Saturday, September 10, 2016

The Tax System and Income Inequality are Two Separate Issues

The New Jersey Star-Ledger editorially railed against the “richest 0.1 percent” for using their political influence to rig the tax system to lower their tax bills, thus contributing to economic inequality. In the process, the Star-Ledger took a shot at Ted Cruz for his call to abolish the IRS, which the Star-Ledger sees as a tool to fight inequality through redistribution of wealth. In A tax loophole that needs to be nailed shut, the Star-Ledger writes:

Nearly 250 years ago, Adam Smith noted in The Wealth of Nations that capitalists are predisposed to conspire against the public, whether it's through the creation of monopolies or some other form of privilege, usually with the blessing of the state.

Economists call it rent-seeking. The rest of us call it daylight robbery.

Whatever you want to call it, the current tax system has contributed to obscene levels of income and wealth inequality.

Notice the editors’ phrase “usually with the blessing of the state.” I wonder if they realize the implication: that government’s tax and regulatory powers, not free markets, leads to “rent-seeking.”

I left these comments:

The Star-Ledger is mixing apples and oranges here; economic inequality and income taxes.

There are two types of economic inequality; market-based, the good kind, and political-based, the bad kind. We should want more of the first, and eliminate the second. What kind on inequality is highlighted in this editorial? Political-based, because fostered by a corrupt income tax system.

The Star-Ledger is partly right that the tax system fosters economic inequality—It fosters the bad kind.

Inequality in and of itself is not bad. Just the opposite: Unfettered market-based economic inequality is a sign of a just society where people are free to rise as far as their talents, ambition, and personal circumstances will take them. Market-based inequality is built on value creation and trade, the win-win transaction. People who get the richest do so by creating the most value for the most people. As Sam Walton said, “There is only one boss—the consumer. [H]e can fire everybody in the company from the chairman on down, simply by spending his money elsewhere.” Only free markets empower consumers in this way. We should want the rich to keep getting richer. We should want more people getting rich. I’m completely selfish. I want more and more availability of the benefits created by entrepreneurs. It makes my money worth more and my life incalculably better than I can ever hope to achieve by my own hand. Who cares about inequality when we’re being showered with great companies, great mass-market products, and millions of jobs? We decide who gets rich through our buying decisions. This is moral economic inequality.

Cruz is obviously right, as well. The current tax system fosters political inequality. Eliminate the IRS and replace it with a simple, special provision-free, low-rate, revenue neutral flat tax. (Personally, I like Steve Forbes’s idea, which leaves the first $45-$50 thousand tax free for a family of four, and taxes every other dollar at 17%—interestingly, the same rate that the NY Times claims the super-rich now pay.)

When the government created the convoluted income tax, it created the incentive for special interests to lobby for special provisions. Of course the rich benefit the most from this system. They make the most, have the biggest tax liability, and thus the most incentive to look for legal ways to avoid taxes. Is it fair? No. But we all cash in on this corruption. The home mortgage deduction is huge and mainly a middle class government favor. High earners are no more wrong to take advantage of legal tax-minimizing provisions as any homeowner, and are no more cheating the treasury than the homeowner.

Special interest lobbyists, rich or otherwise, didn’t create this crony system. The system created the lobbyists. It’s interesting that the Star-Ledger should bring up Adam Smith and rent-seeking. Rent-seeking is another name for government economic favoritism, and is inherent in a mixed economy; the mixing of political power and economics. Only free market capitalism eliminates rent-seeking, because capitalism—properly understood—separates economics and state in the same way as church and state.

The government created this tax system. It should abolish and replace it. What the tax system shouldn’t be used for is to reduce economic inequality. It would be morally wrong to use tax reform to cut down the most talented and productive people. Just replace the tax system, and a major source of rent-seeking—of crony “capitalists” or anyone else conspiring to create privilege with the “blessing,” i.e., force, of the state—will be eliminated. Eliminate the power of politicians to dish out tax favors, and you eliminate rent-seeking tax favoritism. Adam Smith, who identified the virtue of free markets, would approve. That would be real progress.

Related Reading:

Obama's Corrupt "Equality" Campaign and the 99/1 Premise


Mike Kevitt said...

We want the inequality that's determined by the market. So, we want some inequality. That's all that's important. Do we want more or less of it than we have? Neither, unless the market says so. The market determines, actually dictates, that there be some inequality, in whatever amount it determines, which will probably vary over time.

As Walton says, the consumer is boss. But 'consumer' means the buyer is market based. He buys with the money he worked for, thus made and earned. Otherwise, the buyer is a crook. He initiated force, and now buys with the loot. in both cases, he initiated force. He makes goons out of hires, and true victims out of those who are fired. But we don't like to talk about it in these terms. It rocks boats (pirate ships).

In recent years, I've become aware of my confusion when I hear or read the word, rent. I used to think it just meant the relationship between a property owner and somebody he gives use of his property to, by contract. I've found it might refer to other things. I guess it can refer to a relationship between 'government' and people, with no reference to any market, nor to the proper function of actual government, such as the sort of relationship you describe in this posting.

If the word, rent, can apply to this as well as, say, the relationship of landlord and tenant, do the two fall under the same concept? If so, what's the essential distinguishing characteristic held in common by these two relationships.

I think I see a characteristic in one which is mutually exclusive of a characteristic in the other, so they can't be in the same concept, so maybe the word, rent, shouldn't be applied to both. Sorry, but whether I'm right about this instance or not, such an issue is crucial to accurate, proper communication in human relations, for understanding, which is prerequisite for agreement or for disagreement.

Mike Kevitt said...

I must add this to my comment of 9/10/16, 4:28PM, here.

I said the consumer "buys with the money he worked for,... ."

If he buys with money he inherited or was given to him by someone who was alive when that somebody gave it to him, he's a legitimate consumer as per the market. He's not a crook.

"Otherwise, the buyer is a crook."

Michael A. LaFerrara said...

I see your point about "rent-seeking." I don't know where that term came from. I know it's an economic term. But it definitely confuses the issue. "Rent-seeking" implies validity, when in fact it is more appropriately called exploitation, I think.

Mike Kevitt said...

Don Watkins, of the ARI, chimed in today, 9/20/16, on Voices For Reason, on what he called 'rent seeking'. He said about the same that we said, here. But, I think he should have said something more specific about epistemology, mainly the issue of the concepts involved, and their role in correct understanding.