By Kevin
D. Williamson
Monday,
July 17, 2023
We
conservatives like to talk (maybe a little too much) about American exceptionalism,
but spare a kind thought, dear patriot, for American weirdness.
The
United States of America are just what the name says: a union of states, each
with its own powers, interests, and idiosyncrasies. It has been that way from
the beginning, though the metastasis of the federal government (an unhappy
accompaniment of progressive ideology and its so-called rationalism) gradually
has given the country a more unitary and less federal character. The original
union of states already was large, diverse, and unwieldy, and it has not grown
any less so in the years since the revolution. Much of our governmental
weirdness is rooted in accommodating that diversity. The biggest
politico-economic fault running through our national bedrock was slavery,
which, thank God, has been done away with. But many of the big social and
cultural divides that complicated national life in the founding era are very
much with us: the rural-urban divide, the distinctness and relative poverty of
the South, the enduring cussedness of New England, etc. Free trade, to take one
example, remains a divisive national issue today for the same reason it was in
the 18th century: Its costs and benefits are not evenly distributed, and the
economic character of our states and communities is different in different
places. Maine’s biggest foreign trade relationship is with Canada (fish and
crustaceans) while Nevada’s biggest trade relationship is with Switzerland
(precious metals), and the gold business isn’t very much like the lobster
business.
Federalism
was a big part of how we tried to deal with the challenges inherent in our
national complexity and diversity. Some issues are inescapably national, or at
least interstate, in character: international relations, including military
alliances and international trade; immigration; relationships and controversies
among the states. But many of the issues that are today treated as national
controversies were issues for the states to handle in the 18th and 19th
centuries. For example, the idea that the First Amendment restricts a state
government’s relationship with religious organizations would have been big news
to the citizens across much of our new republic, given that they lived in
states that had actual established churches (i.e. churches with official status
supported by the state). Only the federal government was prohibited from
creating an established church. Other peculiar features of our national
political life, such as the Electoral College or the fact that Wyoming (pop.
581,000) gets exactly as many senators as California (pop. 39 million), also
are intended to protect the particular interests of the states, for instance by
ensuring that the smaller, less populous states are not powerless against the
larger, more populous ones.
Which
brings us around to “apportionment.” Stay with me for just a second.
One of
the little ironies of American history is that one of the Supreme Court
opinions that did the most to ratify the shift of power away from the states
and toward Washington is also the source of the famous proverb, “The power to
tax involves the power to destroy.” (That case, McCulloch v. Maryland,
stopped Maryland’s attempt to hinder the operations of the Second Bank of the
United States by taxing its notes. That was Maryland in its Jacksonian era.)
The federal taxation power is very carefully defined—and limited—in the
Constitution, to such an extent that the 16th constitutional amendment was
required to permit Washington to impose a national income tax on the country.
The Constitution distinguishes between “direct” taxes, meaning internal taxes,
and other kinds of levies, which, at the time the Constitution was written,
mostly meant tariffs on imported goods.
Direct
taxes, according to the Constitution, must be “apportioned” among the states,
meaning that they have to be roughly the same on a per-capita basis in every
state. The revolutionary slogan, “No taxation without representation!” can be
heard in echo in the language of Article 1, Section 2, which explicitly
connects representation and tax apportionment: “Representatives and direct
Taxes shall be apportioned among the several States which may be included
within this Union.”
Under
the Articles of Confederation, our original national charter, the federal
government had no power to levy taxes. (That is one reason midcentury libertarian radicals such
as Murray Rothbard advocated, quixotically, a return to the Articles.) When the federal
government needed money, it “requisitioned” it, meaning that it sent a bill to
the states requesting that they pay a sum of $x/capita, the burden of
the requisition falling evenly on the several states according to their
populations. That didn’t work very well. One of the reasons the framers
scrapped the Articles of Confederation and adopted the Constitution in its
place was to empower the federal government to collect taxes. But they did
not—and would not have been permitted to—give the federal
government an unlimited power to tax. Apportionment was a compromise between
the federalist empire-builders and the anti-federalist spirit that animated
politics in much of the country far from the urban commercial centers.
Because
an income tax is a direct tax in the constitutional sense, and
because such a tax is impossible to apportion among the states on a per capita
basis, the 16th Amendment was passed, reading: “The Congress shall have power
to lay and collect taxes on incomes, from whatever source derived, without
apportionment among the several States, and without regard to any census or
enumeration.” The federal government needs money to do things, though one need
not be an anarcho-capitalist radical to appreciate that the federal income tax
has not been an entirely unmixed blessing. But say this much
for it: It isn’t a wealth tax.
Not yet.
My colleagues at the Competitive
Enterprise Institute (where
I am a writer in residence) are taking the lead in what will
be, almost certainly, the most significant case the Supreme Court hears in its
next term: Moore v. United States. (Do not confuse it with the
surveillance case of the same name.) Like many such cases, this one really involves, at heart, very little
more than the question of whether the Constitution says what it actually says
or whether the government can, citing needful exigencies, simply pretend that
the Constitution says whatever the powers that be in Washington decide it needs
to say on any given day.
