This week’s edition of Ethanomics is a bit different from previous editions. I’ve been slacking on my Ethanomics writing (thanks to finals and whatnot) so I have no content to post. This piece is my final paper for an Economics class I took in the Fall 2020 semester titled Economic History of the Western Community. I should have content true to Ethanomics next week, but for now, enjoy this.

Edit: This paper inspired Ethanomics. This page wouldn’t be possible if not for this assignment and the professor of the econ class. Thanks Prof. Aldape!

The Role of Tax Inequality on Greater American Injustices

The concept of taxation is a necessity for ancient empires, modern governments, and every power in between to raise money to cover their administrative and operating expenses. Abstractly, it is almost universally agreed upon that taxes are part of life (just ask Benjamin Franklin) and are supposed to serve the greater good. Disputes over taxes historically and today beg for a defined line to be drawn between fair taxation and theft, democratic use of funds, and equitable taxation for all. Debates over solutions to these problems rage as strong as ever today and define key aspects of many economic schools of thought. Whether they are called taxes, tariffs, tithes, tolls, or duties; they are all fees paid on economic activity to fund an underlying governing body. With the global rise of capitalism, taxes have evolved from a necessity for civilized society to yet another tool for the economically and politically elite to manipulate and control lower classes, disproportionately affecting racial, religious, and other minorities. Analysis of American tax data and total tax burdens indicates half of Americans pay nearly a totality of income tax. The following ideas of tax injustice come largely from class lectures, The Making of Economic Society textbook by Robert Heilbroner and William Milberg, and The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay book by economists Emmanuel Saez and Gabriel Zucman. Class lectures and the textbook describe the historical significance and origin of taxation while the book discusses modern American tax policy, its history, and thorough solutions to the problem proposed by the book’s title.

The world’s first taxes, levied by acquisitive empires millennia before Christ until the Middle Ages, were tariffs and taxes imposed by empires on merchants and conquered people alike. Tariffs benefitted geographically gifted empires by letting them tax merchants traveling through their land, like the Persian empire did to Eurasian Silk Road traders. Taxes on the other hand consisted of laborers paying a percentage of their economic output to tax collectors. Taxes evolved towards theft as the Medieval Era ushered in feudalism. Though feudal society functions a lot like slavery and doesn’t require workers to pay taxes, feudal lords taking the fruits of serf labor is no different than a tax on life and opportunity. Feudal lords, unregulated by governments, seized what surpluses their serfs produced for their consumption and commercial use before peasant revolts shut estates down.[1]

The time between feudalism and the imperialism that set American society up for injustices today was dominated by Christianity’s influence in Europe. The church served as a body of worship and government advisor for the world’s most prosperous region of Western Europe. The church’s views on economics did a 180 from values held during the Crusades thanks to a load of neo-Biblical text interpretations. Among these interpretations were Genesis 14 and 28, obligating Christians to tithe 10% of their income, claiming “The tithe is God’s standard of giving. The tithe does not even belong to the giver but the Lord.”[2] With a stronghold on morality in the world of commerce, the church and Calvinist believers pushed towards exploitative capitalism. The systems advocated for would be frowned upon today for their treatment of poor and marginalized people as capital rather than people, similar to how slavery is viewed today. European capitalists refuted such arguments by invoking God’s supreme will claiming their actions as mortals on Earth won’t change their final destination (heaven or hell) because God had already decided.

Taxation after the Renaissance era became more difficult for the government, especially those in Western Europe with global ventures. The Dutch East India Company (EIC), the first big company to trade internationally by way of the sea (and the most valuable company ever adjusted for inflation)[3] imported tons of East Asian goods to Europe traveling by boat around the horn of Africa and up the Indian Ocean. These new shipping routes marked the end of the silk road and began to revolutionize international travel into what we know it to be today with ports and cargo ships that dwarf those used by the Dutch. Though the company embarked on nautical trade to speed up trade between European and Southeast Asian nations, the company was able to successfully eliminate the tariffs they were charged by traveling over unclaimed waters rather than through different empires. Exploitative ventures by the Dutch EIC revolutionized trade and taxation by paying only import and export duties, skipping multitudes of tariffs that would have been levied on the same goods traveling thousands of miles on the ground.

