Posts tagged with: taxation

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:

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This week I wrote about the dignity of paying taxes (among other ways of contributing to social flourishing). But as we know, not all taxes are created equal. Indeed, as Antony Davies and James Harrigan write this week at US News, “Politicians are in the business of buying votes with tax breaks and sweetheart deals for their preferred constituencies, and they have to offset these deals by taxing disfavored constituencies at increased rates. The longer this game is played, the more convoluted the tax code becomes.”

As I argued previously at Capital Commentary, this amounts to a kind of back door social engineering (as well as playing favorites, picking winners, and so on). The fundamental purpose of taxation is not to buy votes and give preference to lobbies and special constituencies. Instead, as I write, “The point of taxation is to raise funds to enable the government to fulfill its moral, political, and social responsibilities.” Such a view is ultimately at odds with a Utilitarian theory, which considers taxation to be a tool rather used “to maximize overall well-being in society.” Matthew Weinzierl argues for greater attention to a theory of Equal Sacrifice, which on Weinzierl’s account “assumes individuals have the first claim to their output, and that they voluntarily agree to form societies that collect taxes in order to purchase public goods.”
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Jim Wallis and a number of other Christians involved in politics are trying to gain attention for the question, “What would Jesus cut?” The answer to this question is supposed to be as obvious as it is in other moral contexts. For example, would Jesus lie about the useful life of a refrigerator he was selling for Best Buy? No way. Would he bully a kid into giving away his lunch money? Not a chance. Would you find him taking in the show at a strip club on interstate 40 in Arkansas? Unlikely to the extreme.

Would he agree to a 2% cut in the marginal tax rate for income made above $250,000? Would he EVER accept a cut in welfare spending? Those take a little more thought. Jim Wallis and others think it’s a no-brainer. Let us reason together.

As I look over what Wallis wrote, I see several things worth noting. For example, he complains that some Republicans want to cut domestic spending and international aid, while they support an increase in military spending. The implication is that this is obviously a sub-Christian position. But is it? Probably the most essential purpose of government is to protect the life and freedom of citizens. The government achieves this goal through military means. Unless one takes the position that Christianity implies corporate pacificism, then it is unclear the Republicans have blundered according to Christian ethics. Now, match the question of military spending versus international aid and/or domestic spending. Are the latter obviously superior to the former? No. It depends on not only what the stated objective is for the different types of spending, but whether they actually achieve their purposes. To simply state that the Republicans want to bolster military spending while cutting international aid and domestic spending is to achieve nothing at all by way of an indictment.

Here’s another example. Wallis complains bitterly that tax cuts to the wealthiest Americans add billions to the deficit. He is referring to the extension of George W. Bush’s cuts in the marginal tax rates that existed under Bill Clinton. The first question I have is how does Jim Wallis know that the level of taxation was just to begin with? And why take Bill Clinton’s tax levels as the Platonic form of taxation? Maybe they were too high or too low. The highest marginal tax rates have fluctuated drastically in the United States during the last century. John F. Kennedy made a big cut, with impressive economic effects, as did Ronald Reagan. Is Wallis sure that by cutting taxes those men robbed the poor and gave to the rich? Maybe a lot of poor people got jobs because of them. And we aren’t even getting into the question of whether rich people actually have an enhanced duty to pay taxes. If there is a community need, is it righteous to grab a rich person and employ the power of legal coercion to extract the needed funds?

Still another problem with this redistributionist attitude about taxes and spending is that it assumes a zero sum state of affairs. For example, one could assume that the most people would be better off under a system like the old Soviet Union that spread resources out to citizens in a way that prized equality of rations. The United States system didn’t do that nearly as much, not nearly at all. But which of the two systems provided a better life for people? The answer is easy. The United States and its emphasis on liberty did. Why? A more free economic system produces far more wealth than an unfree one. If your equality system produces a little, bitty pie, it may give you a lot of philosophical satisfaction, but it doesn’t do as much actual good for people as the system that prizes free productivity and success over equality.

What Jim Wallis is saying comes from a good heart. He is worried about things like fairness and, of course, about helping people. But the reasoning he employs in doing so assumes that federal programs actually achieve what they set out to do, which is far from obvious, and that they don’t create incentives for behavior that results in greater problems, which often happens. He also assumes a zero sum society. It is entirely possible that economic thinking that concerns itself more with productivity than with equality will actually leave the great majority of people better off.

