Which leads to the question: What will happen if conservatives succeed, as part of their push for an Ownership Society, in redirecting much of the payroll tax from federal coffers into the personal accounts of workers? Most Americans would then be directly supporting the federal government only through the income tax and the few federal sales and excise taxes (e.g., on gasoline). The result: Most Americans would no longer be making any significant contribution whatever toward the maintenance of the federal government.
Any new programs that Congress might adopt would cost the average American little or nothing. He already pays scant income tax, and he would be getting much of his Social Security and Medicare taxes back in the expected personal accounts. So at that point the relatively small number of citizens who make significant income tax payments would be carrying our whole federal edifice.
And there’s the rub. “Rebating” a big chunk of payroll taxes back to workers in the form of personal accounts is devoutly to be wished for in most ways. But one troubling side effect of such a transformation would be to nakedly expose the tax burden that our personal income tax disproportionately lays on the top 5 percent of Americans.
Our Founders had no confidence that voters, unmoored from financial responsibility, would refrain from pillaging the wealth of their neighbors. If most of Washington’s costs end up piled on just a few backs, the only thing preventing a sharp ratcheting up of the income tax will be the decency and political principle of ordinary Americans.
This pessimism is unwarranted. The untaxes would refrain from raising taxes because they know that they benefit from revenue collection. A rational population that was untaxed would stil choose taxes that maximize revenue rather than taxes that maximize “justice”. Obviously if taxes are 100% no one would would bother to earn money. If taxes are 0% no revenue would be collected. The truth is somewhere in between and rational revenue beneficiaries would choose it. Actually they might choose something slightly lower corresponding to their hope that they themselves will eventually earn enough money to pay taxes.