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Who Pays? Taxation and the Common Good
published in Woodstock Report No. 80, December 2004
Reframing the Idea of Taxes
I'd like us to consider tonight the relationship between what I would say are the five most powerful institutions in our society. I would rank them in the following order: business, government, education, family, and religion. And I would suggest that this ranking has reversed itself in the last two to three hundred years.
The role of religion, which was central to social and economic existence for many centuries, has not only been relegated to last place among these institutions, but it has been divorced from them. We hear a lot about the separation of church of state, but the church has increasingly been separated from family, education, and business. It is the divorce between church and business, between religious thought and economic realities, between social morality and unbridled capitalism that is the essence of my concerns tonight.
The problem of taxation goes much deeper than the fairness of the latest tax cuts. It cuts to the very essence of our religion in its role in economic life. My motivation for suggesting to the Iowa bishops in May 2002 that we should endeavor into writing a statement on taxes came out of the frustration of seeing one tax cut after another passed by the Iowa legislature without having enough tax revenues to do a decent job of providing for the general welfare of the people of Iowa. I suggested that we as communities were faced with a two-sided question: 1) What kind of communities do we want to live in? 2) How will we pay for that? The first side of this question raises the issue of what rights do people deserve in our society. Rights are assumed in Catholic social teaching as derived by the dignity of the human person. Because we are created in the image and likeness of God, we are endowed with certain human rights. Catholic social teaching identifies some of these as the right to food, clothing, shelter, education, health care, and work. This is the distributive justice side of this question. How will we distribute our goods and services in order to ensure that needs are met and rights are protected?
Tax Justice as Contributive Justice. The other side of this question, which isn't looked at nearly as often, is the issue of contributive justice. How will we pay for these services that we agree as a society are basic to our needs? If the first side of the question raises the Catholic social teaching principle of rights, I would suggest that the contributive justice side raises the issue of responsibilities. Because after all, we're taught in Catholic social teaching that with every right comes a responsibility. We have a right to vote; we have a responsibility to vote. We have a right to private property; we have a responsibility to use private property toward the common good.
"Kids I know are losing their after-school programs."
So this other side of contributive justice is basically what I want to look at tonight. Serving as social action director for the Diocese of Davenport and serving on a number of not-for-profit boards, with organizations that serve the poor, I've been acutely aware of the need for additional state dollars to reverse the pace of state government cutbacks of human services, health care, and education. Those programs may seem like budget line items to Iowa legislators, but for me, funding for some of those programs meant real people getting real services to make a real difference in their lives. Kids I know are losing their after-school programs. Families I know are losing their food stamps and health insurance. Seniors I know are struggling on a fixed income.
The state of Iowa has been making recent tax cuts to become more competitive with neighboring states. Tax cuts have reduced revenues to the point where we expect a $550 million shortfall in the Iowa budget. The fat was cut out of the Iowa budget many years ago. Now we're cutting the muscle.
Part of the problem is that our states are involved in a race to the bottom - the bottom of the rate of welfare benefits so that we get our welfare clients to move out of state. The race to the bottom of tax rates for corporations so that we prevent our corporations from moving out of state. And a race to the bottom of tax rates for wealthy retirees so that we keep our retirees in the state and they keep their tax payments in our state.
"Part of the problem is that our states are involved in a race to the bottom."
It's an unhealthy competition where the rich win, the common good loses, and the states feel forced to compete or lose competitive advantage with neighboring states. So we wrote this statement on taxes with this dual case of contributive and distributive justice.
From "Me" to "We." This theory of contributive justice could begin with Aristotle, who said that the pursuit of common interests could be one and the same as our pursuit of virtuous happiness. Now John Locke suggested that payment of taxes was sort of a quid pro quo - I pay the quid in taxes and I receive the quo in services. But a theory of contributive justice goes beyond this Aristotelian notion of happiness or Locke's quid pro quo or even the stakeholder theory of taxes. If we look closely at contributive justice, I would suggest it's not only about my happiness, my stake, or my self-interest, but it's about our relationships in a community, our responsibility to be contributing members of a community, to be our brother's keeper, so to speak. A payment of taxes as a moral obligation of contributive justice goes beyond my interest in following the law or making sure that my business has good roads; it's centered on living gospel values, which are essentially communitarian values.
