Tax Policy Should Be Based Upon Economic Outcomes, Not “Fairness”

Here is a message I sent on 5/12/11 to Alan Reynolds, noted economist with the Cato Institute, commenting on a piece he had written for the Wall Street Journal and focusing, in particular, upon the way the debate on tax policy had become focused upon “fairness” rather than upon effectiveness in raising revenues.

Dear Mr. Reynolds,

Thanks for another fine piece – “Obama’s Soak-The-Rich Tax Hikes . . .” – on the subject of the Left’s ongoing (and distressingly successful) crusade to obscure the distinction between tax-rates and tax-revenues.  I have to say, though, that every time I begin to grow even a tiny bit optimistic about the odds that the general public (not to mention our politicians) is starting to understand that rate-hikes do not automatically result in revenue-increases, along comes yet another piece of news that suggests that even our leaders just plain don’t get it.  The latest such example that caught my eye was the news that one of the big “bi-partisan” groups of federal politicians (I seem to recall it was a group of U.S. Senators – 3 Dems and 3 Republicans) had signalled an emerging consensus for achieving a “balanced budget” by means of a combination of spending cuts (none of them in the area of the euphemistically labeled “entitlements”) and tax-rate increases.

It has started to dawn on me that, if we are to win this argument, we are going to have to attack the core of the problem, which is that the Left has succeeded in framing the debate in terms of “fairness” – as distinct from effectiveness.  For example, their primary argument in favor of rate increases seems to be a combination of (a) the continuing fiction that all tax-rate increases are to be directed solely at “the rich,” and (b) the assertion that there is nothing unfair about compelling “the rich” to pay an ever-larger share of their incomes to the Treasury – indeed, the proponents of this argument often go to the length of asserting that “the rich” have something tantamount to a moral duty to accept higher tax rates.

The obvious question begged by this line of argument is, how does one ascertain precisely the marginal rate or percentage at which this particular moral obligation is deemed satisfied?   (What would Jesus say to a 45% marginal rate, as opposed to 39%?)  The less obvious question, and the one almost never raised publicly by any Republican or Conservative official or commentator, is, why are we even considering rate increases if the likely outcome would be to prolong the recession rather than to cause an increase in U.S. tax revenues?   Of course, that is the implicit point of your article, but, I guess what I am suggesting is, why can’t we Conservatives just come right out and make that point explicit – indeed, why aren’t we shouting it from the rooftops, so that all the voters can make the connection and get the point?    To put it in a more positive manner:  the fundamental purpose of tax policy is to maximize tax revenue, not to achieve moral or social objectives regarding allocation or confiscation of incomes and resources.   Of course we would all prefer to adopt policies that seemed relatively fair and reasonable, but if it is a near-certainty that cutting rates will help the economy whereas raising rates will harm the economy, are we really so concerned with “morality” (and are we really so certain that redistribution is the morally superior policy) that we would be willing to cause further damage to the economy in order to achieve moral purity?   I mean, is there really any doubt that the American public, if asked to choose between a more “moral” tax policy and a tax policy that ended the recession, would decide that they would rather get their houses and their jobs back than worry about punishing the rich?
[Posted on 10 Feb 2012]

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