Thursday, October 5, 2017

Fairness, not Envy, Should Be the Purpose of 'Tax Reform'

Not surprisingly, the Republicans’ tax legislation is hated by the Left. In Trump, the huckster populist, lies about his tax plan, the New Jersey Star-Ledger weighed in:

“President Trump, desperate for a legislative victory, now hopes to find it in bipartisan tax reform. Let us help.
The Democrats should unite on three conditions: Not a dollar more in tax cuts for the rich, not a dollar added to the national deficit, and no votes on anything until Trump reveals his own tax returns.” [emphasis added]

That was followed by a diatribe about how much taxes would go down under Trump—leaving out, of course, that the people who will see the biggest tax “break” also happen to pay the lion’s share of the federal income tax.

I left these comments:

Of the three reasons given, only the second is relevant. Tax reform should be revenue neutral. (How “revenue neutral” is determined is a separate matter. But we’re talking broad principles here.) Taxation is not the biggest problem today. Spending is, because deficit spending is backdoor taxation. Merely cutting overall tax revenue is no tax cut at all. While I love tax cuts, it makes no sense to cut tax revenue without spending cuts—and neither party is willing to cut spending.

As to “tax cuts for the rich” and Trump’s tax returns, let me say this: My father once told me, as I was entering the workforce out of high school half a century ago, that in regard to money and wealth, “Never worry about the next guy. Only worry about yourself”—Specifically, am I being treated fairly? Reason one and three above is an appeal to envy and to the psychological illness that is placing more concern with others than for oneself. What is of concern to me is fairness, which is why I favor a flat tax with no deductions (deductions typically favor some while bypassing others) save for a generous low-end personal deduction for everyone. Will some rich guy get a big tax cut? Why should I care? As long as the tax rules treat me the same as him, it’s all I can ask. Trump’s tax returns? I even care less.

But since a simple flat tax is not in Trump’s cards, let me address the biggest part of Trump’s tax plan: corporate tax cuts. Cuts? We should eliminate the corporate income tax altogether. It is both morally unfair and economically stupid.

Especially in high-tax states like New Jersey, people are up in arms about the proposal to end the deduction for state and local taxes, on the grounds that we shouldn’t be taxed twice on the same income. Though the issue of tax deductibility is more complicated than that, for the sake of this principle I'll just say: Fair enough. But if that’s so, then we should eliminate the corporate income tax. The corporate tax is the poster child for double taxation.

A business corporation is not a person. It is an association of individuals who come together voluntarily for a productive mission. It is a legal and cultural framework for cooperation. It makes no more sense to tax a corporation than to tax a labor union or a chess club. The owners of the corporation are taxed at the individual level, to the extent they draw dividend income or earn capital gains or draw wages and salaries from the company. To tax a corporation is to tax the owners twice, which is no less bad than taxing individuals once at the state level and again at the federal: Both are double taxation. Morally, this is wrong. To the extent profits are not distributed, they should remain with the company unmolested by taxation. Economically, all corporate taxes do is harm the company’s ability to reinvest in the company, which harms the company’s ability to innovate and grow, to the detriment of owners, employees, and consumers.

So let’s stop whining about “tax cuts for the rich” and Trump’s tax returns, and focus on what really counts—a fairer and less complicated tax system.

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