Contributive justice is directly tied to the communitarian values apparent in the Hebrew sense of Shalom in Isaiah's call to care for the widow, the orphan, and the stranger. Or the concept described by Aristotle, Aquinas, Augustine, and many others as "the common good."
Now our forefathers thought enough of communitarian values to include providing for the general welfare as part of the Preamble of our Constitution. But much has changed since Adam Smith wrote his economic treatise in 1776. We're becoming a highly individualistic culture where competition is the norm, where profit is the bottom line, and where success in business is equated with success in life.
We need to reframe the idea of taxes as a means of achieve the common good.
I would define taxes as an involuntary contribution from an individual or corporation for the benefit of the common good. In a society that is so extremely individualistic, we should expect to find some people who are unwilling to carry their own weight in pursuit of the common good. That's why tax dodging, tax evasion, and tax cuts are so popular. It's not a part of the American ethic to want to give our money to the government. Part of the reason is the inefficiencies and bureaucracies of government. Part of it is the misplaced priorities of funding by our government. But even if we fix those problems, I would suggest that a fair number of Americans would be unlikely to cheerfully contribute to a budget that pays for common goals instead of individualistic goals. Nor would we find many corporations who would be willing to take from their bottom line profits and give toward collective goals. In this context, a communitarian approach to taxes is countercultural because in an individualistic society, it's all about maximizing profit; it's about competing, and it's about accumulating wealth. And this is where I believe the role of religion comes in. The central message of the Iowa Catholic Conference statement on taxes is that we need to reframe the idea of taxes as a means of achieving what our church teaches as "the pursuit of the common good."
The Holiness Factor. In the very early stages of capitalism, religion still held a strong hold on business and the businesspeople had enough religious beliefs that there were voluntary and involuntary restraints on the excessive pursuit of profits. Business was supposed to be a service to the community. And if wealth was accumulated, it could not be enjoyed or spent on luxuries. Those who employed tactics viewed by their peers as over-usuristic were refused communion by their local church. Riches were not seen as the evil they once were, but it was the excessive preoccupation with the accumulation of wealth that was the root of evil. In fact, a holy life, in the eyes of many Christians in these times, particularly those influenced by Calvinism, was measured by temporal success in one's business.
The Protestant work ethic played a major role in redefining the accumulation of wealth as the sign of God's favor while illness and poverty were viewed as a sign of laziness or sloth, or worse, as a sign of disfavor with God.
I believe that taxes can best be understood in terms of this notion of contributive justice, which I would suggest is also based on Jesus' message of unconditional love, that it's not just about: What do I get back for my taxes or the quid pro quo that comes from taxes. It's more of an unconditional contribution toward the common good. And if we look at business today, basically what I see is that businesses are only looking at the bottom line indicators of financial profits. Now I'm not anti-business. In fact, I'm working on my doctorate in business administration as we speak. But I think that business as an institution must take its proper role in society as being a means towards economizing efficiencies of production and social organization for the betterment of the common good. So it's a means towards the end of the common good, but we see it as a means unto itself.
In conclusion, I think we need to develop this theory of contributive justice. It should be based on the principle that the more wealth that has been accumulated by an individual or a corporate business, the more indebted they are to contribute to a community. Now taxes are only one way of paying that debt. Taxes can be a means towards the end of distributive justice by redistributing the wealth through a progressive system of taxes. Or taxes can also be a means towards the ends of contributive justice by collecting revenues for the common good, each according to one's ability to pay. From the Catholic social teaching point of view, we're talking not only about rights, but about responsibilities. But in the end, what we're looking at here is the divorce between religion and social and business ethics. I think that's what has left this vacuum in our life.