Blog author: hunter.baker
Wednesday, February 9, 2011
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Michael Kinsley has a column up at The Politico in which he claims to debunk a series of Reagan myths. The one that annoys me the most is the one that is obviously and clearly incorrect and at the same time gets the least explanation from Kinsley. Here it is:

6. The Reagan tax cuts paid for themselves because of the Laffer Curve. Please.

With every other “myth” Kinsley takes on, he at least feels the need to explain himself. Not so with the Laffer Curve. I suspect the reason Kinsley doesn’t narrate here is because the slightest bit of examination would reveal that the Laffer Curve is AXIOMATICALLY TRUE.

Too much? No. The Laffer Curve is undeniable. It looks like this:

It is very simple. If you tax at either 0% or 100% you will get nothing because either there is no tax OR the effort of making money is not worth it. You can increase taxes to some optimum point where you will continue to get more revenue up to the point where increased taxation becomes counterproductive because it causes people to reduce their effort. We observed this phenomenon actually occurring in the United States when we had ultra-high marginal tax rates. Various types of earners curtailed their effort once they hit the magic level at which they would begin to pay the highest rates. They preferred to put off additional activity until the next year. Famously, the detective novels about Nero Wolfe mentioned his tendency to take a few months off at the end of the year because of the top rates of taxation.

Because people react rationally to high rates of taxation, you will realize less revenue because of a reduction in taxable activity. What exactly is Kinsley saying “Please.” about? Does he deny that moving from a 70% tax on the highest earners to a rate in the 30′s or high 20′s could lead to increased revenue as top producers expand their efforts and investments AND stop working so hard to conceal money they have made and otherwise evade taxation? At a lower rate, it is obvious that non-compliance becomes a risk much less worth taking.

No, Reagan’s embrace of the Laffer Curve was the most rock-solid common sense. And by the way, look at federal revenues after the tax reduction. Real federal revenues increased quite nicely.

The only way the Laffer Curve would be wrong is if one misinterpreted it, as some do. For example, anyone suggesting you would gain more revenue by reducing a 20% tax rate to 10% is probably wrong. But moving out of the prohibitive zone, which is likely anything over 50%, is a shrewd policy decision.

Blog author: jcouretas
Monday, January 10, 2011
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Catching up on some recent Acton commentaries. We welcome a new writer, John Addison Teevan, who is director of the Prison Extension Program at Grace College. He also teaches economics and Bible courses at the Winona Lake, Ind., school. This column was published Dec. 29. Sign up for the free, weekly email newsletter Acton News & Commentary here.

A Tithe for Uncle Sam

By John Addision Teevan

Political leaders talk as if the money Americans keep (not paid in taxes) belongs to the government and that our keeping money they could tax is an actual cost to them. This kind of distorted thinking has led us into the fiscal irresponsibility that threatens to destroy our country.

It is, of course, fair to say that there are many exemptions that, if eliminated, could bring in more tax revenue. But Congress prefers a tax code of convoluted exemptions and tax breaks that they create and sustain to keep various interest groups coming to their offices. Taxpayers love breaks such as the homeowners’ exemption that allows taxpayers who itemize to deduct their mortgage interest. Although paying less in taxes is in general a good thing, all such exemptions confuse the process, contribute to an impossibly intricate tax code and keep lawyers, accountants and tax prep software companies prospering. The amount we spend on tax preparation in terms of actual cost and time wasted compared to a simplified tax code is worth billions.

The most extreme example of the fallacious notion that government has a right to its citizens’ money is the idea is that the cost to the government of not taxing the disposable income of all Americans at 100 percent is $11.5 trillion (as if we’d bother working if we faced a 100 percent tax rate). Economist Arthur Laffer noted that the government might collect little in taxes if the tax rates were either very low or very high, because in the latter case Americans would adjust their income according to tax incentives. Government officials unfortunately tend not to think in terms of incentives but of rules and therefore assume, contrary to Laffer’s findings, that higher tax rates always bring in more revenue.

Taken to its conclusion, this thinking leads tragically to socialism. If we think the government is the best source of compassion for the needy and the engine of economic growth, then it makes sense to set taxes at high rates so the government can do all good things for the people. One small faction that I read about in an Ohio paper wants Uncle Sam to hire all unemployed people and then print the money to pay them. This childish scheme is really a variation of the more respectable idea that tax cuts “cost” the government in the same way that spending on defense or health care does.

The foolishness of the concept can be illustrated by analogy with a church. Imagine a congregation of 100 families with a budget that reflected an estimated tithe on $65,000 average family income. Using government thinking, the church budget could be $650,000 (10 percent of 100 x $65,000), even if the actual offerings to the church were only $300,000. This is based on the fairly reasonable idea that the people owe their church 10 percent of their income.

Here’s how government budget thinking might work in that church.

