- The Immoral Tax Trap

My buddy Vishnu took a look at the Paul plan for a balanced budget and left his comments here. He basically says that we need to raise taxes in addition to slashing spending, if we are to have any hope of keeping the boat afloat. As you can imagine, I disagree, but not completely.

Before I detail my exception let me say this. I think I know Vishnu pretty well. We’ve been friends and have worked closely together for years, and I think he’s far and away one of the smartest men I’ve ever met. But he’s fallen into a trap – the same trap that many of us fall into when we only look at the accounting side of the federal ledger. There is another side to the whole thing, and that has to do with incentives.

The problem is that with regard to our current tax code, we are at the wrong end of the Laffer curve. Any increase in tax rates under the current code will reduce the incentive for productive activity. It will then lower GDP and won’t result in any additional revenue for the government. So rates can go up all you like, but there won’t be any more money.

The problem really is this… as things stand, rather than someone like me investing a dollar where it will produce the most economic growth, some bureaucrat is ‘investing;’ it where it will produce the most political capital. It's not just me either, it's like that in every industry - the government takes money away from someone who knows where it 'should' best be spent, and give it to someone else to give to their political serfs who will do little or nothing with it. In that way, our tax code has become an indirect form of plunder. The government takes from the most efficient, and gives to the least efficient in exchange for nothing but political fealty. We’ve created a class of dependents who do nothing but ‘vote’ for a living.

And at this point, I’m convinced that we’re at the end of that line. There is no more plunder readily available. Speaking for myself, it’s become a much more efficient process for me to figure out how to hide my money than to pay taxes on it. I would rather spend the cash on lawyers and accountants than to hand it over to the government- even if the result is a wash. And if I feel that way believe me, there are lots of other people who make more than I do, who are doing the same.

Raise taxes to 100% if you want to. You’ll never see a dime of it. The only thing you’ll do is raise the real estate values in Singapore. But in this respect I agree with Vishnu, we need to raise taxes… but not on the people currently paying all the taxes… we need to raise them on the dependent class. Roughly 45% of all Americans pay no net federal taxes at all and that is a totally unsustainable circumstance. They’re the ones whose taxes need to go up.

Government should be a burden for everyone, and no one should be exempt from it. It should be a necessary evil, not a source of wealth. People like Paul Krugman will tell you that it’s immoral to expect the poor to pay what to them is a vast amount in taxes, and I agree. But in my mind that’s only another argument for keeping the necessary burden of government as small as possible. They should not be allowed to pay nothing.

What we need to do if the government is to get more actual revenue, is shift the burden of our tax code away from productive activities, and on to destructive ones. The only legal activity which is ‘destructive’ in the sense that I mean is consumption. In this way we will encourage the GDP to grow and that will increase revenue.

But I have to confess – unless we can change the political dynamic in a meaningful way, I don’t see any way that will happen. Obama’s ‘hope and change’ was never about something new, it was about something old. It was about increasing the level and direction of political plunder, and more directly rewarding the most reliable constituencies. But so long as the illusion of something for nothing is propagated by him and his ilk, we’re all trapped. And while we flounder in this trap, time is running out.

Roughly half of America is so misinformed about our financial condition and the scope of possible solutions, that I don’t think it will be possible to educate them before we face a debt default. And the education they need isn’t about accounting; it’s about right and wrong. Vishnu is certainly not among that ilk. He understands that government is a burden, and I'm confident that his call for higher taxes was a call for higher tax revenue to solve the accounting issue, not a call for higher tax rates to punish the rich. But not everyone feels that way.

Take the example of someone like Anthony Wiener. He believes that it’s a supremely moral act to tax one person who already bears a substantial tax burden, and to give the money to another person who has none. He believes this because his world view is about envy, pretend villains and pretend victims. And into this fictitious imagined narrative he casts himself as the pretend hero. But it’s all pretend – so he doesn’t realize the very real damage he’s doing to everyone involved – including him.

In reality, his is a profoundly immoral act. He’s using the threat of force to punish someone for successful activities, rewarding someone else for unsuccessful activities, and congratulating himself for his wanton thievery in the process. He believes he’s the hero, but he’s really the villain. What he believes is best for everyone is really worst, and what he thinks is helping his newly created dependents is actually hurting them by making them into slaves. But there is no convincing him, or the 30% of the American population who think just like him.

Taxes do need to go up, but not on the people he believes should have their taxes raised. They need to go up on the people who can least afford to pay them. And they need to do so because it’s the only way they will understand that more government is a problem, not a solution. Government produces nothing, and is therefore a net burden. The burden needs to be shared by everyone. That’s a moral statement. And I think the Anthony Wiener’s of this world are simply too fundamentally immoral to learn the difference between right and wrong in time to save us.