Commentary Magazine


The Times’s Idea of “Tax Reform”

The New York Times has a lead editorial today called “Why the Economy Needs Tax Reform.”  It starts off briskly enough:

Over the next four years, tax reform, done right, could be a cure for much of what ails the economy. Higher taxes, raised progressively, could encourage growth by helping to pay for long-neglected public investment in education, infrastructure and basic research. More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path. Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge.

Higher and more progressive taxation, in other words, is just the medicine the economy needs to begin to flourish again for the first time in six years. If the Times can produce even a single instance in history where higher and more progressive taxation led to economic prosperity I will eat my hat. The Times’s formula is precisely what FDR tried in the Great Depression. It didn’t work; the depression lingered on and on. But I can give you numerous instances where tax cutting produced near-instant prosperity (the 1920s, the 1960s, the 1980s, the 2000s in this country and many another instances in other countries; see this from Power Line).

Yes, Clinton raised taxes in 1993 and the economy prospered for the next seven years. But that is a classic case of the post hoc ergo propter hoc fallacy. The economy was already growing well and the real economic growth of the 1990s (and the great rise in the Dow Jones Industrial Average) began only in November 1994, when a Republican Congress was elected and put real brakes on government spending. Government spending rose only 22 percent between 1994 and 2000, while revenues rose by 61 percent. 

As for increased spending on education, the country spends about four times as much, per pupil, in constant dollars, as it did in 1950. So public investment in education has hardly been long-neglected, but the results have been dismal. Obviously, money is not the problem here. Neither is it in higher education, where tuition has been rising far faster than either inflation or medical costs (a clear indication that a cartel is at work). But much of the increased income has gone not to better educating students but to administrative bloat on an epic scale. The University of Wisconsin at Madison has someone on the payroll with the you-can’t-make-this-stuff-up title of Vice Provost for Diversity and Climate.

As for reducing income inequality—which is simply assumed by the left to be pernicious without a shred of evidence being presented that it is—you can read what I think about this spectacularly stupid idea here.

The Times goes on:

A logical way to help raise the additional needed revenue would be to tax capital gains at the same rates as ordinary income. Capital gains on assets held for more than a year before selling are taxed at about the lowest rate in the code, currently 15 percent and expected to rise to 20 percent in 2013. That is an indefensible giveaway to the richest Americans. Research shows that the tax breaks do not add to economic growth but do contribute to inequality. Currently, the top 1 percent of taxpayers receive more than 70 percent of all capital gains, while the bottom 80 percent receive only 6 percent.

Let’s pick apart this farrago of intellectual dishonesty. Yes, capital gains are taxed at a low rate compared to ordinary income. But capital gains in stocks and small businesses come, indirectly, out of after-tax income. Publicly-held corporations pay corporate income taxes (35 percent). What’s left over and not paid out as dividends (also taxed a second time) adds to the book value and hence, indirectly, the stock price. The profits of sub-chapter-S corporations are taxed as the personal income of the stock holders, so, again, the retained earnings have already been taxed when the capital gains are realized. As for the capital gains in, say, a house sale, they are taxed without regard to inflation. So a house that was owned for, say, 40 years and sold in 2012 would have experienced over a five-times inflation but would be taxed as though there had been no inflation in those 40 years.

As for much of total capital gains flowing to the top 1 percent of taxpayers, this is lying with statistics. It implicitly assumes that the top 1 percent is the same group of people year after year (a group of J. P. Morgan clones sitting around in frock coats and top hats, I suppose, lighting cigars with $100 bills). But many of those in the top 1 percent this year won’t be there next year. For example, a small-business owner who worked for 50 years to build his business and then retires and sells the business for, say $2 million. He’s in the 1 percent that year. Next year, living on his retirement income and with no capital gains, he is not. But he worked hard for 50 years, so let’s penalize that effort and that success with confiscatory taxation.

The Times even calls for higher corporate taxes, although American corporate income taxes are now the highest in the world. Has the Times not noticed that capital is now totally global, that it can–and will–flow to where the return is the highest?

Finally there is this:

Mr. Obama would be wise to instruct the Treasury Department to start work on tax reform now, exploring carbon taxes, both to raise revenue and to protect the environment; a value-added tax, coupled with provisions to protect lower-income taxpayers from higher prices, to tax consumption and encourage saving; and a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share.

It’s hard to escape the conclusion that for the New York Times editorial board, tax reform and more and higher taxes are simply the same thing. And that the purpose of taxation is two-fold. One, to feed, without restraint, the ever more ravenous federal beast, and, two, to punish economic success. The financial sector earns a higher return on its capital than other sectors? How dare it? We’ll fix that!

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