Economy & Business

For Democrats, Taxes Aren’t about Revenue

President Barack Obama delivers his State of the Union speech, January 28, 2014. (Larry Downing/Reuters)
When politicians fail at the basics of governance, they embrace moral crusades and moral hysterias.

Perhaps the strangest utterance of Barack Obama’s career in public office — a career that was full of utterly bizarre pronunciations of many kinds on many subjects — was his 2008 claim that raising taxes on the wealthy is a moral imperative, even if the tax increase in question ended up reducing overall federal revenue.

Which is to say, Obama argued that it did not matter whether a tax increase hurt the Treasury, so long as it also hurt, at least in theory and on paper, certain wealthy people. That wasn’t a one-off: In his crackpot speech in Osawatomie, Kan., during which he tried to reanimate Teddy Roosevelt’s “new nationalism” cult (this was back before progressives had decided that to use the word “nationalism” in public was akin to shouting “Sieg heil!”), he took a similarly moralizing approach. “Our tax code must reflect our values,” he proclaimed.

Why?

Here is a brief outline of how government under a liberal-democratic regime such as our own is supposed to work: People by nature have certain rights, and these do not come from the state; the American proposition is that we are endowed by our Creator with certain unalienable rights. Government does not give us these rights (life, liberty, and property prominent among them) but rather is an instrument we create to secure those rights. We do not give up our right to liberty or to property to the state — we can’t; that’s what “unalienable” means — but we can delegate some of our power to the state to protect them. Complementing that, we pool some of our resources to procure certain “public goods” such as courts of law and border guards, certain kinds of infrastructure, and the preservation of nature. None of that is free, and so we agree to pay certain taxes in order to secure both our own individual rights and certain shared interests.

Every system of taxation creates serious problems. Cities and school districts tax our houses and other real estate, which means that you never own your own home but are forever obliged in effect to rent it from the government; the federal government and most states tax our income, which means that you do not own the fruits of your own labor but rather are permitted to receive a portion of them at the sufferance of the state; etc. Intellectual careers have been dedicated to attempting to perfect taxation; 19th-century economist Henry George built a following that endures to this idea with his proposal to derive all government revenue from a single tax on the value of unimproved land. There are lots of big ideas — VAT, the so-called Fair Tax, the progressive income tax — but all of them create perverse incentives and unintentional consequences.

There are two ways around that. There is the American libertarian model, which more or less concedes that all tax regimes are destructive and at least partly immoral (say it with me: “Taxation is theft!”) and advocates limited government funded by low taxes. That’s the “necessary evil, but still evil” school of taxation. The leading intellectual competitor to that in the liberal-democratic world is the Scandinavian model, which combines relatively high taxes with generous social services administered by competent, honest, and transparent government, characterized by consensus-driven democratic politics with broad and deep popular buy-in. This is taxation not as transfer but as social insurance, with the state acting to even out the economic ups and downs of people’s lives — you pay high taxes when you’re younger and when you’re making more money to offset the difficulties of being old or sick.

American progressives tend to admire the Scandinavian model, and not without good reason: Countries such as Denmark and Sweden have their troubles, but they are generally quite happy, healthy, well-governed, and economically vibrant. Conservative critics point out that there is more to the story: These are relatively small (Iceland’s population is about that of Wichita, Kan.) and relatively homogeneous countries with egalitarian cultures and institutions that cannot readily be replicated in a large, dynamic, and diverse country such as the United States; they are in many ways more capitalistic and investment-friendly than the United States is, and — American progressives, take note — their generous welfare benefits are funded by taxes on the middle class that are radically higher than anything Democratic politicians in the United States would be willing to countenance. Indeed, American progressives, with a very few intellectually honest exceptions, argue that middle-class Americans are paying taxes that are too high already, and cannot bring themselves to speak honestly about what kind of middle-class tax burden would be necessary to provide Americans with the sort of social-welfare benefits on offer in, say, Sweden.

Of course, there are some moral questions involved in this. Some people think it’s a moral imperative to have a Scandinavian-style welfare state, and some people think it’s a moral imperative to not have one. But the question about taxes is, largely, a technical one, not a moral one. If government is going to spend x, then it is going to need to collect x in taxes — either now, or it can run deficits in the present and collect the same taxes in the future with interest. There isn’t any perfect tax regime, but there are better and worse ones. For example, some taxes — American corporate taxes, for example — can get very, very complicated, and so complying with them in the most efficient way is very, very expensive for taxpayers. General Electric spends a ton of money figuring out how to not pay any more tax than it has to. From the taxpayer’s point of view, if it costs $1 to figure out how to pay $1 of tax, then the tax may as well be $2; but from the tax-collector’s point of view, that’s out of whack: You’re only getting 50 cents on the dollar of your victims’ beloved citizens’ tax expenditures. You’d rather get 99.9 cents on the dollar of tax pain inflicted — your bosses have to run for reelection, after all.

Taxes can also distort individuals’ and businesses’ economic activity. When Dwight Eisenhower got a $1 million book advance, he figured out a way to take that payment as a capital gain rather than as ordinary income, which is taxed at a much higher rate. Those Wall Street executives and Fortune 500 CEOs who are so intensely hated by people who couldn’t explain to you what they actually do often have their compensation structured in such a way as to minimize the tax owed on it. (Progressives once argued that giving top executives stock in lieu of cash was a good way to make sure that CEOs’ incentives were better aligned with those of the shareholders whom they serve; progressives tend to change their minds about these things an awful lot.) A few years back, the big thing was “corporate inversions” in which a U.S.-based company merges with a firm in a lower-tax country (Ireland and the Netherlands were hot destinations) and legally domiciles itself there for tax purposes. You end up with businesses making a lot of decisions that are inefficient from a production point of view but efficient from a tax point of view. That’s pretty much the definition of a bad tax system: when the tax code leaves businesses better off making what would otherwise be bad business decisions.

