taxes Archives — Laissez FaireLaissez Faire

One of the major themes of this blog is the individualist conviction that your life belongs to you—and that in morality and in politics one must never forget that fact. If you want an unforgettable example of what it means to forget (or evade) that fact, check out this recent New York Times editorial, “The Real Spending Problem.”

What is the real spending problem, according to the Times? Believe it or not, it’s your freedom to spend your own money. No, seriously.

Each year, the government doles out tax breaks worth $1.1 trillion. That is more than the cost of Medicare and Medicaid combined. . . .

Tax breaks work like spending. Giving a deduction for certain activities, like homeownership or retirement savings, is the same as writing a government check to subsidize those activities. Functionally, they mimic entitlements. Like Medicare, Medicaid and Social Security, they are available, year in and year out, in full, to all who qualify. Yet in budget talks, Republicans ignore tax entitlements, which flow mostly to high-income taxpayers, while pushing to cut Medicare, Medicaid and Social Security.

Now, if you found those paragraphs baffling, it’s probably because you’re thinking that there’s kind of a big difference between tax breaks and entitlements: tax breaks involve the government taking less of the money you’ve earned through blood, sweat, and hard work—while entitlements involve seizing more of those earnings and handing them out to other people.

But the Times’s argument becomes graspable once you realize that the left doesn’t look at things that way. It looks at everything from a thoroughly collectivist perspective, where all individuals are interchangeable, their wealth is pooled, and what matters is “society” and its representative, the state.

From that perspective, it’s true that there is no essential difference between entitlements and tax cuts. They are both “costs” to the government: Tax cuts leave resources in the hands of “society” rather than moving them into the pockets of the state, while entitlements shift resources from the pockets of the state back to “society.” Different process, same result.

But the individualist and collectivist perspectives are not “equally valid.” The left’s collectivist perspective is totally false—there is no entity “society” made up of interchangeable units. And it’s totally evil—because pretending that there is a collective means, in practice, treating actual individuals as if their lives and rights don’t matter.

“When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, a decent respect to the opinions of mankind requires that they should conduct a happiness survey to make sure that at least 51 percent of people will be made ‘very happy’ by the decision.”

Thankfully Jefferson spared us that. American Enterprise Institute president Arthur Brooks, unfortunately, does not.

In a piece for yesterday’s Wall Street Journal, Brooks argues that the entitlement state should be “reformed” because the unearned money it doles out to recipients will not actually make them happy. Brooks is certainly right that we need to limit the entitlement state, and that unearned money doesn’t make people happy. But how he argues for those propositions is a disaster: it actually undermines the case for limited government.

Brooks rests his argument on a handful of “happiness studies”—surveys in which respondents describe themselves and their level of satisfaction with life. According to Brooks:

There is a huge amount of research showing that money, when earned, has a generally positive association with happiness. The problem is when it is unearned, when raw purchasing power is untethered from hard work and merit. Above basic subsistence, happiness comes not from money per se, but from the value creation it is rewarding.

I wouldn’t go so far as to say that happiness studies are entirely worthless, but they are at best raw material for philosophers and psychologists to analyze. Among many other reasons to discount their value:

• Defining “happiness” is a controversial philosophic issue.
• Most people are lousy introspectors.
• Even when they can accurately assess their own level of happiness, there is little reason to think most people will honestly report it to researchers.
• At best, the surveys can help identify correlations, not causation.
• The findings of the surveys are often inconsistent.

To treat happiness studies as definitive is ridiculous. We can’t shove aside Aristotle just because we have Gallup.

By arguing against the entitlement state on such a flimsy foundation, Brooks opens the door for any opponent yielding a happiness study that supports greater government intervention. To wit:

People Who Pay Higher Taxes Are Happier: Study

They say money can’t buy you happiness, but what about forking over some of it to the government?

Higher taxes are correlated with higher life satisfaction, according to a November study by six economists affiliated with the Institute for the Study of Labor in Bonn, Germany.

