Tax policy and the ‘fiscal cliff’


By: Robert E. Meyer

There has been controversy among those interested in economics as to which tax policies have been more beneficial to the economy: Those supported by past presidents such as Reagan and George W. Bush, or the type supported by Obama. Many today will claim that supply-side tax policies had little or no positive effects on the economy.

The truth is no tax policy can stem the growing national debt problem without focusing on a reduction in government spending, since taxes deal primarily with revenue production.

The President and House Republicans are currently in a negotiation stalemate that could trigger deep mandatory cuts–harmful to the country’s growth prospects-if the issue remains unresolved by year’s end.

Obama’s call for a “balanced approach,” is really a lopsided approach, calling for increased taxes on the wealthy, while making only trivial changes in domestic spending programs.
The demand that some must pay their “fair share” is an Orwellian mantra, that results in people who pay little or no federal income tax, feeling justified in their indignation toward those few who pay most of the freight already. As Paul Ryan pointed out in the Vice-Presidential debate, the extra tax revenues gained from increasing taxes on the wealthy would only operate the federal budget for a matter of days. This “fair share” demand is based in envy and sentimentality rather than anything fiscally significant or practical.

Polls have indicated conservative lawmakers will be blamed if the impasse continues, resulting in increased taxes for all after the New Year. This seems odd since it is Obama who wants to change the current tax brackets, rather than leaving tax rates as they have existed for over a decade. Yet, it is a good bet that the Republicans will fold and capitulate to Obama’s increase tax demands, fearing the blame and electoral repercussions of the economically misinformed and misguided public.

What has been emphasized by the media is that Romney had an effective personal federal income tax rate of under 15%. What hasn’t been pointed out, is that a substantial portion of Romney’s taxable income was given to charity. The conclusion that Romney’s effective income tax percentage was impacted by his charitable contributions is entirely ignored. Further, it is never observed that much of what Romney gave to charity accomplished many of the same things that paying extra taxes would have, except in a more efficient and self-directed way. One’s federal tax liability, which is at least partly involuntary, is deemed more important to the welfare of society, than one’s charitable contributions which are totally voluntary. In most cases, credible public charities are more effective and efficient with their resources than programs that are established and operated with federal tax money.

Let’s further analyze the anecdotal story about Warren Buffet paying a lower rate than his private secretary. We are then informed about what an injustice such a situation is. Of course, further analysis reveals a different story. Most of the secretary’s income likely comes from wages or salary, while most of Buffet’s taxable income is derived from capital gains, not salary. Money invested in capital is generally at risk of loss, whereas salary and wages are simply payments for services rendered. When people risk their money they have to be compensated for the risk of loss. That incentive is generally a lower rate on how that income is taxed.

As an aside, one wonders what sort of tax advise did Buffet’s secretary receive? My own effective federal tax rate was less than five percent, one third of what Romney pays, and I can’t even itemize deductions. It’s hard to believe the story without knowing more details. The irony is that I’ve always supported a type of flat tax, whether based on consumption or income, and it would be more equitable than the system we have now, even though my personal tax rate would likely go up.

Should the rich pay more in taxes? Sure. Should they pay a greater percentage on higher incomes though? It raises the question as to the mischief that is caused through the implementation of a progressive income tax system–one of the methods which Karl Marx proscribed as a means of destroying capitalism. I could go on to write an entire column on the evils of a progressive income tax system. Suffice it to say it helps to perpetuate the class warfare so prominent in this country, as well as accommodating the perpetual re-election of pandering politicians

What a great bait and switch ploy: Get people arguing about who is paying their “fair share” while the current administration spends us into oblivion. Apparently we elected the government we deserved.

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