic situations. A principle method of using money to induce power is by political contributions. Those who contribute more money to a politician or political group naturally have an easier time influencing policy than those who contribute less. Economically speaking, this can easily result in regulatory capture where the people/groups that are supposed to be regulated are actually determining who is doing the regulating, how they are doing it, and what is being regulated. In Niebuhr’s words, “the creeds and institutions of democracy have never become fully divorced from the special interests of the commercial classes who conceived and developed them. It was their interest to destroy political restraint upon economic activity, and they therefore weakened the authority of the state and made it more pliant to their needs.”[5] This was seen in the aftermath of the Deepwater Horizon blowout as well as the Great Recession. The government sanctioned report on the causes of the Great Recession states that “the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor.”[6] Regulatory capture may not apply to tax reform, but it is an example of how money can induce power.
[8] Niebuhr describes another concept where money is equated with power. Those with more money have more power. In other words, “all social power is partially derived from the actual possession of physical instruments of coercion, economic or martial.”[7] While I cannot speak for Niebuhr, I imagine his concept of a just society may include absolute income equality – everyone has the same amount of wealth and income as everyone else. I do not think this is necessary. Differences in wealth and income are acceptable as long as they are within limits. Because of the link of wealth to power, however, excessive income inequality such as in the United States in 2014 is important, and moral, to counteract.
[9] Coming from a secular perspective, John Rawls arrives at many of the same conclusions as Niebuhr. Concerning power, Rawls notes that it is the State that maintains the power to coerce, but that in the United States this is accomplished through the consent of the governed. Therefore “political power is citizens’ power, which they impose on themselves and one another . . ..”[8] For Rawls, the power of the state is the corporate power of individuals. If the power of these individuals does not approach equality, then some individuals are able to coerce the State to the detriment of others. Because of this it is necessary “to prevent excessive concentrations of property and wealth, especially those likely to lead to political domination.”[9] This does not mean, however, that all income and wealth need be identical from one individual to the next. It merely means that a procedure (“background procedural justice” in Rawls’ terms) is in place to limit exorbitant inequalities and that equality of opportunity is pursued. Inequality, in fact, forms the backbone of Rawls’ argument. He believes in limits on liberty and equality, but only when they benefit the worst off. This forms his now famous “difference principle”: “economic and social inequalities [are acceptable if they] contribute in an effective way to [the] . . . benefit of the least-advantaged members of society.”[10]
[10] Here we encounter a striking similarity between Rawls’s thought and that of many 20th century theologians, particularly liberation theologians. Rawls’s difference principle (DP) is remarkably similar to the preferential option of the poor (POP) first spelled out by Gustavo Gutierrez and taken up by many theologians, Catholic and Protestant alike. Gutierrez is undoubtedly recognized as the “father” of liberation theology and first laid out the POP. For Gutierrez, the POP has multiple meanings. It is expressed through revelation in history as God’s loving and liberatory preference for the poor.[11] It also has epistemological importance – we, First world citizens, should always consider a situation from the perspective of the poor and attempt to understand it through their eyes.[12] This second perspective is expressed concisely by Dorothee Soelle when she tells us “that scripture must be read in terms of those to whom it is addressed . . . [the] poor who went with [Jesus] through the land, including a striking number of women.”[13] More recently, Cynthia Moe-Lobeda has made similar statements in the January 2014 issue of this journal when she says we should “learn also from the experiences of people who suffer because of the systems that bring our material excess.”[14] While I have not yet found a liberation theologian who specifically links the POP with making decisions in ways that most improve the life of the poor in the way that the DP does, it seems like a logical link to include it in both the revelatory and epistemological notions of God’s preference for the poor.
[11] If one accepts this link, we then have arrived at similar positions by different paths – one Christian and one secular.[15] When considering almost any situation, we should (1) look for how God has revealed God’s love for Creation especially through ways in which God has liberated the poor, (2) analyze and attempt to make sense of the situation by viewing it, as best we can, through the lived experience of the poor, and (3) make a decision on how to proceed based on what is in the best interest of the poor. As Rawls states, point (3) does not mean that only the poor should benefit from a decision until they are at the same level (economic or otherwise) as the rest of society.[16] A decision could very well result in the “rich getting richer,” but this decision must be made based first upon what would most help the poor. Points (2) and (3) will most directly affect an analysis of fiscal policy and possibilities for tax reform. Through these three points, a solid case can be made for progressive taxation – the current basis for US tax policy. In essence, point (3) above becomes analogous to asking “is it progressive?”