European, imperialist, colonial attitudes mirroring the Dutch EIC spilled over into the Americas by way of the Columbian Exchange and Triangle Trade in 1492. The trade routes, most notorious for the transfer of Africans as capital goods to the Americas as slaves, were powered by national profit motives to capitalize on the untapped resources on American soil with slave labor and 20% tax rates imposed by the colonial power.[4],[5] The commodification of Africans in America set the country up for failure when it comes to economic and social equality for centuries to come. Far after Columbus had initially sailed the ocean blue, with the Boston Tea Party and American Revolutionary War come and gone, taxation’s effect on not just Africans, but all populations of color in a newly minted United States of America, began to come into focus.

For most of history, taxation has been used as a means of fundraising, and that it was in the United States, but with hindsight being 20/20, it is apparent that taxation has been misused in the country (and globally) since its inception. American taxes like those enacted by the three-fifths compromise and poll taxes combined with modern-day regressive income taxes and targeted tax enforcement serve as an indictment on American tax practices for their role in modern injustice for people who aren’t white and male. The archaic, Eurocentric thought synonymous with capitalism put into national fiscal policy seems to be the common denominator of today’s injustices such as wage gaps and low economic mobility.[6] Negligence in reparative efforts like Andrew Johnson’s revocation of ’40 acres and a mule’ contributed to the persistence and growth of equitability issues today. For centuries, and especially during the Civil Rights movements of the 1960s reformers like Dr. Martin Luther King Jr., Malcolm X, and Angela Davis have gone as far as calling for the abolition of American capitalism to bridge the racial gap in America.[7]

American taxation took a turn for equality during the so-called Golden Age of capitalism when developed economies were booming and yet outpaced by smaller developing economies. The Golden Age in America came as a direct result of increases in manufacturing capacity and productivity post-World War II. From the end of the war in 1945 until 1980, bipartisan demand-side stimulus and labor advocacy led to a real GDP increase in 28 out of 35 years.[8] The Golden Age yielded truly progressive taxes with the top tax rates at 94% during wartime and averaging 81% during the post-war boom.[9] Though these taxes don’t exactly correlate 100% with economic equality, the denial of a relationship between the two is categorically incorrect. Taxes upwards of 75% on the top income levels gave the federal and state governments the capacity to increase the minimum wage, balanced budgets, and create jobs through new government ventures like FDR’s social security and Eisenhower’s Interstate system.[10] Since the Golden Age, the United States has descended into a state of inequality in almost any sense of the word (social, economic, etc…) and has been made great only for those fortunate enough to control significant amounts of income-generating capital.

Through eons of evolution and manipulation, tax has always remained an expense whether the taxpayer is a trillion-dollar corporation or an individual just trying to make an honest living. According to the basic principles of microeconomics, any rational taxpayer is expected to avoid taxes and pay as little as possible within the bounds of rationality and tax legislation. Besides the rationality argument, current American tax policy is largely regressive and neglects rudimentary economic knowledge like marginal propensities to save/consume, trickle-up economics, and corporate politics. After leaving failing to make good on economic inequality for over its 244-year life, the United States of America now faces such a concentrated distribution of wealth that the wealthiest 400 Americans, or “a group so small, that they could fit on a single 747 airplane — with 260 seat leftover” controls more wealth than the bottom 60% (200 million) of Americans.[11]

Although tax avoidance can loosely be considered rational practice in economic terms, it is scaled far out of proportion to favor the wealthiest Americans. Megacorporations and the wealthy who pay millions in taxes can more easily hire accountants to find loopholes for them (and create loopholes by way of corporate politics and lobbies), than lower-class citizens, some of whom can’t even afford an accountant to file their personal income taxes. Accountants and loopholes for the upper wealthy have finagled the tax system so much so that, when income, payroll, consumption, corporate, property, and estate taxes are factored in, almost every class of Americans pays a total tax burden of around 25%.[12] A flat tax like the total tax burden paid by most Americans negates the impact of a progressive income tax by disproportionately targeting lower-income citizens when I come to the ability to pay taxes. Additionally, ambiguity in the semantics of tax legislation allows for the wealthy to dictate how their income is taxed (e.g. booking corporate profits in offshore accounts or reporting income as capital gains). Tax avoidance by megacorporations and the super-rich tighten budgets and directly defunds programs benefitting the citizens chipping in the most relative to their ability to pay.

