The Sovereign Mind

Free thought on politics and real life

The Rhetoric of Tax Policy: A Moderate View

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The rhetoric has heated up recently in the debate over tax policy. Should we tax the rich in order to reduce taxes on the poor (or even write them a check, in some cases)? Or should we cut taxes on the rich? I think it’s a very interesting debate, but I’m disturbed by some extreme comments I’ve heard from supporters of both candidates, and echoed by the candidates themselves.

“The rich can afford to pay more taxes”

True. One simple but reasonable definition of rich might be “someone who can afford more than they need.” In other words, someone is rich if he has excess wealth. Therefore, rich people, by definition, can afford a lot of things, including paying more taxes. However, by that logic we should always increase taxes on the rich, as long as there are rich people to tax. As long as there is a rich person, that person can afford more taxes, so we should tax him more. People who perpetuate this logic don’t intend it, but the logical conclusion of the argument is that there would be no rich people left, because they would have all been taxed to the point where they could not afford more taxes (which, be definition, means they are no longer rich).

“The rich should pay their fair share”

I agree. No one is arguing that anyone should pay more or less than their fair share. But to those who espouse this argument, I ask: How much is their fair share? Obama wants to change the tax highest tax bracket to 39% instead of 36%, as well as increase the capital gains tax. So I ask, Is that their fair share? Can you honestly tell me that if that were the current tax rate, you wouldn’t be arguing for higher taxes on the rich right now? How am I supposed to believe that after Obama implements his tax policy, there won’t be calls for more “fairness” in the tax system? After all, there will still be CEOs that make many times more than their mail-room workers. Are tax increases on the rich always fair, and tax decreases on the rich always unfair?

“Obama’s tax cut is socialism and/or income redistribution”

If any proposed tax policy that favors the poor is considered socialism, then any tax policy that favors the rich should be considered feudalism. Clearly, those are two extremes. Yes, perhaps it could be considered a step toward socialism, in the same way that a step down a mountain can be considered a step toward falling off a cliff. Clearly, if we label any tax policy proposal that cuts taxes to the non-rich at the expense of the rich as “socialism”, we have gone too far.

But many would point to the fact that Obama’s tax cut is really a tax credit which can go to people who don’t even pay taxes, or who pay very little. That is true, but that is really not that exceptional. Many people receive more from the government than they contribute to it, not only in the form of tax credits, but also public services. We would never adopt a system where a person is limited to getting no more benefit from the government than the amount of taxes they pay. That would defeat the purpose of government providing services (for the common good). Imagine if your house caught on fire and the fire department told you they could only fight the fire for a half hour, because you only paid enough taxes for that amount.

What really matters

So let’s get down to what really matters. To me, that means what tax policy is most likely to help our economy recover.

Conservatives argue (in addition to the rhetoric described above) that cutting taxes on the wealthy helps create jobs as rich people have more money to expand businesses and invest in other businesses. Liberals argue (in addition to the rhetoric above), that cutting taxes on the poor and middle class allows them more money to buy goods and services, which also helps grow business. So who’s right? They both are.

The key to both arguments is that money flows. The flaw of so called “class warfare” is that it does not recognize that wealth does not exist in a vacuum. Money is only worth something because it can be transferred, and most money is immediately transferred when it is acquired. When you get paid, you will use that money to spend (transferring to businesses), or save and invest (which again makes that money available to businesses and other individuals). How much money do you have just sitting around in a checking account or your wallet? That is the only real money you hold. The rest of your wealth you’ve either spent or loaned to others.

So wealth flows both from rich to poor and from poor to rich. So both trickle-down and bubble-up are valid economic philosophies. But which one is best for us now? Well, the answer to that question is above my pay grade. You didn’t really think I was going to solve that question in this post, did you? If I could do that… well… I’d be rich.

But one thing I do know: We can debate who to cut taxes on, but raising taxes on anyone during a recession is a bad idea. Obama, to his credit, has said that he will delay raising taxes on the rich until the economy recovers. But it doesn’t seem like a much better idea to raise taxes just as we are recovering. And, since he will not delay his massive tax credit to the poor and middle-class, that will run up the deficit greatly, which somewhat negates his argument that his tax plan is more fiscally responsible.

McCain proposes to cut taxes across the board, with a more modest tax cut to the middle-class than Obama is proposing. This seems more reasonable during a recession. However, my problem with McCain is that he has promised to balance the budget in four years, which seems like wishful thinking. Cutting taxes combined with a slowing economy mean much less revenue for the government, and as much as I like McCain’s commitment to lower government spending, I just don’t think it’s possible to cut that much so fast.

So there’s our choice, rhetoric free. I hope we choose well.

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Written by Mike

October 21, 2008 at 9:35 pm

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