Taxes: It's your money, right?

by Benjamin Kuipers

When I hear this argument about taxes, I remember my young son asking me why I don't buy a really fancy, really fast car, like a Ferrari or a Lamborghini. He knows I like to drive fast, and he knows these are great cars. He looks at my paycheck, and to him, it looks like a lot of money. So why don't I get one? It's my money, right?

Being an adult and responsible

The answers are grown-up and boring. Our financial priority has always been to save enough to pay college expenses for him and his sisters. We live in an area where the school taxes are higher than some other places, but they have really good schools. There's the mortgage to pay on the house, and the roof needs to be replaced next spring. We like to avoid debt, both to reduce insecurity and not to have to pay interest. We saved enough to take the whole family along the next time I traveled to Europe for work, because memories from that kind of experience last a lifetime. We also set aside a fraction of our income for charitable giving, because that's the kind of people we want to be. These are the kind of decisions every family makes, with one set of priorities or another, balancing what's important with the resources available.

Being an adult means being responsible about money. It means meeting my obligations. It means eating out less, to be able to afford the trip to Europe. It means keeping the old car, because we have a commitment to the mortgage. So yes, it's my money, but quite a lot of it is already committed by decisions we have already made.

Now let's talk like adults about taxes.

Where does the money go?

We the people, through our elected representatives, get together and spend money on things. The money we spend has to be paid, sooner or later, through taxes. Some of this money is invested in things we hope will pay off in the future. Over the years, things like the Louisiana Purchase, the Interstate Highway System, and scientific and medical research have a track record of paying off their initial investments many times over, even though each of them has been harshly criticized at times.

Other money we spend is the national equivalent of the cost of living. The cost of the military is a cost of living in an insecure world. Programs like national parks are another cost of living: we the people have decided that we want to preserve some natural and cultural monuments for ourselves and our descendents, and we're willing to pay for them. Medicare and Medicaid are also costs of living: we have decided that letting our poor and elderly suffer and die prematurely is not the kind of people we want to be, and we're willing to spend some money to be more humane.

Some money we spend is the ounce of prevention that saves a pound of cure. Childhood vaccinations and public health programs cost money, but they avoid the vastly greater costs of the illnesses. Remember polio? Head Start and other education programs can be justified on the same grounds. Educated citizens hold down jobs and pay taxes, while criminals and prisoners cost society in many ways, including money. There is legitimate debate about particular programs, in terms of their cost, and their short-term and long-term benefits. But no responsible adult can argue with the proposition that prevention is cheaper than cure. That's why we spend money to fix the roof, even though it doesn't leak yet.

Another very important category of money we spend is to pay our debts. We the people have bought a lot of stuff with borrowed money, and now we have to pay for it, with interest. Whether the money was spent wisely or foolishly, whether we invested it or squandered it, whether our investment has grown or shrunk, the debt is ours, and we have to pay it. If that money was borrowed and spent foolishly, we had better learn to act more responsibly in the future. But we still have to pay for it.

Being responsible for family and country

As an adult, a parent, and a homeowner, I have to balance what we spend to maintain a comfortable lifestyle for our family, while paying our debts, spending what is necessary to prevent future expensive problems, giving to charity, and investing in the future, all within our income.

As a citizen and a taxpayer, I want to do the same thing. When I hear politicians wanting to cut taxes, I am waiting to hear a responsible discussion of investments in the future, prevention of future problems, the costs of living the way we want to live, and the debts we have to pay. What I'm hearing instead is, "It's your money, right?" This sounds like a child who doesn't understand about fixing the roof or saving for college, but wants a fancy car in the driveway right now.

If you look at debt and deficit numbers, it is simply a fact that the Reagan and Bush administrations presided over enormous increases in both budget deficits and the national debt, while the Clinton administration imposed a financial discipline on the country that resulted in a balanced budget and the prospect of significantly paying down the national debt. This is not a partisan claim. This is a fact on the ground. One can argue about the contributions of other factors like the fall of the USSR, the tech boom, and 9/11, but the fact itself doesn't go away.

