Taxes, government, and capitalism: a rant about semantics

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For all the discussions about taxes, government, and capitalism, a lot of people in the United States don’t actually understand any of these concepts both semantically and fundamentally.

For example, if you asked a random person in the street “What do you think about the government?” the overarching themes could be boiled down to the following monolithic statements:

  1. “The government is taking my money through taxes to pay for stuff I don’t want to pay for, and I want the government to keep its nose out of my life. The government makes everything worse.”

  2. “The government is not doing enough for me or my family and it really sucks but there are certain things we need and we need them badly. Someone needs to do something about it.”

  3. “The government should help in some ways but not others. I think there are certain things that the government should just not pay for. There are a lot of things the government is doing now that they shouldn’t do.”

  4. “The government can help the people, but there is a limit to how much and what things can be done. Doing this would not be good for our economy, which is a capitalist economy and not a socialist one.”

Now of those statements, there is only one that actually matters — I’ll save that for the end.

Looking at those themes, it becomes clear that there are many interpretations of government. The modern understanding of government is that it is some distant entity that does something with some amount of money collected by the people it represents. Technically this is true, but it’s not really what government is. By definition, a government is a ruling body of a nation or a state. For the longest time, when problems arose in society, governments would work to resolve them because that was their job. Governments were the administrators for and extensions of rulers. The more successful ones optimized innovation and development. The downside was that governments were only as competent or benevolent as their ruler, and the ruins of many dead societies are clear warnings of what incompetence or tyranny can bring.

Of course, this glosses over a lot of context and ignores the evolution of government and society. However, the core idea of governance is fundamentally the same today. If there’s a problem, the government ideally would implement a solution. But in the modern era, why do so many people think that it’s not the government’s job to resolve problems? That’s where taxes muddy the entire discussion. Taxes are a transactional link between citizen and government, which for the longest time was some variation of the government collecting taxes they levied on the citizens without the citizens getting a say in the matter. Even if they did have a say in the matter, it was very limited and/or large portions of citizens were deliberately excluded.
But this is where that pesky “evolution of government and society” comes back into play. I titled this article “taxes, government, and capitalism” because I was going to open with a discussion about taxes first. But you can’t really talk about taxes without talking about what government is meant to do and how it has evolved. In the modern era, most governments are no longer extensions of rulers because of the permeation of democratic ideals and human rights. To put it more simply, most citizens of modern governments can vote, which theoretically makes governments the extension of their citizens.

With this evolution of government, the tax issue is now flipped. The transactional link between citizen and government became something for citizens to decide, which makes individual interest much more salient. However, this creates an entirely different issue. Everyone has different interests, even if many are shared. In a lot of cases those interests compete with each other, or there are many interests that mean something for one group of people that mean nothing to the others. As a result, there are many things people will no longer want to pay for with tax money, regardless of their necessity.

This central issue has been the driver of thousands of debates around taxation and representation since even before the American Revolution. It makes sense that a group of people that rebelled against a monarchy over its tax policies would want the authority of the new government to be limited on matters like taxation. The severely limited government under the Articles of Confederation was a byproduct of this reactionary mindset, but it pretty much failed within five years and insurgencies like Shays’ Rebellion were happening anyway. The Constitution addressed this by clearly stating that the government can levy taxes but citizens would get to vote for the representatives who decide the intricacies of the taxes (i.e., how much tax money is collected and how to collect them). These complexities of taxation, like the nation, evolved gradually. Similarly, the reactionary colonial mindset to taxes gradually morphed into a homogenized hesitancy towards taxation with concerns about the individual impact of taxes combined with a healthy dose of government skepticism.

Through all this evolution and debate, a key theme has been missed: If governments are meant to be extensions of citizens, that would mean tax money is also the citizens’ money. This is more true now than it was in 1789, but it was never just “the government will take your money.” People voted for that government. It’s their money. Our taxes pay for so many services now, many of which are services that the government eventually realized it had to provide because it needed to. For example, most people reading this probably don’t directly benefit from Medicare or Medicaid (as I assume many of you are Carnegie Mellon students), but your tax money is paying for those services anyway. It’s just fractions of money, and the benefits of having those programs far outweighs the costs. Sure, self-interest is important, but it isn’t that relevant when the government is so expansive that no one can even pinpoint how many services their tax money pays for that they take for granted. If you don’t want your tax money going to stuff you don’t want to pay for, the bad news for you is that it happens already, constantly. It’s been like that throughout history way before democracy. The difference is now that the tax money is yours and you are meant to benefit from it whether you see it or not.

But none of the misunderstandings surrounding government and taxes come close to the those surrounding capitalism. I’d go so far as to say that the misunderstandings regarding capitalism derive from misunderstandings surrounding taxes and government.

