Why am I continually disappointed? This time the question asked in Michael Kinsley’s op-ed was “Given that all taxes are disincentives, what kinds of taxes do we want?” I expected an answer to the question but once again my hopes were dashed. He barely scratched the surface of the question let alone answering it.
Here’s the gist of his remarks:
A good tax — one that has minimal effect on behavior — has two qualities. First, it is as low as possible. Second, it is as consistent as possible across the alternatives.
Sure, a tax of 15% — the current, scandalously low ceiling on the tax on both capital gains and interest — would be less distortive than a tax of 35%, which was the theoretical top tax rate under President Clinton.
But the real distortion comes in a tax system that might take 15% and might take 35%, depending on the situation.
It’s sometimes said that capital gains are “taxed twice.” First they tax your wage income, and then they tax the return on anything you manage to save out of it. In reality, much of the income of the very rich is not taxed on either occasion. Mitt Romney was embarrassed when the world discovered that he had paid taxes of only about 13% on his income in recent years. But that’s on realized income. What percentage of his total lifetime fortune will have been through the tax mill when he dies?
Anyway, what is so terrible about “double taxation”? There are two economic decisions going on: work versus sloth, and saving versus spending. True, you want to encourage work and saving, while discouraging sloth and spending. But just as true: You must tax something. So it makes sense, or so it seems to me, to tax all of these activities equally at the lowest responsible rate. Right now we are violating this principle in every possible way.
At the end of the op-ed he hoists the Jolly Roger:
Like tuning the piano, reforming the tax code is not something you can do just once and then forget about it. You’ve got to do it and then do it again, forever. Even if we blow it this time, we’ll probably get another chance in 2036.
I think he’s mischaracterized the requirements for a good tax code. Beyond the lowest practical rates and being “consistent as possible across the alternatives” I think a good tax code should be time-consistent as well. A good tax code wouldn’t tinker with the rates, how income is calculated, or what’s being taxed every few years. Otherwise all planning will be short term planning. Confucius said “If your plan is a one year plan, plant rice. If your plan is a ten year plan, plant trees. If your plan is a hundred year plan, teach children.” We’re planting rice to the exclusion of all else.
I would state things a bit differently. You will get less of whatever you tax than you otherwise might. The present income tax imposes a tax on income earned through work, on royalties, on rents, and on income earned through investment. The assembly line worker of his example will, in all likelihood, pay tax only on his work and that only via the payroll tax. Statistically speaking, he’ll pay no income tax at all and, consequently, his behavior will not be affected by taxes on income. Until the point at which the thirst for additional revenue reaches him, something inevitable with the spending commitments we’ve made.
In a living environment in which most people buy things imported from China and the rich buy things imported from Europe while millions of our fellow citizens are unemployed, don’t we really want to have less spending on consumer goods rather than less work (by people whose labor is actually taxed) or less investment?
Meanwhile, I’m sure the people in the government of the Chinese Republic, the Weimar government, and the Soviet government all thought they’d have plenty of time to continually tweak, experiment, and refine. The end of a government can come very quickly and it’s frequently the result of economic turmoil. I.e., tweaking, experimenting, and refining.