Everybody loves taxes
“In this world, nothing can be said to be certain except death and taxes.”
– Ben Franklin –
Despite what you might think, you likely love paying taxes.
This is likely not what you tell yourself, however. And it is likely that this is also not what you tell others.
Most people tell themselves and others that they don’t like paying taxes.
But most people are wrong.
In this essay, we are going to discuss why a very large percentage of the United States population loves paying certain taxes. We are going to talk about why people seem to be going out of their way to pay certain taxes, even though they absolutely do not have to. We will look and see how and why people get angry and frustrated when for one reason or another they are prevented from paying these voluntary taxes. And after that, we will try to untangle this paradox and look under its hood. We will try and figure out if there is a way to be creative with our tax system so that people feel this enthusiastic about not just some taxes, but all taxes.
To start, let’s first examine what I said just a few sentences earlier: most people tell themselves that they don’t love paying taxes.
While this is probably true of most people, are there any people that tell themselves that they like paying taxes?
Yes, there are broadly two types. It will help to examine these types, especially the second type. For it will be by way of becoming familiar with this second type that we might find a way to make all taxes more enjoyable.
First Type of People Who Say They Like Taxes: People who like taxes that other people have to pay
This could include people who don’t make much money and are thus subject to minimal or no tax burden. This could also include people who make truck loads of money, but their “money” isn’t paid to them in fiat coinage, but with securities like stocks and bonds. Since stocks and bonds aren’t subject to standard income taxes when held for a year and a day, they don’t have the normal tax burden (it caps out at 20% for the richest).
Second Type of People Who Say They Like Taxes: People who have so much money that they benefit more from saying they want more taxes than they lose from having to pay those taxes
Any extra income is irrelevant to the individuals in this group. It is irrelevant because any income relative to the wealth they already have is miniscule. If they found themselves somehow getting irrelevant income despite themselves, taxes on it are also irrelevant. Since they are already capped out financially, there is not much psychological benefit for them to try and increase their wealth anymore by way of income.
On the flip side, while supporting higher taxes will not hurt financially, the social capital from supporting higher taxes will help this group tremendously. These titans of wealth might be genuinely caring souls who would truly give a needy person their last Leerjet. But, even if they only cared about themselves, it still makes tremendous sense for them to support higher income taxes.
It is this idea about the relative value of social capital that is of fundamental importance. It is this idea that may be the key to making all taxes loved and sought after. We’ll talk more on it later.
Back to the categories of people who say they like taxes. An example of someone who fits both category two and the latter part of category one is Warren Buffett. An example of someone who mostly just fits category two (and a little of the latter part of category one) is Bill Gates.
These are the people who tend to say that they would like to pay more taxes. So much for them.
For the rest of us, we say something different.
Most people don’t have massive globs of cash or securities stocked away somewhere. Most people get paid with dollar bills for doing work. And most people don’t like the idea of giving more of their income to the government than they already do.
You are probably one of these people.
So, ask yourself: since you probably don’t like the idea of being forced to pay more taxes than you already do, what’s the likelihood that you would voluntarily pay more taxes?
Slim to none, right?
The truth is that a very large percentage of the U.S. citizenry loves paying taxes voluntarily. And chances are that you or somebody you love are one of them.
In fact, Americans love paying taxes so much that they will drive to other states to pay completely voluntary taxes. They will drive for hours and wait in line for hours more to pay taxes that they in no way whatsoever have to. And these voluntary taxes are so popular that even people from other countries (like Canada) will drive hours one way to stand in line for hours more for the chance to pay taxes.
Per capita averages of voluntary taxes per state. In the US as a whole, it is about $225 dollars. Source.
These voluntary taxes are so popular that many groups have sprung up, even among the government, whose sole purpose is to try and dissuade Americans from paying voluntary taxes.
Ponder that for a minute. People from other countries are going out of their way to pay our taxes. United States citizens are bending over backward to pay taxes. People want to pay taxes so badly that other people, even some within the government, are trying to stop them.
Thus, while the word “taxes” frequently carries with it a bad connotation, this badness clearly only refers to those taxes that are forced, or compulsory.
It appears, then, that the typical onus attached to having to pay taxes is misplaced. Taxes in and of themselves are neither intrinsically loved nor reviled. It’s compulsion or freedom that are hated or loved. Compulsory taxes tend to be reviled, except for those in groups 1 and 2 above. Yet voluntary taxes seem to be not only well tolerated but sought after. Most of us are not only copacetic with voluntary taxes but we will go to great lengths to have them.
