Blog author: jcarter
by on Monday, November 12, 2012

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.”


  • Greg Colley

    Ok then, let’s be “fair” and implement a graduated flat tax system with no deductions for anything for anyone — individual or enterprise. Say, for the sake of argument, 5% on the first $100,000 of income, 10% of the income between $100,000 and $250,000 and 15% of the income above $250,000. Period. Simple, and reasonably fair. And biblical, too: from whom much is given much is expected. I am tired of hearing arguments that taxation drives irrational business behavior immediately followed by statements that “taxes on expenses” (? — taxes are on net income) would drive many companies out of business. If I can’t deduct the depreciation on my car, my insurance, my utilities, etc. etc.what argument of fairness says that a business enterprise SHOULD be able to? Is it simply that because businesses have the generosity of spirit to actually pay people to generate the profit for them? Not enough, not by a long shot. On the same basis, I could argue that the increase in my wages over 20 years attributable to inflation should also not be taxed — it is only a “nominal” increase. There are other ways to motivate savings (how about a national VAT on non-food items, with higher rates on “luxury” goods? De-stimulating over-consumption is the same as stimulating savings, isn’t it?). Wick Allison has hit the nail on the head, and the more hand wringing there is over how “our ox is getting gored” the more conservatives will get their heads handed to them in elections. It is really that simple.

  • http://www.facebook.com/people/Jesse-Sewell/697070889 Jesse Sewell

    The confusion that exists over this issue is purely the result of lies and distortions on the part of leading Democrats who want to drive a wedge between working class people and those who are part of the investment class. It is disgusting and it should not be tolerated by a principled electorate. This is an indictment of us as a people, failing to recognize the simple truth that free citizens are entitled to own property and should not be subject to double and triple taxation simply because they are wise in managing their money, saving and investing it. The very idea that we tolerate this discussion is reprehensible.

  • Jonathan W.

    I would just like to point out that part of the reason Feldstein’s example about inflation looks so egregious is because of the period he chose. It is curious that he decided to start his analysis in 1973, just as inflation began to shoot up and stay at very high levels for ten years, especially when contrasted with the 20 years before 1973 and after 1983. If he had begun his example in 1950 or in 1980, the numbers would not be nearly as drastic as those in his example. Feldstein’s example is not at all representative of the second half of the 20th century as a whole.

  • http://www.youtube.com/watch?v=rwWW2DQS_DU Booker T.

    I’m not in the mood to start chasing people to pay this or pay that. If you earned your money legitimately, then it is yours. Hopefully, if you are a Christian, God will lay it on your heart to donate to charities of your choice. I’ve been see and tired of this class warfare that is going on. Contrary to popular belief, these Bush tax cuts were supposed to be permanent, but because these folks needed a deal, it was given a fixed duration.

    You know, Obama is such a smart guy. I never knew that millionaires and billionaires start after $200K. Did I miss this lesson in Economics 101? Maybe if the threshold was actually $1 million, we would have actually gotten a deal and we’d probably be handling another issue now.

    Heckuva job, Barry.

  • Martial_Artist

    Mr. Carter,
    Allison nicely refuted. Well done.
    Pax et bonum,
    Keith Töpfer