After every electoral defeat—whether suffered by Republicans or Democrats—a period of hand-wringing and soul-searching inevitably develops in the days and weeks after the election. Journalists and politicians take to print to explain “What went wrong” and “Here’s what should be done differently.” Although the solutions are almost always what the pundits were saying before the election, the exercise in self-reflection is, on the whole, a much needed corrective. But too often the advice tends to be of the always terrible, “We should be more like the party that won.”
A prime example is an article today by Wick Allison, publisher of The American Conservative. Allison voted for Obama in 2008 and hinted that he would do so this year too. So it probably shouldn’t be surprising that that his economic solution looks similar to what President Obama would endorse.
Allison says that the “Republican Party can appeal to ‘Judeo-Christian values’ as long as the sun shines and their voices hold out. But they’ve abandoned the most basic moral value of all: fairness.” While he may have a valid point, Allison muddies the argument by his misunderstanding of both taxation and fairness:
A capital gains tax rate (making money off money) that is lower than the earned income rate (making money off work) is just not fair. Bestowing that rate on hedge-fund managers through a specially designed loophole is just not fair. Allowing the rich to take mortgage deductions for second and third homes, or for homes worth over $1 million, is just not fair. Allowing business owners like me to take myriad deductions that our employees cannot take is just not fair. But, most of all, allowing the wealthy to pay very low tax rates while interest on the war debt accumulates, deficits continue, and middle-class incomes deteriorate is just not fair.
It’s curious that his article quotes C.S. Lewis on fairness since Allison’s concept of fairness would be one that Lewis would likely reject as being unbiblical. Fairness is the idea that similar individuals should be treated similarly in the same circumstances. But Allison is not advocating that people be treated fairly. Indeed, he appears to think it is unfair that those who have more do not pay a disproportionate amount of their income in taxes.
For instance, Allison thinks it’s unfair that employees cannot take advantage of certain tax deductions that business owners are allowed. But the deductions that business owners get to take are those related to business expenses, the costs involved in carrying on a trade or business. Business owners like Allison pay certain expenses—like salaries and insurance premiums for employees—that their workers do not have to pay. If taxes had to be paid on those expenses, many businesses could not afford to operate and the employees would be out of work. Is that the fairness we seek?
Allison’s reference to the unfairness of a lower capital gains rate is also odd considering that capital gains is an unfair form of taxation. As Harvard economist Martin Feldstein explained over a decade ago, “The capital-gains tax violates the basic fairness principle because the primary source of capital gains are inflation and retained earnings.”
A taxpayer who invested $10,000 in1973 in a diversified portfolio of stocks like those in the Standard & Poors index, held it for 20 years, and then sold it in 1993 would have seen its value grow to $42,019 and would have been liable for tax on a nominal gain of $32,019. In reality, the rise in the consumer-price index means that it took $32,545 in 1993 to buy as much in consumer good and services as $10,000 bought in 1973. Inflation created an artificial gain of $22,545 that doesn’t correspond to any real increase in wealth. The real inflation-adjusted gain in 1993 was therefore only $9,474—the difference between the $42,019 value of the portfolio and the initial $10,000 investment related in 1993 prices. The real gain was only 30% of the taxable nominal gain of $32,019.
[. . .]
Taxing the nominal gain is like taxing someone on the money he takes out of his bank account. It’s not real income and it shouldn’t be taxed.
For a similar reason it is unfair to tax the retained earning portion of capital gains:
Since reinvested earnings have already been taxed at the company level, taxing the capital gain that results from retained earnings is double taxation. It violated the fairness principle that two taxpayers with the same income should pay the same tax.
The capital gains tax is not only unfair, it also incentivizes present consumption and discourages savings and investment—the key drivers of economic growth.
I have no doubt that Allison has the best of intentions. But his advocacy for economically confused, populist policies and his embrace of an unbiblical redefinition of “fairness” are not the path we should follow. The Bible commands that Christians look after the well-being of the poor and powerless of society, ensuring that they are treated with justice and fairness. To do that, however, requires that we take actions that actually provide justice and fairness for the poor. Adopting the secular left’s policy of envy and forced equality of outcome is not the solution. If we want to save the poor, we have to do more than propose new ways to soak the “rich.”