Modern Taxation Theory

Pieter Brueghel the Younger, The tax collector’s office, 1640

The way we think about taxation is wrong. Right now, we talk about taxation as if it confiscates some portion of a transaction while leaving the rest of the transaction untaxed. So, for instance, when someone is paid $100, but only receives $80 after tax, we say that they have been subjected to a $20 (or 20% tax). But this is a myth.

In reality, all transactions are taxed at 100%. The “after tax” amount is actually a transfer payment made by the government to the recipient. So, going back to the prior example, when someone is paid $100, but only receives $80 after tax, what has really happened is that the government imposed a tax of $100 (or 100% tax) and then, separately, provided the person a transfer payment of $80.

When people say we should raise taxes, lower taxes, or leave them unchanged, they are speaking nonsense. All transactions are taxed at 100% and no so-called “tax reform” can change that. What people really mean is that we should change (or not change) the amount of transfer payments the government provides to particular individuals.

So, for instance, suppose Jeff Bezos receives $10 billion in final (i.e. disposable) income. All $10 billion of that was actually a transfer payment made by the government to Bezos. Remember again, all transactions are taxed at 100%, and the (wrongly named) “after tax” amount people receive is really a government transfer payment.

When someone says, we should “raise taxes” on Bezos, what they are really saying is that the government should reduce the amount of transfer payments they provide to Bezos. When someone is saying we should lower taxes on him, they are really saying the government should increase transfer payments to him. When someone says we should not change taxes, what they are really saying is the amount of transfer payments Bezos currently receives is appropriate.

Modern Taxation Theory helps us understand the reality of taxes and transfer payments and also helps us clearly confront certain questions that right now are clouded by confused thinking about these categories. So when it comes to the question of “should we tax the rich more,” the real question is “should the government keep paying the rich so much money?” This is the only question that makes sense as all disposable income is in fact transfer payments made by the government. I personally believe that government transfer payments to the rich are excessive and should be rolled back. Others, it seems, disagree.