Taxes: what you keep is lost?
By Robert Harrington
What's "too costly" depends on who's paying
The Flat Tax
What's too costly depends on who's paying
Most of the public arguments among politicians about the tax reduction just passed by Congress as part of the budget deal consisted of a contest about whose proposal distributed more of the reduction to lower income taxpayers. A problem with that is that they have been beating this drum for decades with the result that people in the lower brackets pay only a small part of taxes already. Democrats got around that by arguing that even people who pay no taxes at all should get a "tax credit."
One of the infuriating things about discussions of taxes is the tendency of politicians to speak of "losses" from a tax reduction and to say they are "too costly." The unstated assumption is that the government has a prior right to everything you own, and anything they let you keep is "lost." I suspect that most taxpayers get an acute feeling of a "loss" when they pay their taxes, but that doesn't register with politicians who are thinking about how much they need your money.
Many taxpayers certainly viewed the tax increase in 1993 as "costly." This is the one they made retroactive to January 1st. Of course, that didn't bother Hillary Rodham Clinton, who had arranged to get the Rose Law firm to pay her bonus on December 31, 1992. In business that would be called "insider trading."
I read in the Wall Street Journal that one of the effects of the new tax law is that we'll be dealing with more forms. It figures. These get worse even when they claim it's a simplification, and they didn't even pretend this time.
The reduction in capital gains taxes was a hard sell because it was vulnerable to the criticism that it "benefits the rich." It seems to matter not at all that there is a very good case for the argument that a reduction in capital gains rates brings in more revenue. A visitor from outer space listening to the arguments would conclude that the purpose of taxes is not to collect revenue at all but rather to make sure no one makes too much money.
In addition to the revenue advantage, there is a serious argument against the idea of capital gains taxes in the first place. It is, basically, that the government is spending the nation's capital.
Consider what goes on with capital gains taxes. When investors sell stock or other assets, they are dealing with their savings, which most people try to accumulate for retirement. Usually, the purpose of selling is to invest in something else, such as a different stock or mutual fund. Since the act of selling turns the asset into cash as an intermediate step, the government calls it "income" and levies taxes on the gain of the original asset. The money collected, which was capital up to that point, is then spent by the government, the vast majority of which winds up as consumption.
Another way of putting it is that the government is intercepting the flow of the nation's capital, taking a part of each transaction and spending it. If you don't see anything wrong with that, remember that capital is what people use to start businesses and build plants which provide jobs. The next time a company decides not to build that new plant in your town, you can consider that the money went to some government agency instead. Think of it as the price you pay for the satisfaction of feeling that the government is "soaking the rich."
The case for indexing capital gains for inflation is even more compelling. The portion of a "gain" due to inflation is considerable for an asset held for a long time. It is purely a fiction, but that makes no difference to the IRS. Calling that "income" and taxing it is the moral equivalent of theft, but President Clinton opposed indexing because it would have been "too costly." Yeah, right.
Morgan Hill Times, September 12, 1997
The current tiff about taxes between House Republicans and the White House is another scene in the unending Kabuki on this subject. They're fighting over another few inches to be added to the tax code, the thickness of which already measures in feet. In the process, they have dropped any pretense to "simplification," the prime totem of a few years back.
There are, I suppose, a few people left in the country who think the purpose of the tax code is to collect revenue for the government. How naïve they are. The real purpose is to provide politicians with a massive engine for posing as benevolent dispensers of various public "goods," such as beating up the rich, and handing out favors to their putative constituency groups.
Favorite groups and public goods are, of course, children - who could be against them? - and education, another perennial which warms our hearts. There is much bowing and scraping in the direction of "economic growth," but the problem with that is that it collides with the "soak the rich" doctrine. Anyone caught swimming against that tide is instantly skewered by demagogues of various stripes.
The only people who can really make the economic wheels turn are capitalists; in other words, the rich. So they (and tax measures which would really boost the economy) get short shrift, except the ones who make large political contributions in the right times and places, of course, but they get their favors through the back door, out of public view.
A side effect of all this "benevolence" (or, clearly, the central intended effect for many) is a massive transfer of power from states and communities to Washington. This process has been under way for most of this century, and there is every sign that it will continue indefinitely.
All of this is the reason some people pushed for the flat tax. Few politicians favor it because it would take away the features of the present tax code which allow them to indulge in the periodic orgies of demagoguery that they do, including the current one.
Morgan Hill Times, June 17, 1997