A historic opportunity abandoned

As a fiscal conservative, I believe that George W. Bush abandoned a historic opportunity to change the financial basis of our nation, and then to be able to cut taxes by owing less money. Having inherited a budget surplus from the Clinton administration, he could have maintained the financial discipline and used the surplus to pay down the national debt. Once we had less interest to pay, we could cut taxes responsibly without cutting into investments, prevention, or cost of living.

Some optimists spoke of paying off the national debt entirely, but this was always silly. Business cycles go up and down, and catastrophes like 9/11 can occur, requiring deficit spending and increasing the national debt. Furthermore, economists tell us that some level of debt is good, as a kind of fiscal "ballast." But paying down the debt would have lowered our interest payments, and then lowered our taxes.

Instead, the Bush administration gave the large majority of taxpayers checks for $300 each. Do you remember where that money went? Neither do I. But it didn't go to pay off our national debt, so our taxes still pay for huge amounts of interest. And those debts, and our interest, are still growing. Even at the time, economists knew the growth cycle was turning, so we wouldn't have as much income as before. No one knew about 9/11, of course, but it was coming. We could have had a budget surplus as a financial buffer to help us through the costs of these hard times. But instead, it's gone.

It's like saving up for years to pay college tuition, and then throwing your kid a high school graduation party that costs $25,000. It's a great party, and everyone has a wonderful time, but on Monday morning you realize that the college fund is empty. This is not adult behavior.

Investment versus spending

Investing money is different from spending money. When I spend money, it's gone, and I have whatever I spent it for, whether it's a nice meal, nice clothes, or a nice car. After a while, that's gone, too. When I invest money, I own an asset that produces value, either by growing in value through my work until I sell it, or as a tool to make me more productive. If I buy a computer to help me do my work better, it's an investment in a tool. If I buy the same computer to play video games, I am just spending on amusement, no different from buying movie tickets.

It's rational to borrow money to invest, as long as the increased value of the investment is more than the cost of borrowing. But it's crazy (or at least, not fiscally conservative) to borrow money to spend, except in extreme emergencies.

We can't live without spending on expenses, but as a taxpayer, I want to make sure that as much as possible of my taxes go for investments that will pay off in the future. (The boundary between investments and prevention is fuzzy and not too important for this purpose: both pay off in future benefits. I discuss prevention below.)

The Interstate Highway System was an investment; a big one. It was justified for national defense, but it paid for itself many times over as it helped the economy, by simplifying nationwide transportation. The Internet has a very similar history.

As a nation, we invested in scientific and medical research, particularly after World War II when the military importance of science and technology became totally clear. The United States built the finest scientific community in the world. Over the next few decades, we accumulated a body of basic science that is now being translated into technology, useful products, and economic wealth. The importance of science and technology has never been more clear, but we are in danger of letting the pipeline go dry. We have been so successful with applications lately, that we no longer adequately fund the basic research that drives the whole process and fills the pipeline in the first place.

Prevention and regulations

Prevention is like investment, in that it takes smaller amounts of money now to avoid huge losses in the future. It's much cheaper to fix the roof before it leaks, not after. We vaccinate the kids to prevent a future epidemic.

One role of government is to establish standards that everyone is held to. Zoning and building codes save lives and money. Establishing a common gauge for railroads made cross-country transportation possible. Similar common standards are useful for the automotive, airline, and communication industries, and many others.

