In Defense of Tax Breaks For The Rich

Redacted version of an email I sent to my daughter’s  fiance’:

A few words in defense of pampering the rich.  I am talking specifically about tax policy.

I am sympathetic to your youthful, idealistic, compassionate, egalitarian, soak-the-rich/subsidize-the-poor instincts.  But this is about policies of a federal government, defending and caring for an entire nation – 300 million people, not just the poor.  When I suggest a tax policy that pampers the rich, I am talking about our responsibility to all of our citizens, not just some of them.

The background for this topic is, orthodox Leftist fiscal theory (Krugmanism, etc.), which is that there are two ways to pay for new government programs (bailouts, stimulus packages, “investments” in new energy sources, ObamaCare, etc.):  (i) raise taxes, or (ii) print or borrow money.  Regarding the second method, and contrary to everything you learned in college, there are finite limits to the amounts of government cash available to assist our citizens – be they the poor or the rest of the 300 million.  The supply of our money is not literally finite, but when the government prints or borrows dollars in order to spend them, it ends up cheapening the value of everyone’s dollars; the aggregate true value of our entire money supply is finite, no matter how many new dollars we nominally create.  Growing the nominal money supply is, in the end, just a re-distribution of wealth.

So, let’s talk about raising taxes – specifically, my opposition to tax-rate increases for the rich (which I called, pampering the rich), and your revulsion over that concept and your counter-proposal of a more egalitarian tax policy – “equal treatment for all,” as you put it.

First, let me identify the only kind of tax  that is literally egalitarian:  a capitation tax.  That is when  every citizen, regardless of his income or wealth, is required to pay for the defense of the nation and for the privilege of enjoying roads, bridges, and other elements of the nation’s infrastructure –  a tax in the form of a fixed sum, say, $10 per year per person.  Or more realistically, $1,000, or $10,000, or whatever else would equal, for the entire citizenry (roughly 240 million adults), the government’s total expenditure on the provision of such defense and infrastructure – in other words, each adult citizen would pay an annual tax of 1/240,000,000th of our annual budget.  You want the federal government to spend more, you simply raise the amount of the capitation tax; no deficits, no surpluses, a balanced budget.

In response to the outraged cries of those with below-average incomes (or below-median, below-mode, below-“poverty,” or whatever) and their self-styled defenders, who would submit that such an “equal” tax was unjust or unfair and an infringement of the “rights” of people less-gifted by genetics or life’s vicissitudes, the nation might elect to move toward a more generous version of equality.  Indeed we have been doing so for a very long time.  In this model, an “equal” tax means one in which the taxes upon individual citizens are not equal as to amount, but instead are equal in rate – that is, equal in proportion to the respective citizens’ incomes.  For example, every citizen, instead of paying, say, the same amount of $10,000 per year in tax, would pay, say, 10% of the amount of his income.  This does appear to be a limited form of equality, but it is no longer true equality, because it embodies a bit of social engineering: a determination that citizens should be treated unequally, in that those with greater incomes should pay  more in taxes.  The gradual introduction of this inequality into our tax system has been so subtle, so seemingly “fair,” that nowadays it is seldom thought of as a form of governmental re-distribution of income or wealth, though it truly is.  For example, I, as a higher-income taxpayer, pay 10 times as much in Medicare tax contributions during my lifetime as the contributions made by a person who made only 1/10th as much money as I, yet that lower-income taxpayer will get exactly the same level of medical care from Medicare as will I.   We are taxed unequally, yet we receive equal benefits.  That is re-distribution.

And that then leads to an even more-advanced form of inequality in taxation policy:  the higher-income taxpayer not only pays more tax because a fixed percentage yields a higher product when multiplied by a higher amount of income; the higher-income taxpayer is also required to pay a higher percentage of his income.  For example, if I earn $200,000 per year and you earn $20,000, an “equal” tax would mean that we each pay the same annual tax – say, $10,000.  A tax that is equal as to percentage of income, rather than as to capitation, would mean, assuming a 10% rate of taxation, that I pay $20,000 in tax while you pay $2,000 in tax – I pay 10 times as much as you, though we each benefit from the same roads, bridges, and armed services.  But instead of that, what we have had as our standard model, since we started gradually unwinding the Tax Reform Act of 1986, is a tax that is quite unequal although it is commonly known by the friendly-sounding euphemism, “progressive,” under which I pay at the rate of 33% of my income ($70,000 on my $200,000 income), while you pay at only 15% of your income ($3,000 on your $20,000 income).   (In reality, you would probably pay no tax whatsoever because of  various applicable credits, deductions, exemptions, and minimums available to lower-income taxpayers, and I would only pay at the 33% rate on the portion of my income that exceeded $178,000, with the rest being taxed at lower rates.)  The Left loves this model so much that they are just dying to make the inequality of rates even greater, in their desperate zeal to be fair and just by soaking the rich.

 The philosophical question is, once we agree to depart from true equality of treatment in the calculation of taxes, how unequal should we get?   These are relative concepts, once you get past the pure capitation tax.   When you say you want equal treatment, I suspect you don’t really mean that; what you probably mean is, you want a further departure from both the pure version of equality (the capitation tax) and the modified version of equality (everyone pays the same percentage of his income – as substantially embodied in the 1986 Tax Reform Act), and you want even more “progressivity” than that which we have already developed, as we have veered farther and farther from the ’86 act.  You don’t want more equality, you want less!  On the other hand, when I say I want more pampering of the rich, what I mean is, there is a certain point at which one must begin to think not only in terms of fairness and social justice, but also in terms of the practical consequences of our policies – even if that means being a bit less aggressive in our efforts to soak the rich via our tax system.

To elaborate:  in my world (as in Milton Friedman’s world), the essential purpose of the income tax is to raise enough money to pay for the stuff we want our government to do, and, while we are willing to allow our tax policy to introduce a degree of re-distribution, fairness, and compassion, we must recognize what Krugman and his ilk will not – which is that there is a point at which additional re-distribution becomes counter-productive, in that it creates significant disincentives for our higher-income people (who tend to be our greatest job-creators) to work and take financial risk, and that that, in turn, reduces the total amount of income that is available for such re-distribution.  If we allow the “Bush tax cuts” to expire, that  would mean that tax rates on higher-income individuals (and corporations) go up substantially and that tax rates on investment income (capital gains and dividends) go up substantially.  In my view, it is just plain stupid – self-defeating – to insist upon these rate increases, because they are likely to end up stunting our economic growth and thereby reducing overall tax revenues rather than increasing them, thus hurting the very people we were ostensibly trying to help.   That is called, cutting off your nose to spite your face.

If you want to label the more sensible policy as “pampering,” or “unequal,” or any other term, so what – must we all become equally poor, in order to ensure that no one gets rich?

 

 

 

 

 

 

 

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