Charles
and Kathleen Moore invested in a social enterprise in India, KisanKraft Machine
Tools Private Limited, which helps Indian farmers in poor and underdeveloped
areas improve their businesses—and their lives—by acquiring more modern
equipment. KisanKraft now employs hundreds of people in India and has helped a
great many marginal farmers—and their families and communities—improve their
economic situations by means of their own work and enterprise, not as clients
of some political patron or as dependents on some charitable program. (The next
time someone tells you free-market economics is for people who care only about
themselves … ) KisanKraft is one of those businesses that exists to make a
difference rather than a profit, and, for that reason, it reinvests all of its
earnings into the business itself. The Moores have never received a penny of
income from their investment in the firm, never expected to, and, barring some
unforeseeable development, never will.
But,
thanks to the special kind of imbecility that can be produced only by the
intellectual fusion of Donald Trump with Elizabeth Warren, the Moores have been
given a tax bill not for any income they have realized from their investment—of
which there is $0.00—but for imaginary income. KisanKraft could
have paid out dividends to its investors, who would then have investment income
to pay taxes on. But KisanKraft did not do that. Donald Trump, who
has the resume of a villain from an unpublished Ayn Rand novel—second-rater,
inherited money, serial business failure, corrupt, seething with hatred for
people who succeed in the businesses he failed at—has spent years railing at
American investors and businesses with the unpatriotic gall to invest in
overseas businesses (that are not golf courses), and in 2017 congressional
Republicans, caught up in that unsavory nationalist-populist moment, produced
the grievously misnamed Tax Cuts and Jobs Act, which imposed a “one time”
(“It’s only this once, we promise!”) tax on unrealized overseas investment
income, simply “deeming” profits to have been realized and repatriated for tax
purposes. It was one of the dumbest policy ideas of a remarkably dumb era. Of
course, it was supposed to wring money out of the scheming shifty corporate
“fat cats” who populate the fever dreams of well-heeled Washington
populists.
Of
course, it landed on people like the Moores.
If you
own stocks, an IRA, or a house, then you are familiar with the fact that the
valuations of such assets will from time to time go up and—alas!—down. If your
house is worth $100,000 more today than it was 10 years ago, you have not
actually made $100,000. You may make $100,000, if your house
is still worth $100,000 more than you paid for it when you sell it. If you have
a nice nest egg for your retirement, you can drive yourself crazy checking in
on your account, noting that you “made” $10,000 one day and “lost” $10,000 the
next. Of course, you don’t actually make any money until you
sell the asset and realize the gain, just as you don’t actually lose any
money unless you sell the asset and realize the loss. When a firm reinvests its
revenue in the business rather than paying money out as dividends, that will,
in theory, increase the value of the business, thereby increasing the wealth of
the shareholders who own it. But that is wealth, not income—and
it is not as though there is some linear relationship between reinvested
business income and the value of the business.
And it
is not as though your house value or your IRA moves only in one direction: up.
India has a complicated business environment, and the Moores could lose every
penny they have invested in KisanKraft without ever collecting a single lonely
rupee in actual income.
What the
2017 Tax Cuts and Jobs Act did was clear the way for the wealth tax Sen.
Elizabeth Warren and other multimillionaire class warriors wish to impose on
Americans who are a little wealthier than they are. (Speaking of American
weirdness, how weird is it that our class-war politics mostly pits millionaires
and billionaires against other millionaires and billionaires?
It is not as though the masses are crying out, with one voice, for a mandatory
corporate repatriation tax—what the plebs want is to be able to afford a
house.) If the federal government can treat unrealized income
as though it were real income, then the constitutional limits
on the federal government’s taxation powers—which were put in place for a
reason—will have been completely undermined.
Treating
unrealized gains as though they were real income is not a tax on income at
all—it is a tax on wealth. The 16th Amendment does not authorize a tax on
wealth; and, as a practical matter, the Constitution’s apportionment rule makes
a federal wealth tax impossible.
Wealth
taxes aren’t necessarily god-awful: You probably pay a local wealth tax on your
house, and some reasonably well-governed countries (such as Switzerland and
Norway) have modest wealth taxes at the national level, though some, including
such progressive beaux idéals as Denmark and Sweden,
have abandoned wealth taxes, finding them impractical because of the relatively
high cost of administration and the relatively low production of revenue. But
the question going to the Supreme Court isn’t whether such a tax would be a
good idea as policy: The question is whether a wealth tax disguised as a tax
on hypothetical income is constitutional. It is very difficult
to see how it is, the 9th Circuit’s creative nonsense about “disregarding the
corporate form to facilitate taxation” notwithstanding. Income is
money that comes in—hence the word. Unrealized appreciation of an
ownership stake is an asset, not income.
