There is no such thing as pre-tax income

January 15, 2019 (2232 words) :: The idea of 'pre-tax income' is a pernicious myth that has led to some really dumb libertarian takes around 'taxpayer money'. It needs to be abolished.
Tags: inequality, ideology, public-services, personal

This blog post is from day 15 of a personal challenge to write something every day in 2019. See the other fragments.

I was going through my Dropbox recently and I came across an old, and rather embarrassing, document. Created sometime in my last year of college (2013-2014), the document was an attempt to calculate my monthly budget once I graduated and started working at Google in San Francisco.

The breakdown was something like this, for a $100,000 base salary (which was the standard new grad salary at the time, excluding stock and bonuses):

I remember coming up with these figures and feeling kind of indignant about how much money would be going to taxes. At the time, I considered myself a good liberal who believed in progressive taxation, but even then I was annoyed to realise that a full 33% of my promised income would just disappear from my paycheck every month. What the hell? Surely I earned that $100k. It didn’t seem fair.

It was worse when I did more research on San Francisco rent and realised that there was no way I was getting a one-bedroom apartment for $2,000 a month, which meant I would either have to share a place or have a long commute to work. Or I could spend $4,000 a month and not save any money. Either way, the amount of tax I had to pay was immovable. It wouldn’t budge. I understood (or thought I understood) why tax was a societal necessity, but on a personal level, it rankled.

I never ended up taking the job, and since then haven’t made anywhere near $8,000 per month, so this became a non-issue. But I’ve been thinking about this when I started reading about political economy from a left perspective. From a socialist perspective, harsh progressive taxes (like AOC’s 70% marginal tax rate) are good. But from an individual perspective, we want to hold on to the money we think is ours. We don’t like the idea of the government taking away our hard-earned wages.

This attitude is encouraged by the very form that compensation figures take, as people (myself included) often form an attachment to the salary they are theoretically owed by their employer - the number that’s in their employment contract. But what the hell is this number? It’s made-up. It’s arbitrary. It has no basis in reality (at least for direct employment relationships where the company ensures all the necessary taxes are paid). There is no world in which you “get” all of that salary. We all know that, and adjust our expectations accordingly; when you’re given a job offer with a particular hourly wage or yearly salary, it is always quoted pre-tax, and it is assumed that you’ll do the necessary tax calculations yourself when you’re figuring out your budget.

Why does your employer tell you this made-up number, which includes state/federal taxes and FICA, but not the “company’s” FICA contribution or any other taxes they may have to pay? Why do they not also estimate the amount they spend on your workplace equipment (phone, computer, etc), food, office space, furniture, campus security, etc?

Obviously I am not suggesting that including these numbers in your salary - and thereby inflating it - would be good, not least because these expenses can only be loosely estimated for any individual employee. They aren’t really part of your compensation; instead, they’re merely part of the cost of doing business.

But the same argument applies to taxes. When the onus of paying personal income taxes is treated as if it’s on the worker, the pre-tax salary becomes naturalised, and that number’s lack of relation to reality slips away, forgotten. To put it kindly, this number is a legacy number, a remnant of an outdated tax system that has accumulated by patchwork. It’s the fiscal equivalent of a terrible legacy software program whose components are written in different languages, some of which aren’t even maintained anymore. It needs to be replaced by a simpler and more honest system - one where companies advertise the actual amount of money you get in each paycheck.

That’s not to say that I think there’s a simple technical fix to this problem, devoid of politics. Whether it was done deliberately or not, the design of this current system is a political choice. That individuals think they are “paying” income taxes - that this mythical pre-tax income is something that could actually exist - is a mass delusion, and one that I would argue is an ideological boon for any right-wing political project that seeks to mobilise voters against higher income taxes. It’s harder to get people to acquiesce to having their own money taken away than it is to get them to support taxing corporations more (which is how raising income taxes would effectively appear in the system I’m proposing).

I promise this blog post is more than just “Wendy thinks something is bad and therefore argues it has to be abolished”. There’s a 2003 paper in the Michigan Law Review titled The Myth of Pretax Income which explains this view in more detail:

How can my pretax income be a myth, when I can read it on my W-2? Their argument goes as follows: Pretax income means income in the absence of taxes. But in the absence of taxes there would be no government, in the absence of government there would be anarchy, and in a state of anarchy no one would have any income. Pretax income, then, must be zero – or, equivalently, there is no such thing as pretax income.

Pre-tax income is a paradoxical concept, the result of extrapolating to an impossible point where the function is not defined. Sadly, it’s not acknowledged as such in common parlance. Instead, the whole system is set up to reify the divide between “predistribution” (anything that influences how pre-tax income is determined in the market, like government regulation over wages, collective bargaining, scarcity of certain skills, etc) and “redistribution” (distribution done through the tax system). Emphasis on predistribution (which, despite ex-Labour leader Ed Miliband’s best intentions, never really happened) is often neglected, as it’s assumed that the best way of ensuring a fairer distribution of resources comes through redistribution (like progressive income taxes).