Budget: $650,000. Expenses: charitable relief for church members: $350,000 (54 percent), staff: $150,000 (22 percent), building expenses: $50,000 (8 percent), ministry expenses: $50,000 (8 percent); debt retirement: $50,000 (8 percent).

What is that $350,000 for ‘charitable’ relief for church members? That is the part of the tithe that the members should have given to the church, but did not. Rather than ignore it, the church would reckon it as both income and expense even though not a single dollar changed hands. Government thinking sees any foregone revenue as an expense so that the largest item in this budget is the (fictional) $350,000 expense as if the church spent that money on its own parishioners.

As it stands, the federal government appears to be incapable of balancing income and spending. Right now it is collecting about 16 percent of GDP in taxes and spending well above 20 percent, creating an immense government borrowing gap. Many politicians’ proposed solution is to demand that the existing tax regime be repealed in favor of higher rates; we can’t “afford” the lower rates, they argue. In an economic downturn, however, raising taxes is a surefire way to suppress recovery.

Addressing the spending side of the budget equation is politically painful, no doubt, but it is unavoidable. America faces difficult challenges as we try to grow out of the recession. Having the government think soberly about its tax income and budget expenses would be a good start.

A very good piece on taxation, income inequality and fairness in today’s Wall Street Journal by Arthur C. Brooks, president of the American Enterprise Institute. Brooks, a frequent guest speaker at Acton events, is also author of “The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future”, forthcoming from Basic Books in June. Watch for the review on the PowerBlog soon.

Simple facts about our tax system do not support the contention that it is “unfair” in favor of the rich. According to the most recent IRS data, the top 5% of earners bring in 37% of the income but pay 60% of the federal individual income taxes. The bottom half of earners bring home 12% of the income but pay 3% of the taxes. Today, according to the Tax Foundation, 60% of Americans consume more in government services than they pay in taxes.

In sum: A large majority disagrees with the current administration’s redistributionist philosophy; believes the rich already face a tax rate that is too high; and disapproves of the fact that more and more Americans pay nothing in federal income taxes. So why do arguments like the president’s persist?

The answer is that nobody wants to sound anti-poor, so we too easily concede the notion of fairness to those who define it as redistribution and criticize redistribution only because it leads to economic inefficiency.

This is an error. There is nothing inherently fair about equalizing incomes. If the government penalizes you for working harder than somebody else, that is unfair. If you save your money but retire with the same pension as a free-spending neighbor, that is also unfair.

Read “‘Spreading the Wealth’ Isn’t Fair” on the Wall Street Journal Web site.

From “56% Oppose ‘Sin Taxes’ on Junk Food and Soft Drinks” on Rasmussen Reports:

Several cities and states, faced with big budget problems, are considering so-called “sin taxes” on things like junk food and soft drinks. But just 33% of Americans think these sin taxes are a good idea.

A new Rasmussen Reports national telephone survey shows that 56% oppose sin taxes on sodas and junk food. Twelve percent (12%) are undecided.

Many of the politicians who are pushing these taxes insist that they are intended to fight obesity, especially among children, and to address other public health issues. However, voters are highly skeptical of their motivation.

Only 17% believe the state and national politicians who favor sin taxes are more interested in public health than in finding another source of revenue for the government. Seventy-three percent (73%) say sin tax supporters are more interested in raising additional money for the government.

After all, 86% of adults say it is not the government’s responsibility to determine what people eat and drink. Five percent (5%) believe the government does have that responsibility.

Also see these Acton Institute resources:

“The Sin Tax Craze: Who’s Next?” by Rev. Robert A. Sirico

“Tax man aims to take a bigger bite out of junk food junkies” by Matt Cavedon

“Lifestyle Taxes — Political Camouflage for New Federal Sin Taxes” by Rev. Robert A. Sirico

“The Sin Tax: Economic and Moral Considerations” Occasional Paper by Rev. Robert A. Sirico

“The Economics of Sin Taxes” by James Sadowsky S.J. in Religion & Liberty.

In “The Real Culture War Is Over Capitalism,” Arthur C. Brooks argues in the Wall Street Journal that the “major cultural schism” in America today divides those who support capitalism and, on the other side, those who favor socialism. He makes a strong case for the moral foundations of free enterprise and entrepreneurship and points to the recent “tea parties” as evidence that Americans still favor the market economy. Brooks, the president of the American Enterprise Institute, says Americans are revolting against “absurdities” like the bailout of General Motors that will be financed with ballooning budget deficits and trillions in new federal debt. He writes:

… the tea parties are not based on the cold wonkery of budget data. They are based on an “ethical populism.” The protesters are homeowners who didn’t walk away from their mortgages, small business owners who don’t want corporate welfare and bankers who kept their heads during the frenzy and don’t need bailouts. They were the people who were doing the important things right — and who are now watching elected politicians reward those who did the important things wrong.

