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Richmans' Trade and Taxes Blog
Republican Tax Policies Lack Economic and Political Sense
What do Republicans stand for when it comes to taxes? The Republican platform of 2012 recites:
"Taxes, by their very nature, reduce a citizen’s freedom. Their proper role in a free society should be to fund services that are essential and authorized by the Constitution, such as national security, and the care of those who cannot care for themselves. We reject the use of taxation to redistribute income, fund unnecessary or ineffective programs, or foster the crony capitalism that corrupts both politicians and corporations.Our goal is a tax system that is simple, transparent, flatter, and fair. In contrast, the current IRS code is like a patchwork quilt, stitched together over time from mismatched pieces, and is beyond the comprehension of the average citizen. A reformed code should promote simplicity and coherence, savings and innovation, increase American competitiveness, and recognize the burdens on families with children. To that end, we propose to: Extend the 2001 and 2003 tax relief packages-commonly known as the Bush tax cuts-pending reform of the tax code, to keep tax rates from rising on income, interest, dividends, and capital gains; Reform the tax code by reducing marginal tax rates by 20 percent across-the-board in a revenue-neutral manner; Eliminate the taxes on interest, dividends, and capital gains altogether for lower and middle-income taxpayers; End the Death Tax; and Repeal the Alternative Minimum Tax."
The Republican objection to all taxes is reprehensible. Taxes do not “reduce a citizen’s freedom”. They are a necessary price for having a government of laws and providing security of persons and property. Taxes are bad not because they reduce freedom but when they distribute badly the burden of authorized expenditures of governments or because they have bad economic or social effects, usually the unintended consequences of legislative incompetence and ignorance. And some taxes, e.g., the taxes on motor fuels can be justified as a charge to finance the building and maintenance of highways and streets. The same can be said for court fees and similar charges.
The platform calls for reduced rates of the corporate income tax, a value-added tax in lieu of the personal income tax (at least, reduced progressivity of the personal income tax), and eliminating the tax on the foreign income of American corporations by adopting a territorial system of taxation. Only the latter has merit and would be unnecessary if, as suggested below, the corporate income tax were to be abolished and corporate earnings taxed as personal income.
Where in the Constitution is the federal government made responsible for “the care of those who cannot care for themselves” as the platform urges? It is only the federal government’s monopoly of the progressive income and estate taxes that justifies any federal contribution at all to the support of those “who cannot care for themselves”. State tax systems lack progressivity and support for those who “cannot care for themselves” should be based on ability to pay.
Ability to pay may simply require that the richer you are the more you should pay in taxes for general government and subsidies to low income families. We have grown accustomed to the idea that taxes should be progressive but progressivity is justified only as a means to redistribute income and wealth. Utilizing a proportional tax to provide subsidies that are justifiable accords with the notion of distributing the burden according to ability to pay. Admittedly, the more wealthy would pay an increased share if the tax source is progressive. Many conservatives believe in progressive taxation. All that they ask is that the tax satisfy the criterion that at the margin, the benefits gained by redistribution do not exceed the negative effects on the economy.
One possible solution to the federal government’s effective monopoly of income taxes is a constitutional amendment that allocates some percentage, say 50%, of federal income tax revenues to the states. Instead of grants-in-aid from the federal government, the states may make grants to the federal government for programs and projects that benefit the states. There is no reason that we can see for the states to be dependent on federal government largesse for worthy state programs. Sharing the revenues of the federal income tax would appear to be the solution. State income taxes would be eliminated.
The Republican platform calls for the reduction of expenditures by “reforming” Medicare “the largest driver of future debt”, wind down Fannie Mae and Freddie Mac, (too late!) because “their implicit government guarantee allowed them to avoid market discipline”. On the other hand, it states that the “federal government has a role in housing by enforcing non-discrimination laws and assisting low-income families and the elderly with safe and adequate shelter, especially through the use of housing vouchers”. And oddly, “A comprehensive policy should address the demand for apartment and multi-family housing. Any assistance should be subject to stringent oversight to ensure that funds are spent wisely.” The Democrats, even the leftist ones would agree wholeheartedly. But what gives the federal government any authority over housing and fairness. Fairness, maybe by the 14th Amendment?
