The Max Tax

By Kevin D. Williamson

Sunday, April 10, 2016

There are several expressions that we hear, without thought and without end, when it comes to the debate about taxes: “fairness,” the related term “fair share,” “national income,” and “loopholes.”

The problem is that none of these things exist.

Our tax discussion should be dominated by relatively straightforward (though by no means simple as an economic question) fiscal questions: How do we raise the revenue needed to meet government spending requirements in a way that is minimally disruptive to the productive economic activity that sustains public and private sectors alike? Instead, we spend a great deal of time talking about moral questions — or, more often, resentments disguised as moral questions. If you are a private citizen, the discussion usually goes like this: “Why am I taxed so much, while that guy I don’t like is taxed so little?” If you are a politician giving this speech to a group of supporters, it is: “Why are you taxed so much, while those guys we don’t like are taxed so little?” Often, this question is phrased in relation to how large a share of the “national income” a certain group gets.

There isn’t any “national income.” There’s what Smith earns and what Jones earns and what Thompson earns, not a big bucket labeled “Income” that gets divided up between Smith, Brown, and Thompson. It is a myth that if the incomes of high-income Americans were lower then the incomes of other Americans would be higher. They probably wouldn’t change at all, but they might be lower, too, assuming that some of them are in the business of providing goods and services to high-income people.

But if we are to indulge the myth of “national income” for the sake of simplifying the discussion, consider that the Americans who are among the top 10 percent of all income-earners in a given year (bear in mind that who is in that top 10 percent changes from year to year) earn about 45 percent of all income earned by Americans. But they pay about 68 percent of all federal income taxes. Which is to say, yes, they earn more money relative to other Americans, but they pay even more disproportionate taxes. And yet we hear, endlessly, from the likes of Hillary Rodham Clinton (who makes $6,000 a minute giving speeches to investment bankers) and Bernie Sanders (a lifelong public ward) that these people do not “pay their fair share,” despite paying taxes that are much more than proportionate to their relative income.

There isn’t any real standard of fairness, which is an inevitably subjective concept. If we are to use that which is measurable as our standard, then we have to rely on proportionality, and, by that criterion, high-income Americans are already paying far more than their fair share, and most of you people won’t even send them a thank-you note.

For shame.

I am a writer, not an econometrician, and one of the purposes of literature is to give us some moral insight into questions that are not strictly speaking matters of deduction or mathematical calculation. That’s why demagogues such as Mrs. Clinton and President Obama always frame every political question as white-hats-vs.-black-hats. Herself protests that the top 25 hedge-fund managers (her son-in-law is a hedge-fund manager) out-earn all of the nation’s kindergarten teachers combined. This is true, though only trivially true: Hedge-fund managers wouldn’t earn more if kindergarten teachers earned less, or vice versa. There’s no relationship there. But it’s a memorable little tidbit.

But if we are to have a narrative ethics (apologies, Adam Zachary Newton) of taxation, surely it applies to both sides of the question. President Obama likes to proclaim that, at a certain point, you’ve earned enough money. Is it not also the case that, at a certain point, you’ve paid enough tax?

Earlier, I suggested a $1 million per capita ceiling on federal taxes in any given year. I don’t really care how much money you’ve made, how rich you are, how meretricious your body of work (greetings, Gwyneth Paltrow!), a million bucks a year is enough. After that, you’ve done your duty. A million bucks is a nice, round, easily remembered number, but I haven’t arrived at it entirely arbitrarily. For $1 million a year, your taxes could buy a poor family the median American house ($188,900) and a Mercedes E-Class sedan ($52,650) once every quarter, with a few options on the Benz. If your taxes will buy a family a typical American home and a rather nice German sedan once a quarter — you probably pay your taxes quarterly in that bracket — then you are, by God, paying enough.

They’d own those homes free and clear.

Except for the real-estate taxes. The permanent, endless tax most Americans pay on their homes is one of the most pernicious forms of taxation, because that tax means that there is no such thing as a homeowner. If you have a mortgage, the bank owns your house; once you’ve paid off the bank, the taxman owns your house. You are, in effect, a renter, with the state holding a permanent lien on your property. You pay a tax when you buy a house and when you sell a house, and every year you live in that house, too. At some point, you’ve paid enough. I think a cumulative cap of 20 percent of the house’s value is fair. If you’re in a relatively high property-tax state such as Texas (a tradeoff for Austin’s forgoing an income tax), then you likely pay something just under 2 percent of the value of your home in annual property taxes. If you acquire a house in your thirties and live in it for the rest of your life, you’ve probably paid for it at least twice: Once in mortgage payments, again in taxes. Capping the tax at 20 percent wouldn’t be all that disruptive, fiscally: Only a minority of Americans keep their houses for ten years or more.

Capital-gains tax? Ten percent, tops. Why? God Himself demands only 10 percent of our increase, why should Uncle Stupid get 15 percent or 39 percent?

But when Uncle Stupid does get 15 percent, the politicians are scandalized, just as they are scandalized when firms and individuals take advantage of “loopholes” — which is to say, the law as it actually exists — to lower their taxes. The reason long-term capital gains are taxed at a lower rate than ordinary income is that for decades members of both parties in Congress have argued that we should incentivize long-term investments. Congress writes the law, firms comply with the law, and Congress is scandalized. With the leak of the so-called Panama Papers, many of our British and European friends are watching the same circus: There is in almost none of these cases of corporate tax planning anything illegal or even approaching illegal, but the politicians nonetheless pronounce themselves scandalized by the laws that they themselves have written.

If fairness is proportionality, then high-income Americans, along with businesses and investors, are paying too much tax. Given the distribution of benefits, which are heavily weighted toward the broad middle class, Americans in that bracket arguably are paying too little. If to “work hard and play by the rules” is our criterion of good citizenship, as the Democrats are fond of saying, then firms and individuals engaged in minimizing their taxes by working hard and following the rules — to the letter — should be admired rather than abominated.

We can make of taxes a moral issue. But that is going to lead us down some roads that Democrats, and many Republicans, do not really wish to travel.

Perhaps our tax authorities should stick with fiscal questions rather than fairness questions.