Voices in the media, academia, and the government will dismiss this ethical populism as a fringe movement — maybe even dangerous extremism. In truth, free markets, limited government, and entrepreneurship are still a majoritarian taste. In March 2009, the Pew Research Center asked people if we are better off “in a free market economy even though there may be severe ups and downs from time to time.” Fully 70% agreed, versus 20% who disagreed.

He also points out that the government has been increasingly “exempting” Americans from paying taxes, an intentional strategy to create a larger class of government-dependent citizens.

My colleague Adam Lerrick showed in [the Wall Street Journal] last year that the percentage of American adults who have no federal income-tax liability will rise to 49% from 40% under Mr. Obama’s tax plan. Another 11% will pay less than 5% of their income in federal income taxes and less than $1,000 in total.

To put a modern twist on the old axiom, a man who is not a socialist at 20 has no heart; a man who is still a socialist at 40 either has no head, or pays no taxes. Social Democrats are working to create a society where the majority are net recipients of the “sharing economy.” They are fighting a culture war of attrition with economic tools. Defenders of capitalism risk getting caught flat-footed with increasingly antiquated arguments that free enterprise is a Main Street pocketbook issue. Progressives are working relentlessly to see that it is not.

Read the “The Culture of Charity,” the Spring 2007 interview with Brooks in Acton’s Religion & Liberty. Watch a 16-minute video interview with Brooks recorded at the Acton Grand Rapids office in May 2008

In yesterday’s Wall Street Journal Europe, Alberto Mingardi of Istituto Bruno Leoni (and long-time Acton friend) lists some of the reforms Italy needs to boost economic growth, which is forecast at a measly 0.6 – 0.8 percent for 2008.

Mingardi advocates a number of tax cuts and a more determined privatization of state assets. Some of these issues are being discussed – timidly – in the current election campaign; Mingardi also focuses on de-regulation and de-bureaucratization, issues heretofore neglected by Italian politicians.

Current labor regulations are “so numerous that no one can even give their precise number. No one can comply with rules they don’t even know about.” Mingardi adds that “it’s safe to say at least half the statutes currently in force should be repealed, as their only effect is to create confusion.”

A recent study shows that it takes on average 696 days to dismiss a worker in Italy compared to only 19 in the Netherlands. Critics of de-regulation would argue that Italian workers are therefore better protected. Wrong. Unemployment is 5 per cent in Holland compared to 6 per cent in Italy.

This may seem counter-intuitive but makes economic sense. If I know it will be impossible to fire an unproductive worker, I will be much less likely to take a chance on hiring any worker I don’t personally know. Hence, the Italian model of “family capitalism” and higher levels of unemployment.

Italian bureaucracy also exacts high costs on business creation. According to the World Bank, the cost of opening a business is 18.7 per cent of per capita income compared to only 0.8 per cent in the United Kingdom and 0.3 per cent in the Republic of Ireland. Moreover, an Italian business spends an average of 360 hours per year filing taxes whereas in neighboring Switzerland 63 hours suffice. (Not surprisingly, Switzerland is the economic envy of Europe.)

Workers also pay for onerous regulations. Everyone in Italy nowadays complains about stagnant wages, these are clearly the result of decreasing productivity caused by bureaucratic disincentives for businesses to invest and grow.

An overwhelming bureaucracy undermines both individual liberty and the public interest. It punishes the creative spirit of the entrepreneur by obstructing investment and innovation, and harms society by killing the potential for growth and employment. The irony is that regulation and bureaucracy are often enacted in the name of social values.

The Wall Street Journal jumps on my bandwagon:

We’re all for putting more money in the hands of the poor and moderate earners, especially via stronger economic growth that will give them better paying jobs. But the $250 or $500 one-time rebate check they may now receive has to come from somewhere. The feds will pay for it either by taxing or borrowing from someone else, and those people will have that much less to spend or invest themselves. We are thus supposed to believe it is “stimulating” to take money from one pocket and hand it to another.

To put it another way, when the government calculates gross domestic product, it expressly omits transfer payments. It does so because GDP is the total of goods and services produced in the economy, and transfer payments produce no goods and services. The poor will spend those payments on something, but the amount they thus “inject” into the economy will be offset by whatever the government has to tax or borrow to fund the transfers. No wonder stocks sold off yesterday after Mr. Bernanke endorsed this 1970s’ economic show.

A fiscal stimulus that really stimulates would change incentives, and do so permanently so workers and investors can know what to expect and take risks accordingly.