A View from the Bottom - Alabama
All I'm going to offer you tonight, and I want to keep this light, is a lesson from the bottom. That's right - from the bottom. Because Alabama is the bottom. We all know that. We are last in the nation in almost every minimum measurement of well being. And if Iowa doesn't shape up, you're headed our way. We are dead last, whether it's poverty rates - way above the national average - public school funding, infant mortality, or unwed mothers. Oh, we're even more obese than anybody else in the nation. And if you ever come to our state, it's actually a pretty place. We only have one month of hard winter. We have beautiful natural resources, and we're dead last. I mean the only difference between us and Minnesota is that they have heated garages and they're number one in quality of life and Alabama is close to fifty. Well, it has to do with the taxes. We overtax the poor. We hit them with income tax of $4,600 a year! Sales tax on food - 8, 9, 10 percent. We tax the poor worse than any state in the country. We just crush them. We have the lowest revenues per capita in the nation, and the puniest property taxes in the nation.
"In Alabama, we tax the poor worse than any state in the country. We just crush them."
Now I went to seminary and sort of started figuring this out, and I had to write an academic thesis for my degree. And basically what I did was attack this structure as unjust biblically. Not under Catholic principles, not under mainline Methodist liberal principles, but under conservative, orthodox, evangelical divine command ethics - taught at the Beeson Divinity School, the premier evangelical institution of Alabama. It made a few people mad. It's one thing to say, it's bad for economic development. It's another thing to say that you're supporting a structure that is contrary to your own faith. I said, "Hey! How can we have these laws that are a product of our voting, that are so out of whack with our own Bible? Something's wrong with this. We're not walking the talk! We better clean up our act or face judgment." It caused the biggest stink you can imagine. And our governor tried to do something about it. But I'll get to that in a minute.
Actually, when I took a look at Governing magazine, about three-quarters of the states are either close to us or headed our way. So we are a peek at what it's like when you win the race to the bottom.
A False Gospel. We've got all this talk about life and about values and about family, and we're cutting taxes for the rich? And we're running deficits? Well, what's the reason for all that? What's the conversation? Do you hear any discussion of moral values? No! It's the false gospel of economics. Somehow all of this tax cutting for the rich will create all this new wealth out of hocus pocus thin air. I spent a year looking at that stuff, and it's a lot of air. Supply side economics can't be proven. But it's preached as if it's true. It's bad enough to justify your tax policy on something that isn't even true, but then to pretend it's a substitute for moral analysis? Economics is not moral analysis; at best, it's information. So what we have going on federally is no conversation about the moral issue at stake. The moral issue being what? Well, my Bible tells me that if your community is reflecting the Lord's ways, then your standards have to guarantee minimum standards of dignity and the minimum opportunity to better your life, and the 21st century equivalent of that definitely hits education and a number of other things.
"If your community is reflecting the Lord's ways, then your standards have to guarantee minimum standards of dignity."
We're not talking about it that way federally. We're talking about this hocus pocus economics. And so, the other moral issue once you come up with the standard of revenue is: How are we going to pay for it? Who should bear the burden? Well, that's a moral issue too. Because you're no going to get voluntary contributions of taxes. Can you imagine what the government would collect if it passed the hat around every April 15th? It's ridiculous. Well, there's a reason for that. You see, in the evangelical tradition, we're also into sin and the fall. We go back to chapter 3 of Genesis and say: Yes! That's where greed came from. It's still with us and we're too greedy to contribute our share. In fact, if our greed runs amok, we will devour ourselves with our greed. That's why the "law" has to be - just to check us, to basically save us from our own greed.