So, ideally, you want a tax system with low transaction costs (meaning a low cost of compliance) and one that doesn’t distort a lot of economic activity. You want to get enough money to fund your government programs with as little disruption to life as possible. It’s not obvious how to go about doing that, and often our conversations about taxes are really obscuring more fundamental conversations about the things our taxes fund. We disagree about a great many things, and the best way forward is not always self-evident.

That’s the kind of conversation you have when you have a normal liberal democracy with a functioning civic culture and a political discourse conducted by more or less normal adults. We have Senator Crazypants and Senator Crazierpants.

Senator Elizabeth Warren (Democrat, Radcliffe Quad) and Senator Bernie Sanders (Socialist, Further) both want to be the Democratic party’s presidential nominee in 2020. It’s hard to blame them — it’s an excellent grift, and these are grifters nonpareil. (If you think Senator Sanders’s rape-porn columns were embarrassing, try Senator Warren’s Ultimate Lifetime Money Plan, from back in her days as a conservative-ish Lou Dobbs economic populist.) Sure, Senator Warren is the national hall monitor and Senator Sanders is one sandwich board shy of lecturing lampposts about Lyndon LaRouche, but they think Donald Trump is going to be easy pickin’s. (The 2020 election will be, among other things, a dynamic illustration of the principle that you cannot reason a man out of a belief he was not reasoned into.) But you can’t take a swing at the big orange piñata until you win the primary, and the Democrats are huffing out of the same brown paper bag as the Republicans, which means they’re in the market for crazy. And so Senator Warren and Senator Sanders are trading paint at high speed in the Bats**t 500.

Senator Warren has proposed a 2 percent wealth tax on certain affluent Americans — not a tax on their incomes, but a tax on their savings. Senator Sanders — metaphorically banging a shoe on the podium in his soul while shouting “We will bury you!” — multiplied by four, suggesting an 8 percent tax on savings. There are other countries that have wealth taxes (usually more broadly applied than Senator Sanders or Senator Warren proposes; again, Democrats are very dedicated to the proposition that the American middle class should be exempted from paying very much for the welfare system of which it is the primary beneficiary), but very few of them even reach 1 percent, much less 8 percent: Norway’s wealth tax is less than 1 percent, and Switzerland’s begins at 13 one-hundredths of 1 percent. Austria, Denmark, Sweden, and Germany, among others, once had wealth taxes but eliminated them because — this part should matter — they are usually really, really bad policy.

Remember, though, that Barack Obama was all in favor of bad tax policy — if it hurt the right people. But some rich people are more evil than others. Democrats greeted the grievously misnamed Affordable Care Act as the product of something just short of divine intervention — but they have consistently refused to implement the taxes in the bill that were intended to help pay for it. Senator Warren, you may recall, bitterly opposed the ACA’s tax on medical devices, a lot of which just happen to be sold by companies headquartered within creeping distance of the Harvard Law School and Senator Warren’s multimillion-dollar Cambridge home. Everybody knew that was how it was going to turn out. All of the Vox types insisting that the ACA would lower the deficit were dishonestly counting taxes and other measures they knew were never going to be implemented; and it wasn’t just National Review making that argument at the time — if the Congressional Budget Office had rolled its eyes any harder at the Obama administration’s forecasts, Douglas Elmendorf would have been staring at his own prefrontal cortex. Everybody knew that was horsepucky, and everybody knows this wealth-tax talk is horsepucky, too — it’s rube bait for the Iowa caucuses.

But when it comes to shameless crazy, Senator Sanders is always ready to throw down. Not satisfied with a nonsensical wealth tax that is never going to be enacted or implemented, he has now unveiled a nonsensical inequality tax that is never going to be enacted or implemented. The proposal — which is economically insane and probably illegal — would impose a punitive tax on companies unless they adhered to certain ratio of executive pay to that of the average worker. Of course it’s dumb and destructive — that’s the point.

When politicians fail at the basics of governance — and ours have failed and are failing — they embrace moral crusades and moral hysterias. That’s why New York City is proposing to put people in jail for using the perfectly accurate English words “illegal alien” to describe aliens whose presence in these United States is illegal — while the trains are failing, the schools continue to fail, the garbage piles up, and the police department continues its long history of acting as an organized-crime syndicate. Etc. One of the reasons you have a more libertarian view in the United States and more support for the welfare state in Sweden is that the Swedes can look at their government and say, “Oj, my taxes are higher than the Norralaån in springtime, but at least I get something for all that money.” People in New Jersey? Not really. We’ve seen veterans dying of preventable causes and pointy-headed little bureaucrats lying about it, and nice progressives getting very, very upset about that — and then saying what we really need is higher taxes on the rich so that we can bring the same model of care to everybody else in the country and make it mandatory.

“Excellent care at low cost,” Paul Krugman wrote of the VA system. Hence the relative libertarianism.

Punitive taxes aren’t about the taxes — they’re about the punishment. That taxation should have been converted from a technical question into a moral crusade speaks to the basic failure of the progressive enterprise in the United States and to the deficiency of American political discourse. Moral hysterias are always a distraction from problems that are, if seemingly intractable, much more ordinary. The specific contradiction in this case is the progressive demand for a Scandinavian welfare state at no cost to anybody they care about, which ends up being a very difficult equation to balance, probably an impossible one. And when the numbers don’t work, there’s always cheap moralistic histrionics.

That kind of hysteria isn’t worth much, but it doesn’t cost much, either.

Editor’s note: This article has been updated since its initial posting.

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