Other than the above, the platform makes no mention of federal programs which ought to be reduced or eliminated. We can mention some. The federal government has no business in urban planning, urban transportation, and public housing. The cities are a responsibility of the states. If the states wish to engage in or support urban planning and public housing, they are constitutionally able to do so but the constitution does not empower the federal government to do so. The Department of Urban Housing and Development should be abolished.
The federal government has no constitutional authority to support public education, certainly not to regulate the public schools which are the province of the state. The federal Department of Education should be abolished. The federal program to make loans to college students has been worse than useless. It not only is impoverishing millions of students but most of the loans will never be repaid. It has succeeded in enabling colleges and universities to expand their bureaucracies, raise tuition, and increase faculty salaries. Financing education to create scientific, engineering, and vocational skills is desirable but should be left to the states.
The federal government in response to the allegation that man-made global warming is causing the planet to overheat has spent billions on foolish incentives to reduce carbon emissions. More and more scientists are taking issue with the notion that man-made emissions are the principal cause of climate change. The federal government’s involvement is like Stalin’s attempt to declare what scientists should profess. The billions spent during the past three decades on environmental concerns fail to meet the requirement that government expenditures can only be justified when the benefits equal to or exceed costs. None of the federal government’s expenditures during the past few decades meet this criterion.
It is hard to see how expenditures would be reduced by a policy to correct “crumbling water systems, aging dams, and overwhelmed wastewater infrastructure”. When did drinking water and waste disposal become a federal responsibility? Not under the federal Constitution.
The platform also calls for reduced taxes on capital gains. Capital gains are not income at all unless they are consumed. Capital that is sold and reinvested within a short period of time is not income at all. A capital gain is the present value of an unexpected increase in the value of an income-producing asset. Unrealized (unsold) capital gains are not income. Most economists are similarly confused about when capital gains are income. Because they represent the value of a future stream of income, they are income when as and if they are consumed. That should be the position of the Republican Party. Realized gains should be taxed as ordinary income unless they are reinvested within a short period of time, perhaps three months.
The platform recommends that the rates of corporate income taxes should be reduced. The corporate income tax should be abolished and corporate earnings should be taxed to shareholders as their personal income just as partners are taxed. Corporations are the same as partnerships are, especially now when most states permit partnerships to be limited liability companies.
Republicans often talk about doing away with local property taxes. Economists know that the real estate tax is the only tax local governments can levy that is progressive in its incidence. The burden falls almost entirely on the landlord in the form of reduced land values, making access to real estate ownership less expensive for persons and businesses. If there were no real estate taxes, real estate prices would skyrocket. Moreover, taxes on commercial and industrial property taxes make the real estate tax progressive as do homestead exemptions. From an economic point of view, the real estate tax is an ideal tax for local governments.
The Republican views on taxes and expenditures are for the most part bad economics and bad politics. They appear to endorse the unconstitutional increase in the powers of the federal government vis-a-vis the states. A conservative party should urge the opposite, a return of power to the states. There is no reason why conservatives should entertain such uneconomic and unconstitutional views of taxes and expenditures.
Comment by M, 7/26/2014:
Sam Francis gets credit for popularizing the idea that the Republican party is the Stupid Party.
"there two parties in Washington — the stupid party and the evil party. Every once in a while the stupid party and the evil party get together and do something that is both stupid and evil. In Washington, that is called bipartisanship"
The Democratic party doesn't get all the credit they've earned for being the Evil Party.
(Note) TINA (There Is No Alternative) Which political party is going to enact any part/parcel of the agenda you have outlined?
Response to this comment by Raymond Richman, 7/26/2014:
Response to this comment by Raymond Richman, 7/26/2014:
Real Estate Taxation
Journal of Economic Literature:
Atlantic Economic Journal: