Of cliffs, taxes and community

by Barry Bennett

At 9:30 p.m. on New Year’s Eve, after almost a year of Congressional avoidance and posturing, we skidded to a stop at the very edge of the fiscal cliff. Or at least an agreement of sorts was reached. Having averted the possibly catastrophic alternative, we can look back from the edge and marvel at our political system’s astonishing ability to turn the trivial into the phantasmagoric, as it did when it debated which tiny number of Americans—families making over $250,000, $600,000, or $1,000,000—should be subject to a modest tax increase. The magic figure of $450,000, together with various other compromises, led to a deal at the not-quite eleventh hour.

Small differences become magnified when they are the only things in dispute, and the debate over whether two percent, or one percent, or one-half of one percent of Americans should pay more taxes obscured the far more significant agreement that at least 98 percent should not. Despite the nation’s near-bankruptcy, the fierce political adversaries agreed that 309,000,000 Americans (of 315,000,000) should be exempt from further contributions to the commonweal, the two parties’ shared understanding greatly exaggerating an argument over the remaining small fraction.

But the 309,000,000 is the far more significant number, and not only because it is much larger. The 98 percent’s immunity from tax increases reflects the nation’s now decades-long demonization of taxes, and reinforces the disconnect in the popular mind between taxes and services. For over a generation, support of new taxes has been political suicide, regardless of economic conditions, existing tax rates, or government deficits; the President’s proposal to allow taxes to rise for the wealthiest Americans is popular only because it touches so few. Instead of viewing taxes as, in Supreme Court Justice Oliver Wendell Holmes, Jr.’s famous phrase, “the price we pay for a civilized society,” we see them as an arbitrary tariff on the fruit of our labor for which we receive little or nothing in return.

The appropriate level of taxation is surely subject to reasonable dispute; but the politics make a coherent debate impossible. As highlighted by the frenzied response to President Obama’s grammatically impaired campaign statement “you didn’t build that”—referring to roads and bridges and, by implication, the entire infrastructure that supports businesses—our attitude toward taxes reflects the extreme individualism that has led many Americans to believe that they alone are responsible for their accomplishments. We give little credit to government—or community.

Hence the sign at an anti-Obamacare rally, “Keep your government hands off my Medicare.” And hence the letters in the Oregonian concerning possible tax increases. One letter writer, decrying a potential tax on certain business transactions, wrote that the government, “a third party,” should not intervene in an agreement between two individuals. Another correspondent wrote that taxes should not be raised to pay for a certain program, because “government should pay for it, not the taxpayers.”

This objection is not as odd as it sounds given that we have been conditioned to expect services without paying for them. Consider a poll taken last December concerning how Congress should avoid the fiscal cliff. The only proposal supported by a majority was raising taxes on the wealthy. Although three-quarters rejected letting the Bush tax cuts expire for incomes below $250,000, majorities also rejected cuts in Medicaid or Medicare or raising the Medicare eligibility age. Polls routinely show that the only popular spending cut is foreign aid, undoubtedly because few feel personally affected by it.

But we don’t take for granted only highly visible government programs like Medicare. Even more significant are the things we cannot see. In 2005 the World Bank set out to determine the sources of the world’s wealth. After assessing the contributions, for each of 120 countries, of the traditional measures of capital—land, natural resources, and produced capital (that is, machinery, equipment, and structures)—the Bank’s economists discovered something astonishing: most of the world’s wealth was missing.

As documented in its report, Where is the Wealth of Nations? Measuring Capital for the 21st Century (http://siteresources.worldbank.org/INTEEI/214578-1110886258964/20748034/All.pdf), the Bank found that the world’s wealth derived primarily from “intangible capital”—“human capital and the quality of formal and informal institutions.” Intangible capital was “the preponderant form of wealth worldwide” and constituted “the largest share of wealth in virtually all countries.” It includes social capital—“trust among people in a society and their ability to work together for a common purpose”—and even more critically, the rule of law. Countries governed by the rule of law have an “efficient judicial system, clear property rights, and an effective government,” and disputes are resolved by established principles and fair procedures. Without the rule of law, businesses cannot protect their assets, while contracts may be unenforceable: companies are hesitant to invest and economies stagnate. By itself, the rule of law accounted for over half of the world’s intangible capital, making it the single most important generator of wealth on earth.

The richer the country, the higher the percentage of its wealth that derived from intangible capital. The Bank economists found this result unsurprising, since “rich countries are largely rich because of the skills of their population and the quality of the institutions supporting economic activity.” In the richest country, Switzerland, 84 percent of the wealth derived from intangible capital; the figure for the United States (the fourth richest) was 82 percent. In a separate analysis, Nobel prize-winning economist Herbert Simon concluded that social capital—which he said took primarily the form of “organizational and governmental skills”—must produce at least 90 percent of the wealth in wealthy countries such as the United States and the countries of northwestern Europe. (As to “governmental skills”: the paralysis of the political system aside, if the government were anywhere near as hapless as the caricature has it, the United States would be a poor country indeed. But that’s a topic for another day.)

We celebrate the human skills aspect of social capital but too often seem unaware of the rest, as if we toil in a vacuum. Yet without the web of relationships and institutions that compose a society, our skills would be of little value; we would produce almost nothing. These abstractions have their visible manifestation in institutions such as courts, civic organizations, and government agencies. Similarly, taxes are the concrete manifestation of our support for the institutions of social capital: the debate over taxes is a debate over community. How much we are willing to pay, and for what ends, defines the kind of society we want and is a measure of the obligations we believe we owe one another. Our leaders encourage us to ignore these obligations in favor of asking ourselves, “Are you better off than you were four years ago?”—thus telling citizens to measure their government not by whether the community has prospered but by how much each of us has been able to extract from the common purse.

To restore the balance between self and community, we must change the national conversation. We can start by discarding our myopic attitude toward taxes. Perhaps then we will recognize that our willingness—or unwillingness—to be taxed reveals our values and shapes our society, and that none of us prosper on our own.


Barry Bennett is an attorney with the Bonneville Power Administration, an agency within the United States Department of Energy, and an adjunct instructor in the Marylhurst MBA program.

Photo: cogdogblog via Flickr