An A-plus in charity doesn't average an F in justice out to a C. You have to come up with the burden fairly. I would maintain that cutting taxes for the wealthiest Americans is sort of the wrong way at the moment. Well, where are we going? Let's go back to Alabama's pitiful story. Our governor is a good Southern Baptist. He tried to get us out of the mess. He tried to get us started. He proposed a tax reform bill that would have moved a lot of the burden off the poor. It would have increased taxes on people like me and on big timber and it lost 2-1 at the polls. More than half of Alabama's voters would have seen an immediate tax cut. And it failed. Now you know how hard it is to explain that to out-of-state people? They call me up and say, "What is with you people down there?" I said, "You kind of have to be here to know a little bit about the history. But I admit it looks squirrelly."
What happened? The rhetoric, lies, and distortions fooled these people into voting against their own relief. Democracy failed in Alabama. If we keep thinking about tax policy in terms of false economics, in terms of "the best cut for me is the answer," and if we don't start talking about it morally, then the race to the bottom will continue. Other states will come closer to us and the federal government will eventually head our way.
The book of Deuteronomy really summarized this well. You know, if you walk in the ways of the Lord, you will prosper. You will be blessed. Deuteronomy is one of the strongest books that lay out this whole system of justice. But if you forget God, if you become prosperous, wealthy, and content, you start to believe it came from your own efforts. "No, it has nothing to do with God. It has nothing to do with good fortune, being born well, or being blessed with extra talent." Where did you get the extra talent? If you're a person of faith, you don't think you got it from your own worth. And the book of Deuteronomy speaks to that. If you become wealthy and prosperous and you forget me, you will be destroyed because your greed will devour you. That's what's happened to us. And we're having a hard time getting out of it. So I would implore everybody else. Learn the lesson from the bottom.
Going After Tax Cheats: A Way to Fairness
Before I became IRS Commissioner in 1997, I was not in the tax business at all, and so I didn't pay much attention to the Gospel readings that mentioned tax collectors. Then I became the chief tax collector, so I started to pay more attention to some of the stories, like this one from Matthew which reads, "Jesus said to them, 'I tell you the truth. The tax collectors and the prostitutes are entering the Kingdom of God ahead of you. For John came to show you the way of righteousness, and you did not believe him. But the tax collectors and the prostitutes did. And even after you saw this, you did not repent and believe him.' " I'm being redeemed for being the chief tax collector, by being asked to comment on that experience in light of Catholic social teachings.
One of the things I learned from being involved in several other Woodstock projects earlier on is that part of the Jesuit methodology, which is very powerful for addressing complicated social and ethical issues, is to start by trying to draw out the most relevant facts about an issue. And in the tax field, that's pretty hard to do because there are so many facts and figures that it's very easy to get confused before you even get to what they mean.
Let me just share with you what I think are two of the most relevant facts about the federal tax system. Fact number one: If one looks at who actually pays the income taxes at the federal level, most of the tax is now being paid by upper income taxpayers and large corporations. And it's being paid in amounts that are substantially more than in proportion to what their earnings are. Fact number two: A tremendous amount of tax, an almost unimaginably large amount of tax that should be paid according to the laws that are already on the books, is not being paid. As a matter of fact, those amounts are so large that they are far, far, far in excess of the spread in what is being debated about tax cuts or no tax cuts in the political debates.
Significantly Progressive. Let me just give you a little more about who actually pays tax in the federal system. For income taxes on individuals, about 62 percent of this tax is paid by about eight percent of taxpayers, which are those who make over $100,000 a year. Among corporations, about 90 percent is paid by the 7,000 largest corporations, which are those with over $250 million of assets. So, about two thirds of the total federal income tax is paid by about eight percent of individual taxpayers and a few thousand large corporations.
At the other end of the scale, the bottom half of all individual taxpayers, which are about 67 million taxpayers, paid in total less than 5 percent of the total federal income tax. And of the poorest, 18 million taxpayers, they actually got a negative tax. We paid out $30 billion in refunds through the earned income tax credit, which is essentially a negative income tax.
"Quite a small fraction of taxpayers actually pay most of the income taxes of the federal government."
