Death and Taxes

Presumably spurred by the president’s recent proposals on revisions to the tax code AKA “the Buffett Rule” a number of my colleagues at OTB have posted on federal income taxes, viz. James Joyner, Doug Mataconis, and Alex Knapp. A few days ago (how the time does fly!) I promised some remarks on taxes of my own.

I haven’t been sitting idle. I’ve been struggling to organize my thoughts but, try as I might, I’ve failed. What I’m going to post is more of a collection of aphorisms than an organized essay. So be it.

In discussing the “millionaire’s tax” I think there are several distinct things that are all being treated as though they’re one thing: pragmatic, political, economic, and justice issues.

We’re not going to eliminate the income tax any time soon. You can’t finance the things that we need to do with a head tax or a use tax. For example, although in principle you could have an FDA and USDA financed with use taxes and in principle you could finance White House expenses, Congressional salaries, and minor Congressional expenses with a head tax you can’t maintain a modern military that way.

In theory you could substitute a national sales tax for an income tax but in practice a sales tax as high as it would need to be, well into double digits, would be uncollectable. The incentives for black marketeering would be sufficiently high that evading the sales tax would be endemic.

We could avoid the problems of a sales tax in the way that our European cousins have, with a value-added tax. However, the very feature that makes it more efficient makes it sufficiently painless as to be an incentive for continually ratcheting up government spending.

Flat taxes, sales taxes, and VATs, however appealing they might be lack one feature that dooms their ever replacing the income tax as the primary federal government funding source: they don’t provide the opportunity for changing other people’s behavior that the income tax does.

The thirst for changing other people’s behavior probably goes back to Alley Oop. Oddly, no similar appetite for changing one’s own behavior, despite it having been preached by Confucius, Buddha, Jesus of Nazareth, and Mohammed, has managed to catch on.

We tax the rich for the same reason that the 1930s bank robber Willie Sutton robbed banks: it’s where the money is. As an increasing proportion of the country’s wealth and income has fallen to those at the highest income levels over the last several decades, that those at the highest income levels would pay the greater proportion of taxes was inevitable. People at the lower income levels just don’t have enough to tax. Even if you wanted to you can’t fund the government that way.

There’s also the political aspect: by definition 50% of the people are in the bottom 50% of income earners. At least some of these people vote and you can ensure their votes while providing them services without taxing them and still support the federal government.

The third factor in discussing taxes is economic efficiency. I don’t mean by this what some people call the Laffer curve, the self-evident proposition, first pointed out a millennium ago, that some tax rates produce higher revenues than others and that you can’t necessarily increase your revenues by increasing the tax rates.

What I mean is that taxing income with the dizzying array of ifs, ands, and buts that we do induces people to change their behavior in such a way as to reduce their tax liabilities and some of these changes in behavior may result in less total economic activity than would otherwise have been the case. A provision in the tax code that produces less revenue than the amount by which it reduces economic activity is inefficient. Enough of such provisions may be catastrophic.

The final consideration is justice and its cousin, fairness. I suspect that we can all agree that taxing 100% of someone’s income is unjust. I doubt that there’s a similar agreement that taxing 0% of someone’s income is unjust. I attribute this to greed, propaganda, and a convenient propensity to confuse expediency with fairness or justice.

Pragmatically, we’re going to tax the rich and, if we need more revenue, we’ll tax the rich more. That’s also the political calculus. Economic efficiency should limit the scale, scope, and structure of taxation. Justice demands not only some limits to the scale, scope, and structure of taxation but imposes a responsibility of prudent stewardship on government. It’s in these latter areas that we are desperately lacking.

I opposed the tax cuts of the early Aughts and I opposed their renewal last year. There was no notable decline in personal consumption but there was a decline in business expenditures. The tax cut was improperly targeted. Since, when the rates were lowered a decade ago, it didn’t give a notable boost to the economy, I sincerely doubt that returning them to the level they were in 2000 wil hurt the economy much if at all. And we’re in desperate need of both additional revenue and spending cuts—we’re borrowing more than we’re taxing. That’s both inefficient and immoral, in the long term at least.

That having been said our main fiscal problem isn’t, as Dr. Krugman and his groupies would have you believe, that the federal income tax rates are too low. With the same tax rates five years ago our deficit was enormously lower. Our problem is that our incomes are too low and we haven’t reduced federal, state, and local government spending commensurately with the decline in incomes.

In any number of previous posts I’ve explained my preferences for spending reduction: I think we need to make major cuts in defense spending, well beyond those that withdrawing our troops from Iraq and Afghanistan will bring. We should reduce our Social Security and Medicare current expenses and future liabilities by means-testing. Even if we were to make those changes which I suspect most people would consider drastic, our spending would still be much higher than our revenues.

We need higher tax revenues and a new tax bracket for millionaires doesn’t provide nearly enough new revenue to fill the hole we’ve got, however good it may feel to those whose definition of fairness runs in that direction. I think that should be done by eliminating some of what are now being called “tax expenditures” and used to be called tax breaks and loopholes. I’d start with capping the mortgage interest deduction. That’s the Great White Whale of tax expenditures.

I also think that we need structural changes in healthcare, education, and government in general. But those are subjects for future posts.