Wrong, Wrong, and Wrong about Taxes

by Kevin D. Williamson

I wanted to have something nice to say about this article, “Nine Things the Rich Don’t Want You to Know about Taxes,” because it reiterates a few points that I think are important: that the poor really do pay a lot more in taxes than we often account for in our political discussions, and that our tax code is a fairly horrible, counterproductive mess, a paradise for rent-seekers and influence-buyers.

Unfortunately, it’s a mess from the beginning — a surprisingly thorough mess. I’m not one to be bowled over by credentials, but the author, David Cay Johnston, is identified as a former New York Times reporter, a professor at Syracuse, and a winner of the Pulitzer Prize. I expect a guy with that background to be wrong about everything in the big picture, but I expect him to be careful in the details.

He gets off on the wrong foot:

For three decades we have conducted a massive economic experiment, testing a theory known as supply-side economics. The theory goes like this: Lower tax rates will encourage more investment, which in turn will mean more jobs and greater prosperity — so much so that tax revenues will go up, despite lower rates. The late Milton Friedman, the libertarian economist who wanted to shut down public parks because he considered them socialism, promoted this strategy. Ronald Reagan embraced Friedman’s ideas and made them into policy when he was elected president in 1980.

How many factual errors does that paragraph contain? Let’s sum them up: 1. Supply-side economics is not synonymous with the Laffer Curve, the theory that tax cuts produce higher revenue (which they usually don’t.) 2. Milton Friedman was not a supply-sider and was skeptical of their tax claims, famously proclaiming that if you cut taxes and revenue goes up, then you haven’t cut them enough. 3. Milton Friedman did not believe in privatizing city parks or consider them socialism; the “neighborhood effect,” he argued, in many cases created a legitimate public good that could be publicly provided. (This earned him the wrath of Murray Rothbard and other to-the-wall libertarians.) No raving anti-socialist, Friedman famously supported government funding of education — he just wanted it done through vouchers, in a marketplace with consumer choice. 4. Milton Friedman did not “support this strategy” on taxes; he expected tax cuts to produce unpopular deficits that would act as a restraint on future spending. (He kind of blew that call, no?) 5. Ronald Reagan did not put many of Milton Friedman’s ideas into practice, unfortunately.

So, the only two facts in that lead that seem to be true are: 1. Milton Friedman was a libertarian economist; 2. Ronald Reagan was president in the 1980s.

Unfortunately, the piece does not get much better from there. The author conflates outcomes in statistical categories with outcomes in actual households (something I’ve had a bit to say about of late). He makes a very big deal out of the fact that capital-gains taxes aren’t paid until the capital gain is realized, oblivious to the fact that you don’t know what the gain is until it is realized, and therefore do not know what the tax is. (He’s mad because a hedge-fund manager who makes $1 billion in on-paper gains this year isn’t taxed immediately; but if that money is still invested, he might very well lose some of it next year. There is no capital gain to tax until the asset is actually sold.)

I dislike tax holidays of the sort offered by the Jobs Creation Act of 2004 (like Milton Friedman, I like my tax cuts permanent), but I doubt very much that the very nice tax break Pfizer enjoyed on its repatriated profits were the reason it began downsizing shortly thereafter. Johnson blames that tax break and says because of it “at least 100,000 jobs were destroyed.” Again, I think it was kind of a dumb tax break, but he does not even attempt to show how it might have destroyed 100,000 jobs. Whatever mechanism he believes to be at work is not obvious. How were 100,000 previously profitable workers rendered unprofitable by lower taxes? (I am not saying it could not happen, but I cannot imagine how.)

Finally, he stacks the math in his estimate of the European welfare states: “A proper comparison would take the 30 percent average tax on American workers and add their out-of-pocket spending on health care, college tuition and fees for services, and compare that with taxes that the average German pays.” But Germans also pay out-of-pocket for health care (their system has co-pays, which were raised by a 2004 health-reform law), university tuition, student  loans, etc., on top of their relatively high taxes. So the proper comparison is American taxes plus American spending on X, Y, and Z vs. German taxes plus German spending on X, Y, and Z. Maybe the numbers still work out in the Germans’ favor. But you will not know until you ask the right question.

Our tax code is full of boneheadedness. Our debate about the tax code is full of boneheadedness, too.

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