Saturday, February 27, 2010

The Tax Club

Imagine you are a member of a very well-known and distinguished club. At one meeting you sit around the polished table in the club headquarters to discuss the matter of the annual budget. This year the club has taken on a number of expensive projects and is going to run up short on its budget. It is suggested that the deficit should be made up by increasing membership fees.

At this suggestion everyone looks a little uncomfortable. Times are hard. Increasing membership fees would be difficult for everyone. Someone else suggests cutting down on club projects so that their cost will not exceed current membership fees. There is silence at this suggestion, too. The club members are very proud of the projects and service the club performs for the community. It would be hard to drop these.

You are shocked at the next suggestion that is made. Looking at the other club members, one of members points a finger straight at you and says- “Let’s just increase his membership fees to cover the deficit.” He continues talking without looking you in the face. “We all know that he makes plenty. Why not raise his membership fees since he can afford it.”

You breathlessly attempt to sputter a response, but are cut off.

Greedy, they call you. Don’t you want the club to continue in its noble pursuits? If you are unwilling to pay your dues, perhaps you will no longer be permitted to be a member.

The solution is perfect. The club will be able to continue its work. The hard-working members who cannot afford higher membership fees will not have to pay them. The vote passes by a huge majority. Your fellow members look away from you and raise their hands in favor of the new membership fee formula.

This is the story of our federal budget and its proposed tax scheme. Already we operate under a graduated tax scale. Instead of every person paying a set percentage of their income, the government requires a higher percentage of income the more a person earns. Under the current system, the person making $30,000 a year pays 13.6% of their income as federal taxes while the person earning $300,000 a year pays 28% of their income as federal tax. But like the club members looking for additional funding, the President and members of the House and Senate are unwilling to cut programs and are looking for additional federal revenue. Although high earners already pay more than “their share,” they are seen as ideal targets and helpless against a majority vote.

The vote to raise taxes against high earners is referred to these days as “rolling back tax cuts on the wealthy.” In this way politicians infer that they are simply removing an unfair advantage that the wealthy have been enjoying. If the President is to be taken literally and is planning to restore the tax to pre-President Bush levels, he would be raising the income tax on our $300,000 earner from 28% to 32%. But how much he will actually raise them remains to be seen. He has pledged that he will not raise taxes on those earning under $250,000 a year, just on 5% of Americans making over $250,000 a year.

The solution seems perfect. But here is why an additional tax on the wealthy (and why graduated tax plans in general) hurts and will continue to hurt America.

1) It divides Americans against each other. We talk about class warfare- the rich vs. the poor. But consider what can be more divisive to America than elections where Americans vote about whose taxes they are going to increase. It allows a majority of the American electorate to confiscate the property of their fellow Americans. It causes Americans to examine each other with greed. They begin to vote against their wealthy neighbor, not because he has not contributed his share, but because they see that he continues to have resources that can be taken away. This is not liberty and justice for all. It corrupts politics and makes every man an enemy to his neighbor.

2) It discourages production. Consider the $250,000 ceiling that President Obama proposes putting on earnings. He is literally legislating a law of diminishing returns. Just imagine how many people will deliberately work and produce less in order to avoid higher taxes. Imagine the impact in health care, where many doctors are making around $250,000. Will doctors continue to see patients at the end of the year when they are already at their maximum earnings and any more patient visits will bump them into a higher tax bracket? We might consider such an action petty. But is there anything petty about quitting when you realize that each additional drop of sweat loses you thousands of dollars?

3) It assumes “enough” for each person. By setting $250,000 as the tax-at-will income, President Obama is attempting to establish by law how much income is “enough” to earn. Anyone making more than $250,000 is fair game because their income is now considered luxurious. But this “enough” is not the same for every person or circumstance. A $250,000 income might be luxurious for one family, whereas for another it might be a shoestring budget. What happens when medical catastrophes, educational expenses, business failures, or other circumstances make this level of income insufficient for survival? If a family is working overtime to pay off medical debt, should they be taxed at double or triple the rate of other Americans because of their high earnings?

4) It decreases spending power. Many Americans seem to think that money is wasted in the hands of the wealthy. If it is to benefit America, money must be transferred to the hands and programs of the federal government. But little do we consider that money taken from the wealthy is money taken away from purchasing American products, from building American businesses, and from hiring American employees. Money taken from the wealthy is money taken from the American economy. It is money taken away that could have been generously devoted to churches and charities. It is instead whittled away in a shuffle of administrators, middle men, and pork-laden spending bills.

5) It provokes the talented to leave the country. This may seem far-fetched, but consider all of the foreign professionals who have brought their skills to America because of the economic freedom and wealth they can enjoy here. If American professionals were to leave for greener pastures, we might consider them leaving the country unpatriotic. But is it unpatriotic to leave the country that turns cannibal and makes you the meal? What will happen when the high-flying earners realize that they can apply their skills and talents in other countries where they will be taxed less? What will we do without their skills and talents?

6) Most importantly, a graduated tax scale and the President’s proposed tax increases further erode America’s already shaky protection of property rights. We consider our rights inalienable and God-given. We believe that governments should not be allowed to take them away. And yet we have developed a tolerance to our President and legislature deciding how much of our property they can confiscate in a given tax year. What’s worse, we allow them to pick and choose who they will tax and how much they will tax them. How can the right to own property be God-given and remain inalienable if legislatures can confiscate property at will?

The graduated tax scale and the President’s proposed tax raises are the signs of a fading America. They will weaken America- discouraging production and encouraging the wealthy to quit or leave. They divide America- pitting Americans against each other in a mad scrabble for tax votes. Worst of all, they show that the Americans no longer care to fight to protect their neighbor’s property rights. Does a person who works extra hard and extra long deserve to enjoy the fruits of their labors? Is this still the home of the American Dream where with sweat and determination anyone can rise to any height? Not if the majority has anything to say about it.

Rusty Scalpel

3 comments:

Anne said...

Thank you for explaining this through an analogy. It really put it into perspective for me.

Christopher said...

I fully agree and make another suggestion. See my blog post http://latterdaypolitics.blogspot.com/2010/03/tax-returns.html
about how states should play in the role of taxation.

Ludwig Von Mises said...

Here is link of a video that maybe you copied in preparing this post as you echo the message CF&P's very own Dan Mitchell:

http://www.youtube.com/watch?v=XeXPibDuy6M

(Tu Ne Cede Malis)