Atlas Shrugged: The Mocking

Friday, April 15, 2011

Flashback Megan: Tax Time

Megan McArdle's output has been skimpy lately so let's visit Mr. Peabody's Wayback Machine once again, as "Jane Galt" tells us looters and moochers that paying for the benefits society provides is grossly unfair.

November 24, 2002
From the desk of Jane Galt:

The Jane Galt Tax Plan

[by "Jane Galt," a name that in no way indicates a love of Ayn Rand and her morally, socially, financially superior imaginary characters]

Fritz Schrank asks how we should simplify taxes. Well, here's the Jane Galt version, guaranteed to please no one but its author:

1) Get rid of all our poverty programs, except those aimed at the disabled, and temporary unemployment assistance, and institute the negative income tax. That is to say, the system should be continuously progressive, from a steep negative rate of up to 100% on very low earners, gradually declining until it zeroes out around $28,000 a year, and then rising gradually until it maxes out around 35% on the top brackets.

2) Eliminate FICA and pay for Social Security and Medicare out of general revenue. It's time to stop pretending it's a pension system, when there are no assets in the "trust fund"

3) Eliminate the corporate income tax

4) Eliminate the special treatment for capital gains. All income should be taxed at the same level, regardless of its source.

5) Eliminate all deductions. Period, end of statement. No mortgate, student, child, etc. All causes are equally worthy in the eyes of the person who possesses the deduction; it is a waste of our time as a nation to sit around arguing about who deserves what.

6) Just say no to the Value Added Tax. In theory, it's a good tax. In practice, because it is extremely hard to tell what proportion of the price of anything represents the tax, it removes the good and natural pressure upon tax rates.

7) Get rid of the estate tax, and tax the capital gains on whatever is sold.

So why these particular features?

Well, the negative income tax does two things: encourages work by removing the disincentives created by potential loss of benefits; and means that the entire country, poorest to richest, faces a marginal tax increase if they want more spending: the poor have to give back some of their rebate, while the rich have to pay higher rates. For many on the left, that may of course be a bug, not a feature, as it forces the electorate to think much harder about whether or not they want new spending.

The arguments between conservatives and liberals often go like this:

C: The rich pay all the taxes
L: That's not true -- what about FICA?

Both have points. But the central issue that the conservatives are trying to get at is that the majority of the electorate does not face a marginal tax increase when they agitate for new spending. FICA may indeed be regressive, but its rates are unaffected by the level of spending in government. So a majority is prone to agitate for higher taxes, because they will not be paying those taxes.

I don't think it's a healthy situation for the electorate when a large majority is voting for spending that costs them nothing. To the minds of someone who pays no income tax, there's no cost/benefit analysis to be made; they're getting stuff for free. Even something of trivial benefit to them is thus better than not raising taxes. So we end up spending money on a lot of crap, because most of the voters don't care -- it's not their money.

On the other hand, liberals have a point about fairness. It isn't fair to say that some guy who brings home $20K should pay the same quarter of his income as Warren Buffett. The decrease in Joe Schmoe's standard of living represented by that 25% is much greater than the decrease in Warren Buffett's SOL from taking a quarter of his loot.

A negative income tax increases fairness, removes perverse incentives from the current benefit system, and makes sure that everyone has to think about whether they really want that new spending they're voting for -- enough to give up some of their cash.

Killing FICA increases fairness while removing some of the obstacles to reform by eliminating the fiction of an insurance program.

Eliminating the corporate income tax while equalizing treatment between capital gains does a number of things. It mitigates the current bias towards (tax deductible) debt financing. It ends all the ridiculous distortionary crap that corporations do to get around taxes. It ends the bias towards retained earnings that helped produce such interesting results in the stock market. It takes away a large chunk of the ability of the rich to avoid taxes by deferring their income in capital gains. It ends the tax preference for stock options that helped make the start of the new millenium so lively. Under this plan, income is income is income, no matter where it comes from. Thus we can stop the multi-billion dollar industry in shifting income from tax-disadvantaged to tax-advantaged forms.

If you just end the corporate tax without changing capital gains, you keep much of the distortion and shelter for the rich. If you eliminate special capital gains treatment without eliminating the corporate tax, you bias the economy away from investment, because now income is taxed at a high level twice -- once when its made by the company, and a second time when its distributed to the company's owners. This way, we tax it once, when it hits a real person.

We eliminate deductions for two reasons. First of all, they're distortionary. If it makes economic sense for adults to go to school, they will go to school. Giving a tax credit for it just encourages marginal activity that wouldn't pay for itself without a subsidy. Try thinking of it not as a tax credit, but as you giving someone else money to follow their dream of learning Old Church Slavonic, and you see what I mean.

Second of all, deductions are the way that the rich make sure that they pay a lot less taxes than the upper middle class. There is a reason that Barbra Streisand thinks that income taxes should be raised; she isn't going to pay much more tax. Most of her money is in assets, earning more money. It's the guy who owns the gas station down the street who's going to get it in the teeth. If we want to tax the rich, let's tax them, not give umpteen zillion deductions so they have the same marginal rate as your average bike messenger.