Which leads one to the only sane reaction to this phenomenon. This would be running up to the nearest rooftop and shouting: “This is nuts! Why isn’t anyone talking about this?”
The truth is that while the idea of voluntary taxes certainly seems strange at first blush, it comes with a long legacy. All the way back in the 1690s, the philosopher John Locke, in his Second Treatise on Government, touched on the idea that taxes should be voluntary. Of course, under his system, all of the affairs between government and its constituent parts (or citizens) should be volitional, or by “contract”.
Similar sentiments were expressed by many of the early United States presidents and founders, namely George Washington and Thomas Jefferson. In regards to this “contract”, the voluntary nature of a polity, and taxes, Washington said:
“The Parliament of Great Britain hath no more Right to put their hands into my Pocket without my consent, than I have to put my hands into yours, for money.”
Jefferson went so far as to act on this reasoning and abolish all compulsory Federal domestic taxes on its citizens. This then became status quo for about eighty years.
Of course, as the role of the government has expanded from that of merely protecting interstate trade and guarding against foreign invasion to the welfare/warfare state that we have today, the idea of a truly voluntary tax system has also gone away.
But while our tax systems have become larger and more compulsory, there is still a large and growing part of our tax system that is voluntary. And as we’ve seen, people love it.
This presents us with an obvious opportunity. Compulsory taxes are reviled and avoided. Voluntary taxes are loved, cherished, and sought after. Would there be a way to get rid of all of the bad compulsory taxes and just have the good, beloved voluntary taxes?
Would it be possible to make paying taxes so irresistible to so many that the brutality of compulsion is no longer part of the system?
Maybe. The truth is that I don’t know. But it’s worth thinking about. Let’s look into this some more.
Of course the type of voluntary taxes that I’m talking about here are our various state and multi-state lotteries. While there are many lotteries, I’m going to refer to them all as “the lottery”. In fact, I’ll go one further in this age of truncated twitterspeach and just call it “the lotto”.
The lotto has proven to be an awesome tax system. As you’ve probably seen personally, especially with the early 2016 $1.4 billion Powerball shenanigans, it’s both amazingly popular and amazingly profitable. You yourself might have been one of these people driving across state lines to take advantage of the 1-in-250,000,000 or so chance of being a winner.
And not only is the lotto popular, it is effective. In eleven states, the lotto provides the government with more income than all corporate taxes put together. Yes, you read that correctly. The lotto brings in more than all corporate income taxes. In some states, it’s even more than double.
Think about how profound that is. Corporate income taxes are very important sources of revenue. Let’s look at them in context of all sources of government revenue.
If you look at a summation of federal, state, and local taxes, corporate taxes make 10.2% of all government revenue. Individual taxes (not including property, social security, sales tax, and the like), are comparable at 37.7%.
In harder numbers, in 2015, all US governments collected a total of about $2.2 trillion in income taxes, though I’ve also seen varying reports.
The obvious logistical question is therefore, how much of this compulsory taxation can be replaced by purely voluntary taxation?
Again, I have no idea. But I’m not sure that anybody else does either. And this is fertile ground for speculation.
To even start to answer this question, let’s see if we can get an idea of how much voluntary taxes are already bringing in. While I have seen widely different numbers as to the profitability of the lotto, one number that seems reasonable that I’ve calculated is over forty billion dollars per year in recent years.
Here’s how I got that number:
In 2015, Americans spent about seventy billion dollars on the lotto in the forty-three states that have it. Word on the street is that about sixty percent of this gross revenue goes to pay out winners. That’s forty-two billion dollars in payout. Yet, about forty-five percent of that payout is then taxed again. That’s $18.9 billion dollars back. After that there are some marginal costs of production, such as paying for advertising and all that. There’s various reports at how much these marginal costs are, but I’ve read eight percent of gross. So, operational costs are 5.6 billion dollars, which I honestly don’t believe. As an aside, if that cost of operations is true, I need to get a job with the lotto. Yet, given how wont the government is to waste money, perhaps we should believe that number. Anyway, as these numbers are probably all inaccurate, we’ll just use them to get a ballpark. Let’s break it down:
$70 billion – $42 billion + $18.9 billion – $5.6 billion = $41.3 billion
So, while $41 billion certainly isn’t $2.2 trillion, it’s ain’t chump change neither.
