Thursday, June 30, 2011

To Keep in Mind as "Millionaires and Billionaires" Get Taxed

As the debt ceiling starts to fall in and politicians scramble to make their final points, we urge gentle readers to remember these immutable truths:
  • That effective tax rates (how much tax gets collected as a percentage of GDP) matter more than published marginal tax rates (how much of a particular band of income is officially taxed before credits and deductions).
  • That as tax rates declined over the last generation, tax receipts went up and the effective tax rate remained essentially constant.
  • That the so-called "tax breaks for the rich" enacted a decade ago yielded a more progressive pattern of tax collection, as roughly 50% of Our Republic's citizens now pay no federal income tax while the top percentiles pay the largest share of federal taxes.
  • That the tax on corporate jets proposed by the President would yield revenue equal to some tiny decimal of a percent of the federal deficit.
  • That people with control of wealth inevitably alter their economic decisions to avoid taxes when taxes are high.
  • That taxes on oil companies simply make petroleum products more expensive in the future.
  • That, as Milton Friedman pointed out a generation ago, the fundamental problem is not government debt but government spending: whether the government taxes a dollar or borrows it, by so doing the government decides what will be done with that dollar, and over time, governments tend to make poorer decisions about how to invest money than do private citizens. (Why? Because governments make decisions for political reasons, and citizens who handle their own money care a lot about how it's handled. That is, no one takes better care of your stuff than you.)
So SWNID expects that in the end, our Public Servants will agree to a lot of spending cuts, the elimination of a couple of fiscally insignificant tax deductions or credits, both sides will claim credit for themselves, assign blame to the other, fire up the base by noting the threat that the other side poses, and appeal to the center with fear about the future (Dems) or impatience with the present (GOP).

If only we could agree also that:
  • The real problem is massive malinvestment from the real estate bubble fed by low interest rates and government-sponsored borrowing incentives.
  • The business climate still is awful; hence, cash is sitting around waiting to be invested.
  • Insofar as federal policy can affect the business climate, it could do so positively by phasing narrowly defined tax credits while also gradually lowering tax rates. Effect: decisions would be made on economic merits instead of for tax-avoidance purposes, improving the quality and prudence of investment and lessening the boom and bust that are fed by tax policies that aim at social engineering.
We won't get any decline in business tax rates in return for an end to energy subsidies, for example. And the resulting tax revenue will not make much difference, and not nearly as much as the long-term growth fueled by a less complex, less restrictive tax code.

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