Three Possibilities for Tax Reform: Mortgage Interest Deductions, Capital Gains/Dividend Taxes, and Taxes that Account for Market Externalities
[12] Using the framework laid out above, it is possible to identify many different areas for tax reform. I will focus on three. The first two are related to progressive tax approaches while the third attempts to account for expenses that are not figured into price. In other words, these costs are external to the market. For instance, the cost of our electricity ignores the harm done to the local environment (used nuclear fuel) as well as the global climate through carbon emissions, etc.
[13] The least controversial of these approaches involves the current ability to deduct interest on a mortgage. While there is a cap on the amount of interest that is able to be deducted, the larger the mortgage, the more one is able to deduct (usually capped at a mortgage total of $1,000,000).[17] This is a clear case of a regressive tax policy – those with less expensive homes receive less of a benefit than those with more expensive homes. The idea of eliminating this deduction has adherents among many different political groups, but the lobbyists representing realtors and home builders have been able to influence Congress to maintain the status quo. There are also many Americans that benefit from this deduction who, even if they agree with the unfairness of it, are unlikely to be vocal enough to move their congress people to action. It is possible to maintain a mortgage interest deduction if it were restructured in a way that is progressive. This could be done by creating different brackets based on the size of the mortgage with the percent to be deducted decreasing with the size of the mortgage – much like income tax.
[14] A trickier approach involves income from investments. Capital gains and qualified dividend income (hereafter called simply “dividend” – see end note)[18], along with their low tax rates, became headline material in the 2012 presidential race. Many were unaware that it is perfectly legal for someone making $21 million a year to pay only 15% on that income.[19] This “income” is not treated as income. It comes from investments that pay regular dividends or that were sold for a profit after being held longer than one year. For those in lower tax brackets, the percentage is 5%. Beginning in 2013, there is a new rate of 20% for those making more than $450,000 if married and $400,000 if single.[20] There is very little reasonable argument for treating capital gains and dividend income separately in the tax code. It is outside the scope of this article to pick apart these arguments, but rough explanations can be found in the endnotes.[21] Instead, keeping in mind point (2) above, the salient question to ask is “who benefits from a lower tax rate on capital gains and dividends?” Not only do more wealthy Americans benefit from this reduced tax rate, but the amount they benefit is considerably more. This would mean that a reduced rate for investments fails both the progressive tax test synonymous with point (3) above. By treating capital gains and dividend income as “normal” income, revenue would certainly increase even if many pulled their wealth out of investments), thus providing a bigger “pie” from which to provide for the general welfare.[22]
[15] The last approach for tax reform is by far the most important. It not only addresses a just tax code but also the critical threat to our environment that we are currently experiencing. In order to understand how a tax on carbon emissions and other social costs work, it is first necessary to examine the economic concept of market externalities. In a free market economy, the price of a good is determined by the market. A producer, however, is unlikely to sell a good for less than the cost of production. For most goods, this model holds true, but for others, there are costs that are not borne solely by the producer. Pollution is a common example of a market externality. The cost of polluting is borne by everyone who lives in the affected environment, not just the producer. Therefore, in calculating a minimum price, the producer can ignore the damage done to the environment — something economists call a social cost. In other words, the damage of pollution is paid for by society at large and not by the producer through the price paid by the buyer. In order to make any progress on climate change, it is necessary to factor these social costs into the price of a good – such as energy.
[16] A carbon tax has not gotten much traction in Congress in the United States. Many politicians are against any new tax whatsoever. Others demand that any new tax be accompanied by an equal reduction in federal spending. A carbon tax, however, is a special kind of tax that is different from income or sales tax. A pigovian tax is “a tax designed to internalize negative externalities into the price system.”[23] In other words, a pigovian tax is used to improve efficiency in the market, a goal embraced by most economics whether they fall under the umbrella of Hayek or Keynes. It is not of the same class of taxation that Nozick equated with slavery.