First, let’s break down capitalism. A lot of people lump markets and capitalism together as if they’re synonymous, but markets have been around for thousands of years. Barter and trade systems are a great example of this. People want something, and someone realizes they can make that item and sell that to people willing to pay for it. But, others realize they can make and sell that item, too, and so they all start competing to try to get the most buyers. This is just supply and demand. It’s not a novel idea that was created in 1776 by Adam Smith the way many modern economists and institutions make it seem like it is.

Adam Smith, who wrote “The Wealth of Nations,” is known as the godfather of capitalism and for defining free markets, but that’s not really true. The entire crux of his book is actually focused on the growth of nations, which required wealth to be recycled into the economy to continue to maximize growth. The writing itself was meant to challenge the mercantilist system of the time. It also challenged the hoarding of wealth, land, and resources by a small group of aristocrats and nobles. He wasn’t against government intervention, and recognized that government would be needed to provide the necessary services that markets simply can’t provide as much as would be needed to enforce property rights. In fact, he encouraged this. He thought that profit-seekers had very different interests than the majority of people, and that fast profit was a sign of fast ruin. His ideal market system prioritized lower long-term profits and high wages for workers. In Smith’s ideal economic model, there wouldn’t be room for billionaires or landlords because that’s completely antithetical to the recycling of wealth into the economy. I could keep going, but the point of this is to illustrate that Smith’s writing is not what capitalism is.

The capitalism that we are familiar with now is a product of the Industrial Revolution. The structure of firms in the private sector evolved into the corporate structure we know today, where executives split from the workers, and most gains go to those executives. On the other hand, workers became increasingly unskilled as trades were broken down into simpler tasks that didn’t require as much specialization (blue-collar workers) and they were managed by middle class workers who carried out the goals of the executives (white-collar workers). The economy grew rapidly, which was naturally going to happen as more people were employed and more goods were produced and consumed.

However, the economy is just a summation of the activity of the people in it. It doesn’t actually say anything about whether that economy is actually helpful for most people. The blue-collar workers had dirt-poor wages and awful working conditions. The white-collar workers generally fared much better, but were also not paid very well. On top of that, living conditions for most people were terrible; “good” living conditions were unaffordable for most people. Labor movements demanded the government to regulate the private sector and advocate for better working and living conditions and higher pay for workers. Government became increasingly important: because capitalism wasn’t helping most people, they turned to the government to advocate for individual self-interest. This is a significant reason why taxes shifted towards a redistributive approach, particularly with the creation of a progressive income tax system in 1917.

But self-interest is tricky because capitalists want to maximize profit and power for themselves as much as possible. This isn’t new. The uncomfortable truth of human history is that hierarchy has been a central tenet of society. The people at the top will do what they can to maintain or expand their power.

People in power justified feudalism and mercantilism the same ways they now justify capitalism. But this doesn’t change the fact that, at its core, capitalism is just another system where a small plurality of people hold the wealth while exploiting the majority. In a system of competing self-interests, capitalists would also be the ones with the resources to impose their interests, and those interests are at odds with the majority. During the industrial revolution, capitalists ensured that the government would mainly act in their interest and diminish the bargaining power of the majority. Capitalists also convinced a good chunk of people that capitalism is positive through fearmongering about socialism. They encourage the idea that capitalists should be the ones to provide services instead of the government because capitalists would be the most efficient provider of the service. If this all sounds familiar, that’s because this is the basis of the limited government and anti-tax narratives popular in the United States since the 1980s. It’s what drives the four central monolithic themes I listed at the beginning of this insanely long history diatribe. You can also see a lot of parallels between the evolution of capitalism during the technological revolution of the last 30 years and the evolution of capitalism in the Gilded Age.

I promised I’d tell you at the end which of those themes in the beginning is the only one that matters, and it’s the second theme that is listed. There are problems in our society that have real consequences for real people, and someone has to do something about it. All these debates about taxes, government, and capitalism don’t really take away from the urgency of needing to fix society’s problems and helping those who are the worst off even if they obfuscate that urgency. History is cyclical in nature. Societies form, grow, and die, and governments have to do what they can to ensure their society’s survival up until they can’t anymore. The more humans repeat this cycle, the more we learn about efficient survival.

But it says a lot about us that the hierarchical structures that benefited those at the top continue to manifest themselves today, especially with the unprecedented access to information we have now. Does this mean we are doomed to continue this cyclical process because we can’t break away from the hierarchical structures that have defined societies for so long despite all the knowledge and resources we have? Truthfully, I don’t know. But isn’t it at least worth trying something different? We’re at a point in our history where we have the resources, wealth, and technology to fix most of our problems, if not almost all of them. Maybe instead of debating what the role of taxes, government, and capitalism is, we should start asking the people in power how they can look at all the pain and destitution in the world from the comfort of their ivory tower and say with a straight face, “Yep, this is fine.”