Further, realize that this voluntary taxation is something that is not present in every state (there are seven missing) and is actively discouraged by many groups, even by certain factions of the government.
Also realize that people are playing the lottery after already paying their taxes. This is not a one or the other type deal. It is not that people get a tax discount for playing the lottery. People who play the lottery do so with after tax income.
United States citizens pay more for voluntary taxation than they do for sports tickets, books, video games, movie tickets, and music combined.
So, let us say that our goal is to replace all income taxes on the federal, state, and local levels with a voluntary tax akin to the lotto. If we were to do that, we would need to do something that garners approximately fifty times more revenue than what the lotto does.
And this number is further complicated by at least two more variables, one helpful, the other not helpful.
On the helpful side, if there were no income tax, there would be more income that individuals could spend voluntarily. If there was an attractive voluntary tax like the lotto, they would be more apt to partake.
On the not helpful side, if there were no income taxes, then governments could not recoup the around 45% income tax on lotto winnings. That would really hurt the revenue that lotto currently brings in.
These are all things to think about, but we shouldn’t let the details derail the idea quite yet.
To mix metaphors, while the devil is in the details, we also don’t want to miss the forest for the trees. So, let’s keep those demons out of our woods for the time being.
An ironically non-epicurean Lotto
Here’s the rub:
In any group, those individuals with the greatest wealth should have at least equal inducements to contribute to the financial well being of the group as those with the least wealth.
If you and a bunch of your friends decide to form a touch football club with totally voluntary dues, it would not be cool if the richest people in the group never ponied up to help pay for refreshments, lease field time, pitch in to hire a ref, or anything like that. They should have at least equal incentive to contribute as much or more than anyone else.
Likewise, if we are all in a group that we formed by “social contract” called a “country” or “nation-state” or something like that, it would seem really, really not cool if certain wealthy members of this group also never ponied up for stuff.
Unfortunately for voluntary taxes as they currently stand, the poor seem to be partaking a little too much and the rich not quite enough.
We need to fix this.
Before we get in to how to fix this, let’s again look at the numbers.
A very dated (by about thirty years) Duke study in the 1980s showed that the poorest third of all households buy half of all lotto tickets.
Even though this study was done a while back, this discrepancy appears to still be the trend. While a great linear regression is a little hard to do, there definitely is evidence that the poorer you are, the more likely you are to spend disproportionately more on the lotto, both in relative and absolute terms.
There is a definite trend in the amount of money spent on the lotto as an indirect relation to income. Source.
Unfortunately, there are some nefarious reasons for this. Advertising for the lotto seems to be much more heavily focused on poorer neighborhoods. Furthermore, the lotto marketing paints a decidedly false picture that winning is a viable means to alleviate financial and personal troubles (an awful and painful twist of the truth, as a violent death and financial ruin frequently follow a lotto win).
Yet, not all blame should be placed on the marketers. The fact that Canadians drive over the border to get US lotto tickets cannot be placed on marketing. Neither can the fact that Alabamans seem to be livid that they have to drive to Tennessee or Georgia to get their Powerball tickets.
Further, there is a thing called agency. At some point, no matter what someone’s circumstances, she or he is responsible for her or his behavior.
And it is well established since antiquity that certain socioeconomic groups, for one reason or another, tend to choose to do things that are harmful to themselves.
For examples in antiquity, read Nietzsche’s On The Genealogy of Morals.
For examples in more modern times, we have some numbers. The numbers are clear that poorer people are more likely to smoke cigarettes (in Alabama this is $5.51 per pack or $2,011 per year for one pack a day). Poorer people are much more likely to drink alcohol in excess at a given sitting and spend a far greater percentage of their income on alcohol. Poorer people are much more likely to gamble in general.
Why is this? Well, it is certainly multifactorial and complicated. Smoking, drinking, and other such things are only obliquely related so I’ll just skip them. But let’s look at gambling a little more as this is obviously directly related.
As for gambling and the poor, there is some evidence that even the perception that one is poor relative to one’s peers does something to our brains making us more likely to gamble. So, being dissatisfied with your life from a financial perspective means that you’re more likely to gamble, no matter what your absolute wealth. That could explain some of this.
