Matt Whitman of both the Ten Minute Bible Hour¹ and No Dumb Questions² fame (links below) tweeted a twoosh on the Elmo X Machine on Wednesday:
https://x.com/MattWhitmanTMBH/status/1864178422492135589
I'm hearing there's talk of getting rid of taxes on social security, which seems obviously good to me.
What's the case for continuing to collect income tax on social security from seniors?
- Matt Whitman, via X, 4th Dec 2024
This is a classically excellent put question of the form, "Given P Why Q?" where we are asked to find the reasonable case to arrive at Q from P. There is a stated reasonable opinion and the question which follows is also reasonable.
Firstly, I live in Australia; which means that I am most familiar with how the taxation system works here, and being an accountant who takes worked on both sides of the fence (both out here in private practice and inside the dark box of the Australian Taxation Office with the mice on treadmills in cages) I have at least a passing idea of the basics of how taxation works and more importantly, civic telos in operation.
Secondly, I need to clear away the discussion about the right of the state to collect taxation. Even going back to the ancient world, soldiers were paid in coin, which they could use as a universal token system to buy goods and services. The state always owned the coin. That means that they always had the right in principle to lay a claim on the coin that they issued in the first place. Any statement that "taxation is theft" is from the outset a lie, because even if you worked for it, the dollars, pounds, lira, euro, dinar, shekels, and wurniks that you have in your possession, were always actually the stuff of the state who always had a claim to take it back. The word "taxation" itself is derived from Latin which means "I pay"; where the person paying tax is always merely paying back the state for the provision of services (usually defence and law) which it has already provided.
So then, having established that the state always had the right to lay claim to taxation, Mr Whitman's question is grounded in the secondary moral domain of fairness. This is again an excellent position to be asking a question from; because one of the features of a good law, of which taxation law is a part, always has to do about the fairness of that law.
In addressing that issue, I refer to Section 6.5 of the Income Tax Assessment Act 1997.
https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html
Income according to ordinary concepts ( ordinary income )
(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income .
Note: Some of the provisions about assessable income listed in section 10 - 5 may affect the treatment of ordinary income.
(2) If you are an Australian resident, your assessable income includes the * ordinary income you * derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
- Section 6.5, Income Tax Assessment Act 1997
Part of what makes a law a good law, are the components of simplicity, predictability, and fairness.
A good law should in principle be as simple as possible and stated as simply as possible. The law even though it might have perfectly good reasons why it exists, doesn't need to state why it does. The most basic road law of driving on the left (or right) is of itself arbitrary and it obviously exists for people's safety but the law has no need to entertain the reasons of 'because'.
A good law should in principle be as predictable as possible. As a law is a general statement of behaviour, conduct, operation, method et cetera, and as law exists for the regulation, standardisation and protection of society, then the law should be written in such a way that someone should be able to follow it and know what the general case is for the thing which the law covers.
A good law should in principle be as fair as possible. Since the law is itself an imposition upon the absolute freedom of people to do whatever they want, then the law should simultaneously exist to maximise people's happiness or utility in their reasonable and fair conduct as well as to fall on all people equally. The law should also take into account that what is fair for someone might not necessarily be fair for someone else due to circumstance. This is the underlying principle of equity, which is also an excellent foundation for law.
So then, if we consider that the law should be fair simple, predictable, and fair, then what is the case for collecting income tax on social security from seniors?
The Income Tax Assessment Act 1997 makes literally no distinction about what kind of income is income and assumes that all income derived from all sources is ordinary income. Income from all sources, is a pretty simple statement. Income from all sources, is a predictable statement. And since the Income Tax Assessment Act 1997 applies to everyone equally, then the law is fair in the sense that there are no exceptions as to whom the law falls upon.
Social Security, Old Age Pensions, Welfare Payments Superannuation Payments, et cetera, are in principle no different to Wages, Rents, and Dividends. As a Dollar is one of the very few things which is perfectly fungible, that is that one dollar is absolutely identical and interchangeable which any other dollar, then there is no reason whatsoever why the taxation system should care a jot about what kind of ordinary income it is.
Nor should the taxation system should care a jot about the age of the taxpayer. Since the state provides services equally, (defence, law, roads, schools, hospitals) without distinction of the age of taxpayers, then there should not be a distinction made. The law should not care a jot if the taxpayer is 2 or 102.
The question of fairness, should be properly addressed within the substance of the subject of the law itself. In this case, since Social Security are ordinary income, then the question of fairness is not about age of taxpayers, but rather the amount of income since dollars are perfectly fungible.
Someone who has a very limited income, is very much going to miss one dollar being taken from them, whereas a millionaire is not. Ten Dollars might be the difference between whether or not a homeless person eats today, whereas Lord Phillip Fortherington-Smythe who is the head of a multi-national multi-trillon dollar corporation and who looks at balance sheets and profit and loss statements where 000's are stated, can't even see the existence of Ten Dollars.
One of the interesting things about money is that the marginal utility of that last dollar, actually decreases the more of it that someone has. In the end it decreases so much that the actual marginal utility of that last dollar, is such that very rich people don't even know about individual dollars. I live way down at the bottom; where I can tell you that a loaf of bread has 20 slices in it and costs $2.39 at Aldi, whereas someone in the board room of a major corporation who has servants, might not even do their own shopping.
So for this reason, the best taxation law with respect to income, imposes progressive rates of income as it makes logical sense, to charge the people who actually derive the most benefit from the regulation, standardisation and protection of society, as measured in the dollars that they derive in ordinary income, the highest marginal rates on that last dollar.
If we assume that our theoretical senior, has no other income apart from their social security payments, then in my country they are on $1144,40 per fortnight which is $29,754 per year. Once you also factor in tax offsets for deriving such a low income, then the amount of taxation which is assessable on $29,754 per year is $0. Yes this is a matter of semantics but the social security payments have been assessed as ordinary income; and $0 of income tax to be paid is still an amount. I think that that would probably satisfy Mr Whitman. More importantly, it does so because the law was simple, predictable, and fair in the first place.
Is the law in his country that well designed? If not, that's a problem with the law and not the principle.
¹ https://www.thetmbh.com
² https://www.nodumbquestions.fm