[17] In economic theory, a pigovian tax on carbon emissions accomplishes two goals, not just one. Called a double dividend, this tax both increases market efficiency as well as improving the condition of the environment (or at least slowing its worsening).[24] The environmental goal of a carbon tax would be to reduce carbon emissions to a level that would at least halt a global increase of atmospheric CO2 and at best reduce these levels. Revenue generated from a carbon tax should be funneled into projects that work on climate change mitigation (how we adapt to climate change) as well as projects that work to reverse human effects on climate change (technology for removing carbon from the atmosphere for instance). It is important to note that non-carbon based energy, such as wind and solar, would not be taxed since they produce zero carbon emissions.[25] A free market would therefore incentivize both increased investment in these forms of energy as well as reducing their relative price which would increase demand for “clean” energy.
[18] Lastly, it is not only important to impose a pigovian tax on carbon emissions but also to reward individuals, corporations, and entire nations for producing or preserving resources that remove carbon from the atmosphere. These are known as carbon sinks, the largest of which are rainforests. While carbon emissions are a negative externality, carbon sinks are a positive one. The former should be internalized through a pigovian tax while the latter should be rewarded. This could be accomplished domestically by tax deductions for carbon sinks or a cash payment to the state, nation, etc. contingent upon the preservation of them. It is in the global self-interest to pay Brazil, for instance, to preserve the Amazon rainforest or to pay a corporation for research into technology whose end would be an artificial carbon sink. These payouts could be financed through the revenue generated by a tax on carbon emissions.
“Then let us go to serve in peace”[26]
[19] As with many, if not all, issues regarding religion, we cannot hope for unanimity. The best we can hope for is only consensus. This article hopes to lend a voice to the conversation. Undoubtedly, there are voices that will agree and disagree. I look forward to hearing both as we together engage in civil discourse and moral discernment in the church while considering their implications for the role of government and tax policy. The main points I have attempted to lay out deserve repeating. If we are to take seriously the many calls in Scripture to serve the poor, the widow, and the orphan, then we should not limit this assistance solely to the private sphere. Corporate assistance should be found in small groups as well as large. This includes the federal government which is formed “of the people.” Towards this end, I have shown how theologians such as Reinhold Niebuhr and many liberation theologians (Gustavo Gutierrez, Dorothee Soelle, et al) have argued for the government to be active in the plight of the poor. This is most concisely stated in the preferential option for the poor. Secular philosopher John Rawls arrives at a similar concept in his difference principle – when making a decision, choose the one that best improves the lot of the worst off.
[20] With this framework in mind, I have discussed three approaches for reforming the US tax code: eliminating/changing the mortgage interest deduction, equating capital gains and dividend income tax rates to income tax rates, and imposing a tax on carbon that accounts for the social cost of carbon emissions. These three approaches come out of the above framework. Many other approaches are possible using this framework – particularly concerning corporate, as opposed to household, taxes. This framework could also be used for reforming the spending side of fiscal policy.
[21] Most of these approaches must keep in mind that the United States economy does not function as a closed system. The actions and inactions of other countries have a large influence on how these approaches will play out – especially concerning a carbon tax. The United States, however, cannot continue to sit on the sidelines regarding economic issues while it waits for the rest of the world to reach a decision and act on it. With issues as critical as climate change, unilateral action on the part of the United States is warranted even when considering effects such as carbon leakage and free-riders. The same is also true of investment income tax reform. Capital flight may be a predictable, if unintended, consequence, but this should not be a reason for neglecting reform altogether.
[22] A large part of the Gospel deals with unilateral action. We do not love our neighbor in the hopes that they will love us. We do not perform good works to merit salvation. We forgive others without requiring that they in turn forgive us. Quid pro quo may be business as usual in politics and business, but as Christians we should be willing to act first without expectation of reciprocity. Leading by example may very well be a better axiom for us than quid pro quo.
NOTES
[1]The Constitution of the United States. Article I Section 8.
[2]NBC News. “Biden calls paying taxes a patriotic act.” http://www.nbcnews.com/id/26771716/ns/politics-decision_08/t/biden-calls-paying-higher-taxes-patriotic-act (accessed June, 12 2013).
[3]Robert Nozick, Anarchy, State, and Utopia.(New York: Basic Books, 1974) 169.
