Why Tax Policy Is a Dissembler’s Paradise

All politics is the art of deception, none more so than the oft-repeated claim about “tax cuts for the rich.” First, the extension of the rate cuts of 2003 that President Obama grudgingly agreed to in exchange for an extension of unemployment benefits is not in any way a reduction of income tax. The only question was whether everyone’s tax liability was going to increase in January. Second, most people that are referred to as “rich” are hardly the silk-top-hat Monopoly-board caricatures of the super-wealthy. A couple whose income exceeds $250,000 spent much of their earlier lives earning less than that. Also, if they had to pony up $30,000 after taxes just for tuition in order to send each of their children to college, they hardly feel “rich.” It also ignores the sacrifices that were made by small-business people to build their firms often persevering through periods of low earnings or even loss, to achieve success. It takes a lot of chutzpah to claim that these folks are all “millionaires and billionaires.”

More and more of the public understand that personal income tax hikes hurt business and thus hiring. According to Bill Ahern of the Tax Foundation, the hikes from 33 percent to 36 percent and from 35 percent to 39.6 percent on high wages, and the hikes on long-term gains and qualified dividends from 15 percent to 20 percent are not massive (roughly $70 billion/year), but will hit almost half the business income passed through to individuals. Combined with the healthcare taxes that will kick in on them in 2013, these hikes threatened recovery.

Add to this organizations like wealthforcommongood.org which is advancing a petition signed by 411 individuals asking for tax hikes for the “rich” to continue. Similar activity, initiated by Bill Gates Sr., Warren Buffett and others, have campaigned unsuccessfully for a state income tax on high-income people in Washington State, and a resumption of federal estate taxes. They say that they want the government to retain “the increased revenues, an estimated $700 billion over 10 years” to be used “toward making long-overdue investments in education, health, job creation, renewable energy, transportation and other infrastructure.”

We recommend that the 411 petitioners simply write a check for the additional tax and send it to the U.S. Treasury. One assumes that Secretary Timothy Geithner accepts voluntary contributions, even though he wasn’t too good about making mandatory contributions before he got his present job. Massachusetts tried this. When it cut its income tax rate from 5.9 percent to 5.6 percent, legislators decided to leave the old rate on the form as a voluntary line item. Senator Kerry paid the lower rate, and so did almost everyone else.

When people advocate for a public policy, they are trying to change the law for everyone, not to start a new charity, but evidence going back to the 1920s is clear. A rise in income tax results in a decline at the margin in economic activity. If the advocates’ case for the reverse is good why the deception?

Now He Tells Us

Speaking at a green energy business conference in Greece, former vice president Al Gore said, “It is not a good policy to have these massive subsidies for first-generation ethanol.” Total U.S. ethanol subsidies reached $7.7 billion last year, according to the International Energy Industry, which said biofuels worldwide received more subsidies than any other form of renewable energy. He admitted that his support for them derived from his political ambitions: “I had a certain fondness for the farmers in the state of Iowa because I was about to run for president.” The Nobel laureate also admitted that the use of biofuels contributes to the global increase in food prices. The admission demonstrates why politicians are lousy at figuring out which alternative fuels makes sense and at second-guessing markets which do a better job at allocating resources.