So, you can quibble with these numbers. You can restate them in a lot of different ways. But I don't think that would change the one basic point I'm making, which is that quite a small fraction of taxpayers actually pay most of the income taxes of the federal government. And as I mentioned, they pay them more than in proportion to their income. Because the top eight percent of taxpayers that pay 62 percent of the tax get about 40 percent of the income, but they pay about 65 percent of the tax.
Now, let me just make clear that I am not taking any kind of a side in the argument of whether that's the right amount of tax that they ought to pay, whether it's too progressive or not progressive enough. I'm just pointing to one thing that I think is indisputable, and that is that federal income taxes, as they are actually paid today, are significantly progressive. That is, the upper income people are paying most of the tax. Those who can pay more do. That is to say, at least those who are actually paying the tax.
That brings me to my second point. The second item in the Iowa Bishops Conference statement says, "All citizens have the right and responsibility to contribute to the common good through the payment of taxes." And I think people of good will can reasonably disagree about the precise degree of the progressivity of the tax code, whether the numbers that I cited are progressive enough or not progressive enough. But I would ask: Can there be any serious disagreement about the fact that those who don't even pay the taxes already required by the tax code are meeting their obligation under the common good? The people who are not even paying what is in the books are clearly, in my view, shirking their responsibility to all the other taxpayers, whether they're rich or poor.
So, what I would say in interpreting the principles that I think were very well stated by Iowa Bishops Conference is that there is a higher degree of certainty about the application of those principles of social justice to the issue related to people who are not paying even what's required than there is about the debate over whether the tax code is progressive enough.
The Cost of Not Paying. Now let me give you some numbers. Three hundred billion dollars - that's the amount that should be paid under the existing tax code that is not paid. Now, as I mentioned, that is a far greater number than the amount of taxes at stake in political debates about whether we should roll back tax cuts. Maybe we should roll back the tax cuts. I'm just saying there's an elephant here in the room that nobody's talking about which is way bigger - $300 billion. As a matter of fact, it's so big, that you could give every honest taxpayer, rich and poor alike, a 15 percent tax cut if we just collected the taxes from the people who aren't paying it at all. And by the way, this number is anything but conservative; it's getting bigger and bigger every year
Now why does this unjust and extremely unfair situation exist? The only answer I can give you is public indifference and political expediency on the part of leaders in both parties. It's happened in both parties. They have passed more and more complicated tax bills of all sorts.
Look at the tax bill that just passed a couple of weeks ago, the corporate tax bill - the conference report alone is 636 pages. It has something in there for everybody. More and more and more complicated provisions. At the same time, the president's budgets that have been passed to administer that system, which is predominantly through the IRS, has been shrinking. The IRS doesn't even have the resources to deal with a fraction of the cases where we know that even the most abusive people are not paying their taxes.
"The number of people in today's surveys who say they would cheat on their taxes has gone up by 65 percent in less than a decade."
Historically, the United States has been extraordinarily compliant with respect to taxes. As a matter of fact, I went around the world and talked to other taxmen, there really has been historically no country where people have complied with the tax law as much as they have in the United States. And in the middle 1990s when they took surveys, and they were pretty reliable surveys, basically 87 to 88 percent of the people said they would not cheat on their taxes even a little bit.
The number of people in today's surveys that are saying they would cheat has gone up by 65 percent. Why? Because they can see that almost anybody can get away with it. I mean, why be a sucker? I mean, if you don't have to pay, we're pretty close to what Susan Pace Hamill said was a voluntary system on April 15th. The only thing is not everybody has come to realize this yet.
So here's a question. If you believe that making the tax system fairer and more in conformity with social teaching is important, what would be the most practical route to address that problem? Would it be to engage in arguments about whether the tax codes should be changed so that the eight
percent of the people and corporations who already pay 70 percent of the tax should pay a little bit more? Argue on that point. Or should it be to focus on the fact that there are 20 percent of the people who are openly saying they're not going to pay what's already on the books? I'll leave you with that question.