Further, there is the idea espoused by Dan Kahneman and Amos Tversky of “loss aversion“. For most people, the pain of losing something is vastly worse than the pleasure of gaining something of equal value. Yet, if for real or perceived reasons, someone thinks that they do not have much, perhaps there is less likelihood that they will feel pain upon losing it. Especially if this is combined with a lack of an intuition regarding large numbers, such as the one in 250 million chance of winning Powerball. This could explain a little more.
Another piece to the puzzle is that if someone is depressed or anxious, such as from socioeconomic reasons, or perhaps the metabolic syndrome, there can be a whole host of neurochemical changes in the brain predisposing towards suboptimal behavior. There is some evidence that these changes, particularly in regard to the neurotransmitter norepinephrine, will change how somebody responds to the loss aversion instinct.
All of this is just to say that as things stand, our voluntary taxation system (the lotto) is disproportionately attractive to the poor. And, like how it would be unfair with our touch football club if only those making minimum wage paid to keep the field lights on while the trust fund kids did nothing, so this system is sub-optimally designed.
This therefore brings us to two things: one, though the poor tend to be subject to some bad habits, this is not to disparage the poor. And two, the rich have other proclivities that may give us opportunities to entice them towards more voluntary taxation.
Regarding my statement about poverty and a tendency towards bad habits, please do not think that I am being critical of everyone in poverty. For most of my adult life, I have either made no money or worked below minimum wage when adjusted on an hourly basis. I am also no trust fund kid. Yet, there’s no shame in this. The ancient Roman stoic philosopher Seneca quoted the other Roman philosopher Epicurus in one of his letters 2,000 years ago:
“A cheerful poverty is an honorable state.”
Seneca went on to say,
“But if it is cheerful it is not poverty at all. It is not the man who has too little who is poor but the one who hankers after more.”
Seneca’s and Epicurus’s sentiments seem to echo what we’re seeing in neuroscience, psychology and marketing. It is not absolute wealth that is the problem. It is perceived wealth in relation to one’s peers. Consequently, it is the pheonomena of comparing yourself to your peers and being suspect to idyllic fantasies that the marketer’s play off of (happiness being tied to having a yacht and the admiration of your family as take them to Disney World, reveling in the envy of your enemies, etc). As Seneca says, quoting Epicurus in another letter:
“If you shape your life according to nature, you will never be poor; if according to people’s opinions, you will never be rich.”
The consequences of shaping our life according to other’s opinions may thus be the perfect segue. For it lets us transition nicely to one of the main goals of this essay. That is, taking advantage of the proclivities of the rich so as to give us an opportunity to entice them to pay taxes voluntarily.
The proclivity that should be most obvious from the outset is exactly what Epicurus and Seneca were spelling out so nicely: the rich tend to care a lot more about people’s opinions. Or, to bring back our original jargon: the rich care a lot about social capital.
In the United States, we live in a world where cars costing less than $15,000 brand new have virtually every feature of cars costing many multiples of that. There is really nothing gained by paying more in any practical sense. Yet the average American spends over $33,000 for their new car.
And consider fancy purses or luggage. Prior to the invention of synthetic materials as used in performance gear, it might make sense to purchase hand crafted, real leather purses, bags, luggage, or whatnot. Now, however, a reasonably priced synthetic bag can look indistinguishable and perform better, for longer, at a fraction of the price, than something costing into the thousands of dollars. Yet, people still hanker after and fantasize over the more expensive, inferior option.
The same can be said with numerous other things. Watches, jewelry, all sorts of clothes, eating out, home decor, you name it. We have become so rich as a society that, beyond a relatively low point, quality has become completely divorced from price. In fact, oftentimes quality may be inversely related to price.
Consider the story of Napoleon and aluminum. Aluminum was so hard to process in the early 1800s that it was considered more valuable than gold. And why wouldn’t it be? Aluminum is incredibly tough, lightweight, and it shines like silver but does not have to be polished. At his banquets, Napoleon’s most honored guests would get aluminum silverware. The chumps had to make do with measly gold.
Of course, aluminum still has all the great properties now that it had back in Napoleon’s day. In fact, it’s properties are even better now, given our advancements in metallurgy. Aluminum is still better than gold. And our aluminum is better than theirs.
But, if you went to a dinner party and someone gave you an aluminum plate and some other guy got a solid gold plate, would you feel honored or dejected? The latter, obvi. Why is this? Because you are wealthy (in absolute terms – whether or not in comparison to your peers I don’t know). The wealthy no longer care about absolute wealth. Like the second type of people who like taxes from the beginning of this essay, they care much more about where they stand in society. They care about social capital.
