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Taxes, Fairness, and Economic Policy
I'm currently watching a discussion on a mailing list that's descending into incomprehensibility, because the participants understand -- as nearly as I can tell -- very little about tax and economic policy, but are very clear on what they don't like. Rather than continue to pound my head against a wall there, I've come here to get it out of my system.
The first notion that you need to get out of your head is that tax policy necessarily has anything to do with fairness. That's a noble thought, but ultimately tax policy revolves around:
Collecting the desired level of revenue
Encouraging "desirable" activities
Discouraging "undesirable" activities
We do argue about whether a tax policy is "fair" or not -- flat tax advocates argue that would be more fair while those who argue for a progressive bracket system think otherwise. Personally, I don't think fair is taken into consideration nearly as much as "will this benefit the people who donate to my campaign?". However, I'm fairly cynical. (No pun intended.)
If you look at many of the things that are deductible, you'll see that the intent (at least at one time) seems to have been to encourage some behavior. Thus, the "marriage penalty" that hits two-income couples is the result of a tax break that was given to single-earner couples when the common pattern was for the wife to stay at home and raise the kids. The deductibility of home mortgage interest encourages people to own their own home which was -- at least until the subprime mortgage crisis blew up in our faces -- considered a good thing.
Conversely, our government feels free to tax the heck out of things that they want to discourage. This frequently takes the form of "sin taxes" on things like cigarettes, soda pop, or bottled water. (The tax on soda pop is supposedly because the sugar it contains is bad for you. That's a cute argument until you realize that they also tax sugar-free diet soda. Fairness? Pretty limited. Revenue? Up!)
One of the things that gets debated is the reduced income tax rate on long-term capital gains. As we all understand, the goal of this tax break is to allow the rich to get richer at the expense of the rest of us...
Oops. Excuse me. The goal of this tax break is to encourage people to invest their money in risky enterprises and thereby stimulate economic growth. To the extent that this actually works, it's a good thing, because economic growth tends to make everyone better off.
(I lack the economic chops to rigorously prove this, but my strong suspicion is that the modal average income of a society tends to be higher in societies at some "reasonable" level of economic inequality. That is to say, in a society where everyone is guaranteed the same result regardless of effort, you would see that the most common income level would be lower than in a society where there are benefits to hard work -- and luck -- that result in some people making more than others. Obviously, there's a degree of economic inequality that you can reach where you fall off the other side, but I don't think we're in that situation at the moment.)
Ronald Reagan said (or so I see him quoted), "If you want less of something, tax it." Generally, that seems to work out pretty well. We haven't eliminated cigarette smoking, but it seems to be on a downtrend, just for example. I worry about taxes that the new healthcare bill applies to medical device makers, because it seems to me that will reduce the level of invention and innovation in that area. Of course, that could be the objective, because paying for things like stents -- or my CPAP machine -- is expensive. And we were told that one of the objectives was to reduce costs.
Let's talk about other things that the government might want to discourage. Saving money comes to mind, at least whenever I look at the interest rate that my bank is paying me. In theory, holding interest rates low, as the Federal Reserve has been doing, should stimulate the economy, because banks will lend at lower rates and the dollar will decline versus foreign currencies thereby making our exports more attractive.
I don't see the banks doing a lot of lending. I don't see our exports going up.
What I do see is that the cost of everything that we really need to import -- say, for instance, oil -- is going up as a result. And people who are sitting on moderate amounts of cash, especially retirees who are trying to live off the interest, are discovering that there is no interest to live off of. So they're being careful with the principal and spending less.
Which is exactly the sort of behavior that you don't want to encourage during a recession. Or so it would seem to me.
I've seen the current Federal Reserve policy described in some places as a massive transfer of wealth from savers to banks. And I see no reason to believe that isn't true. There might be some excuse for this as a method for bailing out banks that are still carrying a lot of bad loans on their balance sheets that haven't yet been written off.
But I see a lot of banks making a lot of money. Which I guess is the behavior that we're encouraging with our current monetary policy.
And I see a lot of expensive gas.
Don't you?
The first notion that you need to get out of your head is that tax policy necessarily has anything to do with fairness. That's a noble thought, but ultimately tax policy revolves around:
We do argue about whether a tax policy is "fair" or not -- flat tax advocates argue that would be more fair while those who argue for a progressive bracket system think otherwise. Personally, I don't think fair is taken into consideration nearly as much as "will this benefit the people who donate to my campaign?". However, I'm fairly cynical. (No pun intended.)
If you look at many of the things that are deductible, you'll see that the intent (at least at one time) seems to have been to encourage some behavior. Thus, the "marriage penalty" that hits two-income couples is the result of a tax break that was given to single-earner couples when the common pattern was for the wife to stay at home and raise the kids. The deductibility of home mortgage interest encourages people to own their own home which was -- at least until the subprime mortgage crisis blew up in our faces -- considered a good thing.
Conversely, our government feels free to tax the heck out of things that they want to discourage. This frequently takes the form of "sin taxes" on things like cigarettes, soda pop, or bottled water. (The tax on soda pop is supposedly because the sugar it contains is bad for you. That's a cute argument until you realize that they also tax sugar-free diet soda. Fairness? Pretty limited. Revenue? Up!)
One of the things that gets debated is the reduced income tax rate on long-term capital gains. As we all understand, the goal of this tax break is to allow the rich to get richer at the expense of the rest of us...
Oops. Excuse me. The goal of this tax break is to encourage people to invest their money in risky enterprises and thereby stimulate economic growth. To the extent that this actually works, it's a good thing, because economic growth tends to make everyone better off.
(I lack the economic chops to rigorously prove this, but my strong suspicion is that the modal average income of a society tends to be higher in societies at some "reasonable" level of economic inequality. That is to say, in a society where everyone is guaranteed the same result regardless of effort, you would see that the most common income level would be lower than in a society where there are benefits to hard work -- and luck -- that result in some people making more than others. Obviously, there's a degree of economic inequality that you can reach where you fall off the other side, but I don't think we're in that situation at the moment.)
Ronald Reagan said (or so I see him quoted), "If you want less of something, tax it." Generally, that seems to work out pretty well. We haven't eliminated cigarette smoking, but it seems to be on a downtrend, just for example. I worry about taxes that the new healthcare bill applies to medical device makers, because it seems to me that will reduce the level of invention and innovation in that area. Of course, that could be the objective, because paying for things like stents -- or my CPAP machine -- is expensive. And we were told that one of the objectives was to reduce costs.
Let's talk about other things that the government might want to discourage. Saving money comes to mind, at least whenever I look at the interest rate that my bank is paying me. In theory, holding interest rates low, as the Federal Reserve has been doing, should stimulate the economy, because banks will lend at lower rates and the dollar will decline versus foreign currencies thereby making our exports more attractive.
I don't see the banks doing a lot of lending. I don't see our exports going up.
What I do see is that the cost of everything that we really need to import -- say, for instance, oil -- is going up as a result. And people who are sitting on moderate amounts of cash, especially retirees who are trying to live off the interest, are discovering that there is no interest to live off of. So they're being careful with the principal and spending less.
Which is exactly the sort of behavior that you don't want to encourage during a recession. Or so it would seem to me.
I've seen the current Federal Reserve policy described in some places as a massive transfer of wealth from savers to banks. And I see no reason to believe that isn't true. There might be some excuse for this as a method for bailing out banks that are still carrying a lot of bad loans on their balance sheets that haven't yet been written off.
But I see a lot of banks making a lot of money. Which I guess is the behavior that we're encouraging with our current monetary policy.
And I see a lot of expensive gas.
Don't you?