Live by the survey, die by the survey. But as bad as it is to base his argument against entitlements on polling, what’s worse is the primacy Brooks gives to the happiness of the entitlement state’s intended recipients. He never challenges the notion that wealth redistribution would be a proper policy if happiness surveys suggested that unearned wealth did in fact make the recipients happier. He never mentions the rights of a creator to the wealth he creates.

Yet that is the only solid, moral, or defensible foundation of a free society—as the Founding Fathers understood. If you earned your paycheck, you have a right to it, regardless of how many people come knocking on the door claiming your money would make them happier than it would make you.

There has long been a tendency among those in the humanities to think that being scientific requires them to mimic the hard sciences. If a philosopher argues that stealing won’t make you happy or that we should set up society on a foundation of individual rights, well, that’s just his opinion. But if we can add a few footnotes and numbers? Now we’re on solid ground. Brooks’s piece helps illustrate the folly in that notion.

Peter Schiff addresses an annoyingly common argument for higher taxes on the wealthy: that the top marginal rate was 91% in the 1950s at the same time the economy boomed.

In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.

So if the top marginal tax rate has fallen to 35% from 91%, how in the world has the tax burden on the wealthy remained roughly the same? Two factors are responsible. Lower- and middle-income workers now bear a significantly lighter burden than in the past. And the confiscatory top marginal rates of the 1950s were essentially symbolic—very few actually paid them. In reality the vast majority of top earners faced lower effective rates than they do today.

Much more here.

Everyone right now is worried about the so-called fiscal cliff—a truckload of new taxes (and an across-the-board cut in government spending) that will take place at the end of the year if Washington can’t come to an agreement. There’s no question those taxes will put a strain on many Americans—Americans who are already feeling the strain of a bad economy. But what’s being ignored in the debate is this: we’ve already fallen headfirst off the freedom cliff.

Over the last century, the U.S. government’s role has transformed from the original one of protecting individual freedom to redistributing wealth (Medicaid, welfare, Social Security, farm subsidies etc.), usurping economic functions that should be private (mail, education, mortgage securitization), and interfering in voluntary economic transactions (virtually everything done by Washington’s alphabet regulatory agencies). Given the omnipresent role of the state in our affairs, is it any wonder we’re facing a massive deficit?

A government that limits its function to protecting American freedom via a police force, military, and legal system, is relatively affordable. War-time aside, during the whole of the 19^th century, when the U.S. came closest to capitalism, federal government spending as a percent of GDP stayed around 3%.

What about state and local government? Tack on another 6% or so. And then keep in mind: this was not perfect capitalism. Particularly at the state and local levels, government was doing things it should not be doing, such as building roads and canals and operating the post office.

The biggest problem today is not that our leaders cannot come to an agreement. It’s that they are trying to satisfy the irreconcilable views of Americans: We want government to do everything—but we want our freedom. We want government to fulfill everyone’s every need—but we don’t want to pay for it.

The result? We have two political parties that agree on what government is doing but are bickering over how to make it affordable. The Democrats say the key is raising taxes. The Republicans say the key is to jigger with the programs and make some minor cuts. But no one is asking: should government be doing things other than protecting our freedom?

Consider the question raised.

John Cochrane notes that some people have been “advocating that even a 91% federal income tax rate, on top of state, sales, etc, as we had in the 1950s, (not counting all the loopholes!) will actually be good for the economy and also raise lots of revenue.” I’ve definitely heard that. But as Cochrine notes, it’s a fantasy. “Europe has been running a very useful set of experiments on what happens if you address yawning deficits with high income, wealth and property taxes.” He goes on to quote a recent article in the Telegraph.

Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50p (percent) top rate of tax, figures have disclosed.

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election. . . .

It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes.

George Osborne, the Chancellor, announced in the Budget earlier this year that the 50p top rate will be reduced to 45p from next April.

Since the announcement, the number of people declaring annual incomes of more than £1 million has risen to 10,000.

However, the number of million-pound earners is still far below the level recorded even at the height of the recession and financial crisis. . . .

Far from raising funds, it actually cost the UK £7 billion in lost tax revenue

Whole thing here.