You don’t want that nice purse, fancy car, or 24 carat gold dining set because these things are nice. You want them because of what you think they will make people think of you.
It is from the angle of social capital that we need to entice the rich to pay voluntary taxes.
Oh, the irony. People who try to lead an “Epicurean life” know apparently nothing about Epicurus and likely very little about how to lead a good life. Epicurus himself lived very simply with his friends. They all bought a rustic house outside of town and enjoyed each other’s company without a lot of fuss or luxuries. This somehow got turned into having yachts and trying to one up people you don’t like. Of course, people who espoused these ideas were present during Epicurus’ time too. This was what his philosophy was decidedly against. Thankfully, an effective voluntary taxation system might be able to use these individuals’ lack of philosophical insight to generate more revenue.
What do the ostensibly rich want (as opposed to people who are rich but don’t go out of their way to show it)?
Why, by and large, they want people to know that they are rich.
Thus, to speak in overgeneralizations: the poor want to become rich and the rich want other people to know that they are rich.
So, let’s make this actionable.
There are individuals within certain socioeconomic strata that equate incomprehensibly large amounts of money with happiness. They will pay taxes voluntarily so as to have even the smallest chance of obtaining this perceived windfall. We have already captured this market.
There are other individuals in other socioeconomic strata that equate the admiration and envy of their peers with happiness. They might pay taxes voluntarily so as to have a chance of obtaining this perceived windfall as well. We haven’t captured this market yet.
We have a lotto for the poor. We need a lotto for the rich.
And what might this lotto for the rich entail? Well, this is more of an empirical question than a merely philosophical one. It could entail some type of social recognition on television and social media, or some totally symbolic position within the government. It could be the membership to some sort of uber-country club. It could be any number of things that no one has thought of yet.
And how would this kind of lotto be differentiated from the one in which you just win money? It needs some barrier to entry that will entice the rich to play. The most obvious thing that I can think of is simply that there would be a more costly buy in. Perhaps a large up front sum would be required to even purchase a ticket, with the tickets sold at a lower cost thereafter. This would be akin to having to pay $100,000 to join a country club and then being charged only a mildly ridiculous price for when you get an old fashioned and some lamb chops for dinner. Another option is that the individual lotto tickets could be expensive. Or some other thing that makes the whole game reek of exclusivity. In economics jargon, we need to take advantage of the phenomenon of Veblen Goods. But we don’t need fancy economic lingo to understand the gist of the idea. I’m sure you already get the picture.
One last thing. Let’s not be provincial. As we saw with Canadians driving across the border to buy Powerball tickets, this is a system that in no way should be relegated to just U.S. citizens. If there are rich folk from other countries who would like to pay U.S. taxes, we should let them. We should welcome them with open arms.
Obviously, this is a project that is rife with possibilities. I’m sure others have better ideas than what I’m listing here. It is time to get thinking.
Be the house
The reason that we have compulsory taxes has nothing to do with any type of necessity of good governance. The reason we have compulsory taxes is because we have not been creative enough. We have not taken to heart the lessons we’ve learned from the lotto. We have yet to expand these lessons to other demographics and other realms. But we need to.
In the meantime, let’s not confuse what could be with what is. The establishment of a transparent and voluntary tax system, combined with the creation of a government that demands citizen participation, are how we make our civic lives ever more awesome. Until we reach that goal, however, it would behoove us all for now to at least be cognizant of how our current tax system works and the faults of our government as it stands. For those who are especially prone to the ill effects of a system that is predatory on disadvantaged groups, it is especially important to be on guard.
A compulsory taxation system demands participation whether or not the system is rational. An irrational system that forces compliance thus forces its constituents to act irrationally. With a voluntary taxation system, however, no matter how bad the system, we at least have the option to act rationally. We can be the patrons of the system, its beneficiaries, and perhaps both. We can choose. Yet, in order to choose well, we must know how the system works. The way our system currently works is that those who are incentivized to play the most should not be playing at all. And while it is their prerogative to play as much as they please, it is everyone’s prerogative to design the system in the best way possible. If the lotto is like a casino, then we should design it where we are all part of the “house”.
But this is not how the government and our taxes are designed now. So, until it gets better, don’t be a sucker. You are not the house. You are the mark.