The abuse of corporate politics doesn’t stop at the U.S. Tax Code, however. Corporate politicians have continually defunded ‘unprofitable’ public works in favor of funding government expenditures profitable to the private sector. The services being defunded are meant to serve the American people over profit generation. The United States Postal Service for example was established to make national and international communication and commerce accessible to all Americans, but instead, the USPS is continually defunded to pay for an endless supply of airplanes, weapons, and other war machines for the military and padding the shareholder wallets of Boeing, Northrop Grumman, and many more. The Internal Revenue Service isn’t immune to being defunded either; the IRS has been defunded so much so that a taxpayer is 2.5 times less likely to be audited in 2020 than they were in 2010.[13] The decrease in audits, conducted largely on upper-class citizens, has led to a decrease in total tax collected with a much sharper decrease for the upper class than average and lower class citizens. Continually defunding the IRS perpetuates the downward spiral of American tax policy by permanently contracting government budgets to essential services like the USPS and IRS. Corporate political backwardation is also relevant in the sheer neglect for the IRS, with the Government Accountability Office’s report that for every $1 spent on the IRS, $4 is generated in tax revenue (a 400% return on investment).[14] The report has clarified the bias American tax policy has favoring the upper class and leaving the middle and lower classes out to dry.

Many economic metrics justify taxation a la Golden Age in today’s society like the efficacy of Demand-side stimulus, marginal propensities to save and consume (MPS/MPC) curves, and the unsustainability of wealth concentration. What was once called “Socialism for the rich and rugged free enterprise capitalism for the poor” by Dr. Martin Luther King Jr., supply-side economics in the form of subsidies to aforementioned tax-evading mega corporations has consistently failed to the point where some 20-year-olds, not yet old enough to drink, have lived through three ‘once-in-a-lifetime’ market crashes. Such market crashes have always required demand-side socialism to save the day with stimulus issued to the people by way of extended unemployment benefits, public works, and billions of dollars in government spending on lower- and middle-class Americans. These stimulus packages implicitly relied on the fact that individuals with less wealth had a higher MPC than wealthier counterparts and were, therefore, more likely to help money circulate more than a billionaire who would put their benefits in a bank account.[15]

Expanding market-crash reversing stimuli into everyday life would undoubtedly be expensive, but the rewards still far outweigh the cost with an adequate tax policy to fund it. Social safety nets and redistributive programs like universal healthcare, housing, and education programs have been proven to stimulate economies for longer than the temporary relief they are implemented for in the United States. The implementation of such programs has been proven to close achievement gaps based on race, religion, gender, and orientation, and there is no reason to believe that won’t happen in America. On top of providing for the people, government-run programs are more effective in eliminating excess costs and give the people more money to spend on leisure/luxury goods. According to 2019 data collected by the Bureau of Labor Statistics (BLS) on consumer units, average income was ~$83k and expenses averaged $34k in housing, healthcare, education, and social security expenses; or about 41% of their income.[16] Assuming a government can tax total national income at 41% plus amounts for infrastructure and other smaller expenses not previously mentioned, any sort of progressivity in the tax rates will liberate the lower class from an unfair burden and instead take the money that’s just gathering dust in a bank account. Given that poorer individuals have a higher propensity to spend money compounded by the fact that all individuals would no longer have to save for big expenses like college or worry about going homeless, money that would have gone towards necessary expenses is freed up to be put into the economy.

It is often said that money makes the world go-round, and in the late-stage capitalist economy thriving in the United States, the profit motive perpetuates injustice just as much as anything else, and there needs to be legislation to curb that practice. Truly progressive tax policy isn’t just a demand by the lower class who are jealous of the fortunes of the super-rich, but equitable policy to give everyone a better shot at economic success. Abuse of tax policy by upper classes has always plagued the institution of taxation and America has proven far and wide it is no exception. Currently, historical economic data is misused and often fabricated to justify elitist trickle-down economics where raw data shows American productive surpluses can be no more with stimulated consumer demand and governmental encouragement. Modernizing and evolving tax policy towards equitability can put an end to the status quo that betrays American citizens whose livelihoods rely most on proper practice. With proper implementation, the economy, and American life, in general, can be improved for individuals of all classes, not just the one-percenters.

“Communism.” The Martin Luther King, Jr., Research and Education Institute, 4 Aug. 2020, kinginstitute.stanford.edu/encyclopedia/communism.