A few years ago, our family bought a piece of property on a small creek. When we needed to fix the septic system, we discovered that the local water authority required a significantly more expensive system than we had planned on. I grumbled, but there was nothing to be done, so I paid what it cost and went on. Now I realize that my kids and I swim in that creek, and it's beautiful and clean, and it's comforting to know that none of my neighbors upstream are leaking sewage into the stream either. If I were making my own decision in isolation, I wouldn't have paid for the better water system. It wouldn't have made sense, because my neighbors probably wouldn't have done it either. The creek would have been too polluted to swim in anyway, and no individual property-owner could fix it. Yes, I grumbled about the cost, but on rational reflection, I'm glad we were all held to a high standard. Now we can all swim in the creek.

Global warming

I believe that global warming is just such an issue. If the Antarctic icecap melts, New York, London, and New Orleans will all be under water, to name just a few. Even ignoring the human costs, the financial costs will be astounding. I'm surprised that real estate investors in these cities aren't mobilizing to save their investments. It's a long-term problem, but I would expect people who build office towers in Manhattan to spare some thought for the decades ahead. Climate is a system with an enormous amount of inertia. Change is slow to get started, but then very hard to stop. The longer we wait, the longer, harder, and more expensive it will be to stop. And we may lose some very valuable coastal cities in the process.

Some people say that global warming is not a real problem. It's possible they are right, but the great preponderance of scientific evidence is against them. There are rational ways to deal with decision-making under this kind of uncertainty. But simply asserting that the problem does not exist, in spite of evidence to the contrary, is not one of them. The responsible adult approach is to consider the alternatives, take into account the costs of guessing wrong about the real situation, and take a balanced approach.

But taxes are too high!

Well, maybe they are and maybe they aren't. It's a matter of looking at what we're getting, and what we're paying for it. We have to look at the four categories of spending:

We have to pay our debts, but we can learn from the wisdom of that spending. Call it tuition in the School of Hard Knocks. (Best school around, but expensive! You can repeat each course as often as you like, but you have to pay for it each time.)

If we don't invest in the future, we'll be sunk. We can debate about which investments are the best, and build what we hope is a strong, diverse portfolio.

If we don't prevent future expensive disasters, we'll be sunk. We can debate about which threats are real and which are imaginary, and which treatments make things better and which make things worse, but a nation as large and complex as ours needs a large, complex system of prevention mechanisms.

Then there's spending on current needs, including being the kind of people we want to be. This includes what we spend on the quality of our own lives, and the money we give to those in need. We can debate about which things taxes should pay for, and which should be left to individuals and private enterprise. We decide these questions through our votes. The decision is about what we need, and who we want to be.

One blanket "Cut taxes!" prescription is nonsense, applied across these four categories. They must be considered carefully and separately.

But the politicians are out of control!

Well, sometimes. I said that "we the people" made certain decisions about how to spend money, but of course it was our elected representatives who actually made those decisions. Since we elected them, we must take responsibility for their decisions, but their motivations are not necessarily the same as ours.

Politicians want to be re-elected. It is natural for them to want to increase current spending, which has immediate impact on their constituents, and cut taxes by cutting investment and prevention, since the effect of those cuts will only be seen in the future. But politicians are enormously responsive if enough constituents demand change that their re-election depends on it. So they are actually quite thoroughly under our control, if only we can exercise that control. We must demand grown-up levels of responsibility about money, not just simplistic slogans about cutting taxes.

Fiscal responsibility

Some politicians consider fiscal responsibility to be a priority. Others do not. Cutting taxes by borrowing money is not fiscal responsibility. Managing to balance tax levels with debt payments, investments, prevention, and spending on cost of living, and achieving a good outcome is fiscal responsibility.

Notwithstanding the volume of campaign rhetoric, the track record demonstrates that the Clinton administration considered fiscal responsibility to be a top priority, while the Reagan and Bush administrations had other priorities. People can and should discuss what those other priorities are, and whether they are more important than fiscal responsibility.

For a fiscal conservative like me, however, the ability of our country to continue to pursue any of its goals depends on our ability to take adult levels of fiscal responsibility. And that means making careful, adult decisions about what is worth paying taxes for, and then paying taxes for those things.

Written 17 July 2004