The problem with this attitude is that treats pre-tax incomes as if they are unchangeable, which means a whole realm of possible strategies are neglected. But, as I argued earlier, these pre-tax numbers are arbitrary, and so the divide between predistribution/redistribution is itself an artificial construct. Not in the sense that it is imaginary - it is very real in the sense that we believe in the numbers we are told reflect our worth - but in the sense that it can shift, depending on material conditions. It is a construct, an artefact, that reflects power relations in the rest of the economy.

A pre-tax income is not a divinely ordained number that emerges fully-formed from the “free market”, as if such a thing ever existed; the fact that investment bankers and highly-sought-after software engineers can make 7-figure salaries (unmoored from any notion of social value) while most teachers or nurses are making subsistence wages is a historical contingency, not a law of nature. Income inequality can change depending on a whole host of factors, some of which are in the “redistribution” sphere (making the tax code more progressive) and some of which are more “predistribution”. The latter could include: stronger teachers’ and nurses’ unions; taxing the hell out of dumb tech companies; stemming the flow of venture capital; and even ideological changes around the glamorisation of these highly-paid workers in society. And, finally, companies should be forbidden from advertising pre-tax incomes as real incomes - the same way it would be outrageous if companies included the “cost” of providing workers with food or electricity or office space in salary offers. We recognise those as part of the costs of doing business; income taxes, as a way to contribute to local/state/federal governments, should be seen the same way, and “paid for” solely by corporations rather than individuals.

(On the idea of taxation as contributing to government budgets: I personally prefer the MMT-inflected view of taxation as a way for government to destroy money in circulation, but I know it’s not a common one, and it also only really holds on an abstract level, with certain assumptions about devolution. It’s something I want to look into more, though. A topic for a future blog post, maybe.)

Is this actually doable? Could we actually kill the use of “pretax income” entirely? I’m aware that it’s a long shot, but it feels like a useful strategic move for the left, even just as a means of combatting individuals’ feelings of resentment toward high progressive taxes. This New York Magazine article from 2009, on Wall Street’s shocked reaction to getting its bonuses cut (through a high tax levied by the Obama administration), is a case in point:

“No offense to Middle America, but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco out of a huge, shiny truck?” e-mails an irate Citigroup executive to a colleague.

(Witness the truly brazen level of meritocratic entitlement here: going to Columbia or Wharton entitles you to make a ton of money even if you don’t actually contribute any value to society! Whereas the worker who literally ensures people are fed didn’t go to business school, so he is entitled to nothing other than being a symbol for the ambitious to look down on and pity.)

“I’m not giving to charity this year!” one hedge-fund analyst shouts into the phone, when I ask about Obama’s planned tax increases. “When people ask me for money, I tell them, ‘If you want me to give you money, send a letter to my senator asking for my taxes to be lowered.’ I feel so much less generous right now. If I have to adopt twenty poor families, I want a thank-you note and an update on their lives. At least Sally Struthers gives you an update.”

(And here, we see a typical instance of pre-tax income fetishisation: “asking for my taxes to be lowered”. The expected income prior to Obama’s tax increase was treated as natural, normal, correct; any negative deviation from that amount is anathema. There appears to be no questioning of whether the period of unusually low taxes was an aberration that ought to be corrected in due course.)

… rage at the masses who don’t understand that Wall Street’s high salaries fund New York’s budget (“We’re fucked,” says a former Lehman equities analyst, referring to the city); …

(This reasoning is so wild - i.e., wrong - that I am suddenly more sympathetic to the MMT view. As far as societal-wide systems for distributing resources go, letting some finance bros make a lot of money and spend it on dumb shit in exchange for taxing them a little to fund public services is a highly suboptimal system. New York City would be way better if it invested in the workers who actually do socially meaningful work, even if every single Wall Street asshole were put on a spaceship to Mars and left to hang out there for a few decades. Not that I’m suggesting the latter. But like, just imagine it. Wouldn’t it be great.)

… (“JPMorgan and all these guys should go on strike—see what happens to the country without Wall Street,” says another hedge-funder). …

(Oh my. Please do. Let’s see what the world looks like without an overly bloated financial sector enforcing the worst tendencies of capitalism on the rest of the economy.)

“Compensation gets so emotional,” says the Bear Stearns managing director. “Everyone has a point of view. The truth is, the market determines what people are worth. Did I think I was overpaid? You betcha. But a lot of people are overpaid.”

(Yes, and they should all be paid less, buddy.)

“I think he doesn’t have an appreciation for how hard it is to build these companies, the blood, sweat, and tears that goes into them,” says a senior executive from a failed Wall Street firm.

(This actually make me laugh out loud. Jesus Christ, lots of things are hard. Reading Infinite Jest in 3 days is hard, and takes lots of blood, sweat, and tears, not to mention barely eating or leaving the house in that time. Typing up all your math and computer science assignments using LaTeX is hard and kind of a waste of time, in hindsight. Writing a 10,000-word dissertation in like 4 days is also hard and probably reflective of a special kind of insanity. The point is, some things that are hard are also dumb or otherwise not deserving of material rewards, and I suspect that running this “failed Wall Street firm” falls in the latter category.)

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