An Economist's Guide to GOT (i.e. "Game Of Taxes”)

Winter is Coming… and It’s Bringing the Army of the Debt.

(Note: Does NOT Contain Spoilers.)

While I’d rather talk with you about last night’s excellent Game of Thrones season premiere, we’ll have to wait on this fantastic topic until a future post. You see, by some cruel accident of “Addition by 1”, the calendrical gods have caused April 15 (Tax Filing Day) — to fall the day after April 14 (GOT Season 8 Premiere Day). Talk about a roller coaster of emotions! However, because the Iron Bank of Washington requires that you file something by today — be it your tax return, or a mere extension — it’s important that we turn our eyes toward taxes for the moment.

A BRIEF RECAP OF THE FIRST 106 SEASONS

While the US did have income taxes as far back as the Civil War (and tariffs and other excise taxes back to the 18th Century), the legal foundations of the federal tax based on income (rather than by population) were established with the ratification of the 16th Amendment in 1913. It’s quaint to recall that there were initially just two nice, low tax brackets — 1% and 6%. But the top tax bracket quickly rose to 77% a few years later (to fund WWI), then continued to bounce down and back up from there.

Meanwhile, the tax code steadily rose in complexity. The elegance of simple tax brackets based on income level seemed, at first, both fair and efficient, but it quickly became apparent that not all sources of income and wealth-transfer are the same. Coupled with growing government spending needs and changing political climates, the internal revenue code grew to thousands of pages — longer than any George R.R. Martin novel, and significantly less fun to read.

WHY DO WE EVEN NEED TAXES?

Whatever you pay in taxes (and however much the government may waste of that money), consider it a small price to pay for defense, infrastructure, public health, etc.… keeping all your gold isn’t worth much if you die of greyscale, or if a Dothraki horde invades and takes it away.

I once had an “extreme” libertarian tell me that the US military should be all voluntary — that is, it should be private militias funded only by voluntary donations. It took me a few moments to realize he wasn’t joking. There is apparently a school of thought that, because government is an inefficient mechanism to achieve many objectives (True), all public needs and goods should be handled by private enterprise. This libertarian utopia also goes by another name: “Anarchy”. And Anarchy doesn’t fare so well in the real world — not only because of the obvious destruction by chaos, but because some authoritarian force rises in the void. Every time.

So, because there’s a need to provide some public goods and services to the public (even if it’s just peacekeeping and infrastructure), there’s a need to generate funds. These funds can come from two sources: taxes and borrowing. And, as we all know, when you borrow you eventually have to pay it back. Right? Or, I guess you could keep borrowing. And borrowing more. Until… wow… is the US National Debt really at $22 Trillion?! And that doesn’t include unfunded liabilities? Oh man.

HIGHER TAXES, LOWER BENEFITS!

How should we pay off this debt?!

Well, one method would be to take over a few castles and use their gold. This was a popular method in the past, but not so popular these days.

The other two options then would be increasing taxes or decreasing spending. Both very difficult politically. There’s a reason no presidential candidate has the slogan: “Higher Taxes, Lower Benefits!”

On the spending side, it’s very hard to remove a spending program once it’s implemented; and, for all the talk about reducing waste and inefficiency, in most cases, the waste in any program pales in comparison to the cost of the program itself. Obviously, people will often disagree on the needfor a program (for example, the ongoing debate about Obamacare), but once the program is there, it’s very difficult to cut without taking a political beating.

On the tax side, everyone wants to pay less in taxes. *I* want to pay less in taxes! YOU want to pay less in taxes! Who wants to pay more in taxes?! No one! So the debate shifts toward having wealthy people pay more in taxes, because most people aren’t wealthy people. And, of course, wealthy tax payers can afford it, right?! They can afford (checks notes) $22 Trillion?!

Thus, we get the government making changes only on the margins — raising a tax rate a little here. Cutting the budget on a program a little there. And, y’know, maybe lowering a tax rate here, and adding a different program there. As the debt continues to rise.

BUT THE TAX CODE ISN’T FAIR!

Repeat after me: “There’s No Such Thing as a Fair Tax Code”. It’s a logical impossibility — that is, except in an idealized economy in which every person (a) works, (b) earns, (c) owns and (d) requires the exact same amounts. The moment any of these differs, there has to be some subjectivity into what a “fair” allocation is. Even “everyone pays the same” is itself making a fairness judgment…

Consider a very simplified analogy: Two friends go to dinner. Ms.A works at a low paying job and struggles to pay rent, while Ms.B inherited a successful business and owns a car collection. Ms.A orders a more expensive entree and has a couple of drinks with dinner, while Ms.B just has an appetizer and a glass of water. When the check comes, should (a) they split it 50/50, (b) Ms.A pay more because she ordered more, or (c) Ms.B pay more because she can afford it? Go ahead and ask a random selection of 10 people, and I guarantee you all 10 won’t give the same answer.

Now, expand that to the entire US — hundreds of millions of people — or even a small town with a hundred people. And consider that we’re not talking about splitting a single meal… we’re talking about maintaining roads, providing police and firefighting services, funding healthcare for certain segments of the population… and the idea that there is a uniformly-agreeable “fair” allocation to collect revenue for those services is nonsensical.

Instead, what we get is “negotiated fairness” — one that most people find, in one way or another, to be unfair!

WHAT TO WATCH FOR THIS SEASON?

Sadly, this is the last season of Game of Thrones… but it’s not the last season of “Game of Taxes”!

Last season saw “House Republican” (with their elephant sigil) shift the “negotiated fairness” toward lower taxes on corporations and related interests. Meanwhile, “House Democrat” (with their donkey sigil) called their banners, took the congressional castle, and in the season finale, began their quest to retake the Iron Throne of Washington. If they succeed, it’s likely we will see them turn the “negotiated fairness” back toward higher taxes on corporations, higher top tax brackets, and greater exemptions for low and middle income Americans.

Meanwhile, as Republicans and Democrats play their “Game of Taxes,” the Army of the Debt is on the march. Winter is Coming.

Thanks for reading! Feel free to email me your thoughts.