An
asset may produce income—or, as a former newspaper editor with
some Journal-Register Co. stock-option paperwork filed away in a folder labeled
“You Are Not as Smart as You Think You Are” can tell you, an asset may not produce
income. As the commercials say, investing involves risk.
KisanKraft could have
paid the Moores a dividend. But it didn’t. The 16th Amendment could have
legalized wealth taxes. But it didn’t. The people who passed the 16th
Amendment could have repealed the Constitution’s apportionment
rule. But they didn’t. The law could say something else rather
than what it says.
But it
doesn’t.
It’s a
weird country, sure. But I prefer it this way. And it works.
Economics
for English Majors
If you
want to imagine the kind of chaos I’ve written about above, consider the fact
that Amazon’s shareholders saw an on-paper gain of $1 trillion between March of
2020 and July of 2021—a gain that was lost by December of 2022. What do you do
when you’ve taxed shareholders on $1 trillion in gains that turned out to be
transitory? “No backsies”?
Sen.
Warren and other like-minded class warriors occasionally—very
occasionally—hesitate when it comes to business taxes, worried that they will
create disincentives to invest in the United States and incentives to offshore.
Well—imagine that!
I will
here repeat my advice to policymakers worried about overseas tax havens: Be the
tax haven! Low taxes don’t mean Mad Max stuff, as my
progressive friends sometimes insist: The United States has a relatively high
corporate income tax rate, higher than the world average and higher than
Scandinavian welfare states such as Denmark. When it comes to capital gains,
prosperous Switzerland gets by with no national tax on them at all. Spend a
little time in Copenhagen or Zurich and tell me if that looks like dystopia to
you.
Being a
tax haven works out pretty well for places such as the Cayman Islands. Imagine
having a very attractive tax environment while also having the most productive,
dynamic, and innovative economy in the world, the world’s best system of higher
education, the world’s most sophisticated venture capital industry (assuming we
don’t murder it), and the largest national economy on earth.
Be the
tax haven.
Words
About Words
Words
that don’t mean what the authors sometimes think they mean: bombastic and semiautomatic.
From Salon: “After publicly boycotting Bud
Light, Kid Rock is quietly serving the beer at his Nashville bar: This is
another example of conservative politicians walking back on bombastic public
boycotts.” I am pretty sure that Kid Rock is not a “conservative politician,”
or a politician of any kind. But, never mind that for the moment: Bombastic
does not mean “overly emotional” or “excited” or anything like that: It refers
to language that is artificially refined or formal, made high-sounding in an
attempt to sound smart, “high-sounding but with little meaning,” as the Oxford
people put it. Kid Rock is many things—“high-sounding” is not one of them.
Ask Salon:
“F**k Bud Light, f**k Anheuser-Busch,” Rock said in a viral video before shooting a semi-automatic
weapon at cases of the beer.
As you
can tell from the video, Kid Rock is not firing a semiautomatic weapon—he is
firing a fully automatic weapon, a machine gun. Gun control advocates pretty
routinely confuse the two, often in ways that might seem, to a cynical man,
very possibly intentional.
English—how
does it work?
Kid Rock
knows something about how English works. He may not be bombastic, but he is
clever—a lot of high-sounding writers never produce a line as economically
humorous as “roll in the Fleetwood, that’s how I mack.”
(To mack is
to act as a pimp; a Fleetwood is a model of Cadillac;
Fleetwood Mac is . . . all right, you get it.)
And not
to keep picking on the poor nitwits who write for Salon, but
Indiana Jones does not wear a Panama hat, for Pete’s
sake.
Making his way back home, he’s met by the very robbers he tried to
outsmart and although he loses the cross to them, he’s awarded for his gumption
by the head thief (Paul Maxwell), who takes off his Panama hat and puts it on
Indy’s head. Now his “costume” is complete.
(The
error has since been amended without
acknowledgement.)
In Closing
Every
time I see a headline that says the sun is doing something a
little bit weird, I
worry. If you have read my work for a while, then you probably know that one of
my themes is sharks vs. cows: You are a lot—a lot!—more likely to be killed by
a cow, a deer, or a bee than you are to be eaten by a shark, but we worry about
shark attacks, because shark attacks are terrifying at some deep weird
atavistic level. It’s probably an evolutionary thing, which is why lots of
people have phobias about spiders and snakes but not about, say, napalm or
other modern terrors that we haven’t had time to evolve a deep-seated fear of.
But if there is a go-to example of something that is outside of our control,
then surely the activity of the sun is the textbook case. Statistically
unlikely things do happen—1-in-200 million events happen—but it is best not
to use lottery tickets as your
retirement plan, it
is best if you buy health insurance, etc., best to take care of the things that
are within your control. If you had asked me when I was 20 for a breakdown of
what’s in my control vs. out of my control when it comes to the important
things in life, I probably would have said 80/20 in my control. At 50, I think
I’d reverse those proportions. At 80, I guess I’ll be down to 3 or 4 percent.
Part of me wants to believe that this is wisdom, but mostly (80/20?) I
know better than to suspect myself of that.
No comments:
Post a Comment