That's fine, I hear you say, but why all the deductions? Why not just the bad ones?

Because, as we've found since Reagan's simplification, there's no such thing as just one deduction. If you want the mortgage tax credit, you're going to need to give someone else the land-use abatement, and then there's the guy with his Urban Empowerment Zone Qualified Small Business, and next thing you know, we haven't gotten anywhere. The only way to get a clean code is to get rid of all of them. This won't be fun for many people. Housing prices will drop, for starters. On the other hand, so will tax rates. And come on -- why should an apartment renter be paying more taxes so you can frolic in the greenery?

Why get rid of the estate tax? Because the revenues raised are trivial, and people spend an enormous amount of time and money structuring their estates to get around them. Again, a disproportionate share of the tax is paid not by the super rich, but by the poor schmucks with one or two big assets they can't structure to get around the tax. On the other hand, when it's sold the inheritors should pay all the capital gains -- if you get rid of the estate tax, you should get rid of the stepped-up basis as well.

So that's Jane's plan. As you can see, it would be efficient, fair, and has absolutely no chance of ever getting passed unless they make me Dictator for the Decade.

Sigh. I could solve so many problems, if only people would let me tell them what to do. But no, they insist on mucking it up by deciding for themselves.

Tip of the hat to TBogg, who reminds us that Miss Galt has a slight problem with numbers.


Anonymous said...

The whole thing is such gobbledygook I can't stand it. What "general revenues" will cover SS if FICA is demolished? Where, exactly, does she think "revenue" comes from?

Plus, I love the notion that Barbara Streisand doesn't have any taxable income. It may be low in proportion to her other assets--her catalog etc... but she actually does earn money directly.


Susan of Texas said...

I guess any money that is collected then loaned out doesn't really exist. (We must tell the banks at once.) McArdle keeps saying that the SS fund is imaginary because the US might just decide to default on its loans.

Lurking Canadian said...

I wonder where her "continuously progressive" tax rates max out? If we assume she's mapping linearly from -100% at 0, through 0% at 28K, and the upper bracket rate is 35%, then the upper bracket starts at...$37800 and is clipped from there to infinity. Yeah, that sounds fair, Megs.

And notice the suffering of the "poor guy" who only has one or two assets subject to the estate tax that he's unable to hide. In order to be subject to the estate tax, that means he has one or two assets each worth small integer multiples of one million dollars. Poor schlub.

Kathy said...

I tried to read her plan, but it's really stupid gibberish.

Reminds me of a dumb-as-dirt coworker from back in the 70's, who thought he was brilliant, and backed me into a corner of the employe lunch room... to explain Relativity to me. As a "Hard" Science Fiction reader, I already had a fairly good layman's understanding of the basics of E=mc2, and his explanation was- well imagine ArgleBargle explaining the subject. With bad breath, to boot.

Anonymous said...

2) Eliminate FICA and pay for Social Security and Medicare out of general revenue. It's time to stop pretending it's a pension system, when there are no assets in the "trust fund"

WTF? I'm sure all those pension systems, banks, foreign gov'ts etc. will be glad to know that U.S. Treasury Bills are not actual "assets."

I used to wonder how she kept her job at The Atlantic. Now I wonder how she got hired in the first place.


fish said...

2) Eliminate FICA and pay for Social Security and Medicare out of general revenue. It's time to stop pretending it's a pension system, when there are no assets in the "trust fund"

Actually this is one of my pet peeves. The gov converts the taxes to tbills then immediately takes out loans on those bills (i.e. spends the money) and folds it into the budget. They are paying SS benefits with current tax revenue. So just fold FICA into our taxes and stop pretending the tbills have any significance other than a place holder for future tax revenue.
This is not an endorsement for eliminating SS, just eliminating the accounting game.

Blaine - Moderator said...

Couldn't agree more. Eliminating the Corporate Income Tax at both the Federal as well as the State level is the easiest, quickest and cheapest way to:
- Create millions of jobs
- Raise wages
- Lower prices for goods and services
- Increase US stock prices by 25-40%
- Assist our nation's State/Muni underfunded pension issue
- Fix US residential real estate values
- Re-allocate top minds away from tax avoidance jobs to something productive or educational

Kathy said...

Blaine - Moderator said...
... Couldn't agree more. Eliminating the Corporate Income Tax at both the Federal as well as the State level is the easiest, quickest and cheapest way to: Ponys for everyone! with Rainbows! and fountains in green parks stretching off to the horizon!!! Ice Cream for everyone!

WHAT a crock.

satch said...

Well... I DID like taxing capital gains at the ordinary income rate, and axing once and for all the notion of a value added tax. And most of Europe seems to get along quite well without a mortgage interest deduction. Eliminating the corporate income tax is ridiculous, especially now, in the wake of "Citizens United". If corporations are now granted the same rights as actual people, then they can freaking well pay for the benefits of living in The Greatest Country In The World(tm).