[4]Cf. Foucault. The History of Sexuality Volume 1 and LyotardThe Postmodern Condition.
[5]Reinhold Niebuhr, Moral Man and Immoral Society, (Louisville: Westminster John Knox Press, 2001) 14.
[6]The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. xviii http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (accessed June 18, 2013). For more on regulatory capture and moral hazard cf. Russell Roberts Gambling with Other People’s Money: How Perverted Incentives Caused the Financial Crisishttp://mercatus.org/publication/gambling-other-peoples-money
[7]Niebuhr 237.
[8]John Rawls Justice as Fairness: A Restatement, (Cambridge: The Belknap Press of Harvard UP, 2001) 40.
[9]Ibid. 44.
[10]Ibid. 52.
[11]Gustavo Gutierrez Gustavo Gutierrez: Essential Writings ed. James B. Nickoloff (Minneapolis: Fortress P, 1996) p. 101-108.
[12]Ibid. p. 4.
[13]Dorothee Sölle, Thinking About God: An Introduction to Theology (Philadelphia: Trinity Press International, 1990) 39.
[14] Moe-Lobeda, Cynthia. “Neighbor-love’s Moral Framework: From Markets that Concentrate Wealth to Markets that Serve Abundant Life for All.” Journal of Lutheran Ethics, January, 2014. Paragraph [23].
[15]It may be more accurate to generalize “Christian” to mean “religious” as the heart of the POP, in my opinion, is the Golden Rule which is not exclusive to Christianity.
[16]Rawls 61-66.
[17]October 13, 1987 proves an important date for this tax policy. Interest deductions only apply for mortgages after that date if the total is $1,000,000 or less. Before that date, there is no limit. Publication 936 – Main Content. http://www.irs.gov/publications/p936/ar02.html#en_US_2012_publink1000229900 (accessed July7, 2013).
[18]There are two rates of taxation on dividends. One is equal to one’s tax bracket. The other, called qualified dividends, are equal to the capital gains rate. The main difference is the length of time a stock was held before the dividend execution.
[19]Mitt Romney tax returns make him a personal embodiment of GOP tax policyhttp://articles.washingtonpost.com/2012-01-24/business/35438224_1_tax-returns-tax-rate-tax-proposals (accessed July 3, 2013).
[20]Tony Nitti “Raising Capital Gains Rates In the Name of Tax Reform” Forbeshttp://www.forbes.com/sites/anthonynitti/2013/05/31/raising-capital-gains-rates-in-the-name-of-tax-reform/ (accessed July 8, 2013).
[21]The CATO Institute lists six reasons for maintaining the status quo regarding capital gains and dividend taxes. Reason 3, that of double taxation, provides a prima facie argument against raising investment tax rates. Taking a closer look, however, the double taxation argument proves fallacious. This argument rests on the assertion that because corporations pay taxes on profit, an investor who sells stock of that company or receives a dividend from that company would pay a tax again on that profit. If one imagines a minimum wage worker at a fast-food restaurant attempting to use this argument (the corporation already pays taxes on this money so my income should be exempt) it would fall flat. This may be a false analogy as wages are costs that are not taxed, yet the idea can still stand. Argument 4 fears capital flight to other countries with lower tax rates. This is certainly an important issue. An economy built on growth in corporate earnings, however, is already on a sandy foundation. If our economy is so weak that it cannot stand an equitable investment income tax rate, we have bigger problems. The remaining four arguments are all subjective and do not need addressed. http://www.cato.org/publications/commentary/six-reasons-keep-capital-gains-tax-rates-low (accessed July 8, 2013).
[22]These reforms would have to maintain the status quo concerning the one place middle and lower income earners do invest – retirement plans.
[23]Bernard P. Herber and Jose T. Raga “An International Carbon Tax to Combat Global Warming: An Economic and Political Analysis of the European Union Proposal” American Journal of Economics and Sociology Vol. 54, No. 3 (July, 1995) p. 258.
[24]Ibid., p. 261.
[25]Nuclear power is carbon free, yet it yields significant social costs through the danger of radioactive spent fuel. It may be a stop-gap measure while renewable energy is further developed, but it is not a long-term solution.
[26]Delores Dufner “The Spirit Sends Us Forth to Serve” With One Voice (Augsburg Fortress: Minneapolis, 1995).