Taxing of Income

While at work yesterday, one of my co-workers came into the store and asked if I had heard anything about Washington State entertaining the idea of a State Income Tax. I hadn't, but remarked that I wouldn't be surprised to learn that they were pushing for it. After all, it is the government's longstanding belief that we all exist to serve them--that what we have is do in part because they allow us to exist.

 

So, I figured I'd look into it when I got home to see if there was anything to this. Unfortunately, I couldn't find anything in the local rags, but I did stumble on something that I thought was rather interesting. It's a quote carried on a Tax Policy website that seems to endorse a state income tax over a state sales tax. They claim that a sales tax is disproportionately levied on the poor because the poor have less disposable income to start with. The rich, however, with their truckloads of greenbacks, are ripe for the picking. And since they have so much disposable income, they should have to pay more.

 

While this sounds good on paper, we must remember a couple of rules that we all play by:

• The number one rule is that all taxation is theft--pure and simple. Anytime someone is deprived of their property, whether by crook or the state, it's theft.
• The second rule is that taxes will always be one tick below what will start a popular revolution. So, if you're one of the "poor" looking to get out from under oppressive excise taxes (sales taxes) by subjecting another class of citizens to a graduated tax system (income tax), you're sorely mistaken. In the end, both classes will end up taxed to the fullest extent palatable by the State. Not only will the "poor" lose this battle, but they'll find themselves under new and improved shackles of taxation.
• The third rule is that a sales tax is blind to income. In Washington State, sales tax is levied on "non-essential" commodities that you can live without. That's why there is no tax on food stuffs, but there is on pop. You can--and probably should--live without pop. Income tax, on the other hand, is taken before you ever have a chance to spend your money. Even before the check lands in your hands, it's been levied with a tax on every dollar earned. You get no choice on how to spend all your money, you only get what's left after the State gets its share.
• The fourth rule states that, while trying to make a "more equal" tax system when applied to the poor and the rich, in the end both will be worse off. Think of it this way: If you go to an amusement park, does the ticket office determine how much to charge you for admittance based on your income? Absolutely not. All parties who wish to utilize their facilities have to pay the same amount. Does the rich get greater use or enjoyment from the rides once inside? No they don't. All visitors are treated equally. So, why should the rich have to pay more for admittance? Why would the poor pay less. They both derive the same amount of pleasure from the rides. Likewise, why should the rich pay more for government services? Does the fire department work less hard to put out a poor man's house fire than a rich man's?

The argument being made on this website is that they wish to equalize how much tax is paid by the rich and the poor. This is nothing more than an excuse to rob both the rich and the poor of their property. To further explain this principle, let's look at a particular quote from this web page:

To illustrate, a Washington family in the lowest 20% income bracket pays 17% of their income towards state and local taxes while Washington families in the top 1% income bracket pay only 3.6% of their incomes towards state and local taxes.  A state income tax can help to alleviate this bias, particularly if implemented with a graduated rate structure.

So, we have Family A who earns $20,000 a year and Family B who earns $200,000 a year. Both families need certain things to live, so they go into their communities and buy goods with their incomes. What the author wants us to believe is that Family B is somehow managing to spend less in taxes than Family A when they both purchase a $4.99 bottle of shampoo. This is just simply not the case--and I'll prove it.

 

Assuming the sales tax is levied at 8.5% per dollar, both families will have to pay an additional 42 cents for the shampoo. Where the author attempts to trick the reader is by misdirecting attention away from the amount paid in taxes to the taxpayers personal income. The value of 42 cents is the same for both, but the percentage taken out of their respective incomes is vastly different. Unfortunately, this amount is way too small to bother with, so let's say that both families pay $1,000 in taxes at year's end. Family A would have paid 5% of their income in taxes while Family B would have paid 0.5% of their income. In the end, while Family A did pay more in tax when compared to his income than Family B, both paid the exact same amount in taxes. This comparison has nothing to do with taxation and should never have been raised as an argument for--or against--it. Much like the analogy of the amusement park, why should any one person be forced to pay more or less based on their personal income than the next person in line?

 

In closing, I wanted to post an interesting quote that was found under the heading, "Constitutional Issues." It looks at what obstacles have been met in the past when an income tax was proposed in this State. I found it interesting that the Washington Supreme Court deemed income to be property. As such, it must be taxed uniformly across the whole State. This is consistent with the language used in the U.S. Constitution regarding a federal direct tax on property:

In 1932, following passage of the only income tax initiative to be approved by state voters, the Washington Supreme Court declared that for purposes of taxation, income is defined as a class of property.  Article IV of the Washington Constitution states that all taxes shall be uniform upon the same class of property.  Therefore, any income tax proposal either would have to be consistent with the Constitution’s uniformity restrictions, or would likely require a constitutional amendment in order to be implemented.

 

The characterization of “income as property” might not hold up in court today.  Several other state Supreme Courts have ruled since 1932 that income is not “property” until it is converted into an asset.  If Washington’s Supreme Court accepted this position, the legislature or a citizen’s initiative could implement a graduated income tax or an income tax with a high exemption without a constitutional amendment.  However, any legislation not consistent with the 1932 ruling would face a near certain legal challenge and the risk of being overturned by the court.

 

Assuming the Washington courts continue to characterize income as a class of property, a flat income tax levied on gross income would meet the Constitution’s strict uniformity requirements, but a graduated tax would not.  The Constitution also limits taxes on personal and real property to 1% of market value, and allows no more than a $3,000 exemption on personal property.

Isn't it funny how the Supreme Court can just arbitrarily decide what income is. The one thing that makes or breaks a man... and we've decided to let government decide whether they'll leave us alone or rob us blind. We surely must be either a nation of trusting individuals or fools. I leave you with this quote: A fool and his money are soon parted.