Joseph Thorndike, the tax historian at Tax Analysts, asks: What if the Income Tax Is All About Envy? Would That Be So Bad?.
The short answer: yes, it would. The primary purpose of a tax is to fund the operations of the government. Asking the tax to do anything else makes it worse at its main job, while imposing wealth-destroying distortions on the economy. Also, as we noted the other day, increasing taxes on “the rich” has coincided with an increase in inequality. It’s not clear at all that taxes at any non-catastrophic level can “help” inequality.
But its a slow news day, so let’s spend a little time on a longer answer. Joseph thinks that inequality on its own is bad, even when “the poor” are well-off in real, but not relative, terms:
In other words, even if a rising tide lifts all boats, the relative size of everybody’s boat still matters. If some boats are much bigger than others, then a society is vulnerable to political instability.
Now, you can object that all the people with little boats are just feeling envious. But that doesn’t make the envy disappear; moral indignation may be satisfying, but it’s not a particularly effective means of keeping the peace. What’s needed, if you’re trying to fend off revolution, is some sort of actual policy response to feelings of relative deprivation.
I think Joseph greatly overstates the risk of well-fed people rising up against their neighbors just because they have nicer cars and houses. People with something to lose tend to be risk-averse, and few things are riskier than revolution. Still, that’s not something I can empirically demonstrate.
One thing that is indisputable is that catastrophe happens when a government makes “equality” its driving principle. It was tried extensively in the 20th century, and tens of millions became equally dead as a result. Given that history, equality as an end in itself has no moral force.
In our current politics, inequality is the cynical rallying cry of a President who lives in a mansion and plays golf at exclusive resorts pretty much every week. He presides over a listless economy, enormous deficits, and a health reform plan that is a debacle. He’s out of ideas, so he’s reduced to saying it’s the rich guy’s fault. Given the approval ratings he’s getting out of it, revolution seems a long way off.
Scott Hodge and Andrew Lundeen, High Income Taxpayers Earn the Majority of All Pass-Through Business Income (Tax Policy Blog). They make a point that can’t be repeated too often:
It is often said that raising top tax rates will have little effect on business activity because only 2 percent of taxpayers with business income will be impacted. However, the more economically meaningful statistic is how much overall business income will be taxed at the highest rates. In 2011, the vast majority (70 percent) of pass-through business income was reported by taxpayers earning more than $200,000. Millionaire tax returns earned 34 percent of all private business income while taxpayers with incomes below $100,000 earned just 14 percent.
Indulging in envy-driven rate increases on “the rich” means weakening businesses and their ability to hire and grow — reducing opportunities for their would-be employees in the name of “equality.”
Perspective. The brilliant Arnold Kling quotes Laurence Kotlicoff on the U.S. Budget:
In a podcast with Russ Roberts, he says,
I think we are probably in worse fiscal shape and any developed country. The reason, Russ, is we’ve been piling up debts for over 6 decades; and when I say ‘we’ I’m referring to Republican and Democratic administrations and Congresses. And we’ve been hiding them. We’ve been keeping them off the books and using economic labels, words, to pretend that they are not real liabilities of the government…we have all these obligations to something like 30-40 million current retirees and close to 80 million baby boomers who are about to start collecting Social Security benefits if they haven’t already. All those obligations are not reported as part of the government’s debt, so we are missing those off-the-book obligations.
But the real economic emergency is inequality. Or austerity. Or something.
Of course, that “something” is probably those Tea Party extremists who actually want the government to live within its means. How dare they.
Kay Bell, Filing patience can prevent a big tax mistake. Hurrying your refund by taking out a refund anticipation loan can be an expensive mistake.
Russ Fox, We Will Soon be Able to Efile Past Due Individual Tax Returns. Good news. While everybody should file on time, not everybody does, and anything that helps non-filers come in from the cold is a good thing.
Programming Note: I am scheduled to participate in a Tax Update Webinar Monday sponsored by the Iowa Bar Association from noon to 1:45 pm. Registration information is here — $40 to get a great start on your 2014 CPE/CLE. Other speakers are Roger McEowen of the Iowa State University Center for Agricultural Law and Taxation, and Kristy Maitre, Iowa’s IRS Stakeholder Liason.
While I hope to be there, I can’t guarantee it. I am on federal jury standby this month, and I won’t know until after 5 p.m. tonight whether I will be hanging out in the jury room at the Des Moines Federal Courthouse instead of at the webinar. They haven’t needed me these first two weeks, but I suppose past performance is no guarantee of future results here. If I am on jury duty, the Tax Update may go quiet for awhile.
Update, 1/18: not called for a jury next week, so I will be on!
TaxProf, The IRS Scandal, Day 253. He quotes an op-ed by an attorney for the Tea Party outfits, who says: “Let’s all be very clear: The FBI did not conduct an “investigation” into the IRS scandal.” Of course. Lookouts don’t investigate.
Robert D. Flach brings the Friday Buzz!
News from the Profession. Life at Deloitte May or May Not Involve Time Spent on Your Knees (Going Concern)