“Consumer Expenditures — 2019.” BLS.gov, 9 Sept. 2020, www.bls.gov/news.release/pdf/cesan.pdf.

Desjardins, Jeff. “The Most Valuable Companies of All-Time.” Visual Capitalist, 9 Mar. 2019, www.visualcapitalist.com/most-valuable-companies-all-time/.

Korostoff, Matt. Wealth, Shown to Scale, Github, 2020, mkorostoff.github.io/1-pixel-wealth/.

The Making of Economic Society, by Robert L. Heilbroner and William S. Milberg, Pearson, 2012, pp. 21–28.

“National Income and Product Accounts Data.” BEA, Bureau of Economic Analysis, apps.bea.gov/iTable/iTable.cfm?reqid=19.

“Portuguese and Spanish Overseas Expansion, 1450–1600.” bolles.org.

“Pursuing the American Dream: Economic Mobility Across Generations.” Pew Charitable Trusts, www.pewtrusts.org/~/media/legacy/uploadedfiles/wwwpewtrustsorg/reports/economic_mobility/PursuingAmericanDreampdf.pdf.

Timmons, Greg. “How Slavery Became the Economic Engine of the South.” History.com, A&E Television Networks, 6 Mar. 2018, www.history.com/news/slavery-profitable-southern-economy.

“Wealth Inequality and the Marginal Propensity to Consume.” Equitable Growth, 25 Apr. 2018, equitablegrowth.org/wealth-inequality-marginal-propensity-consume/.

Zucman, Gabriel. “From Boston to Richmond.” Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, by Emmanuel Saez, W W Norton, 2020, pp. 44–45.

[1] Heilbroner, Robert L., and William S. Milberg. The Making of Economic Society. Pearson, 2012, pp.21–28.

[2] Barcley, William. “The Bible Commands Christians to Tithe.” The Gospel Coalition. The Gospel Coalition, March 28, 2017. https://www.thegospelcoalition.org/article/bible-commands-christians-to-tithe/.

[3] Desjardins, Jeff. “The Most Valuable Companies of All-Time.” Visual Capitalist, 9 Mar. 2019, www.visualcapitalist.com/most-valuable-companies-all-time/.

[4] Timmons, Greg. “How Slavery Became the Economic Engine of the South.” History.com, A&E Television Networks, 6 Mar. 2018, www.history.com/news/slavery-profitable-southern-economy.

[5] “Portuguese and Spanish Overseas Expansion, 1450–1600.” Bolles.org

[6] “Pursuing the American Dream: Economic Mobility Across Generations.” Pew Charitable Trusts, www.pewtrusts.org/~/media/legacy/uploadedfiles/wwwpewtrustsorg/reports/ economic _mobility/PursuingAmericanDreampdf.pdf.

[7] “Communism.” The Martin Luther King, Jr., Research and Education Institute, 4 Aug. 2020, kinginstitute.stanford.edu/encyclopedia/communism.

[8] “National Income and Product Accounts Data.” BEA, Bureau of Economic Analysis, apps.bea.gov/iTable/iTable.cfm?reqid=19.

[9] Zucman, Gabriel. “From Boston to Richmond.” Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, by Emmanuel Saez, W W Norton, 2020, pp.44–45.

[10] Heilbroner and Milberg, p. 127

[11] Korostoff, Matt. Wealth, Shown to Scale, GitHub, 2020, mkorostoff.github.io/1-pixel-wealth/.

[12] Zucman and Saez, p. 28.

[13] Iacurci, Greg. “Attention Taxpayers: Your Chances of Getting Audited Have Fallen Significantly.” CNBC, CNBC, 8 Jan. 2020, www.cnbc.com/2020/01/08/attention-taxpayers-irs-audits-have-fallen-significantly.html.

[14] United States, Congress, Government Accountability Office, et al. INTERNAL REVENUE SERVICE: Absorbing Budget Cuts Has Resulted in Significant Staffing Declines and Uneven Performance, 2014.

[15] “Wealth Inequality and the Marginal Propensity to Consume.” Equitable Growth, 25 Apr. 2018, equitable growth.org/wealth-inequality-marginal-propensity-consume/.

[16] “Consumer Expenditures — 2019.” BLS.gov, 9 Sept. 2020, www.bls.gov/news.release/pdf/cesan.pdf

If you hate trickle-down economics and love pages whose names are puns, this is the place for you.