Washington's Constant View - Raise Taxes

Roger Lowenstein, writing in the Washington Post on Sunday, argued for 5 Steps to a Better Tax System) His steps are as follows:
1. End preferential treatment for private equity fund managers.
2. Raise the cap on the payroll tax.
3. Reinstate a meaningful inheritance tax.
4. End unfair deductions. First, the mortgage deduction. ... A similarly unfair deduction, which McCain favors repealing,
involves corporate health-care plans.
5. (best for last): Repeal the Bush cuts in income and capital gains taxes

He starts out this exploration into raising taxes with a speech he wishes some politician would say "My fellow Americans, I have a plan to raise taxes so that the budget will be closer to balance and future Americans won't have to worry about their retirement security." That is a speech only a Washintonian could love.

There are some decent ideas in his proposal but there are also some absolutely awful ones and the awful outweigh the good. First the good (it is a shorter list) - it might be appropriate to look at the carried interest treatment. It might be good to look at restructuring both the health care deduction and the mortgage interest deduction. The evidence (you can go back to President Reagan's 1986 Tax Panel for a start) on both of those provisions is that they are fundamentally distortive.

But then comes the nonsense. Why would you think that perpetuating the Ponzi Scheme of Social Security will improve it. The system is bankrupt, or will be soon, because of the constant desire of politicians to give away other people's money. If Lowenstein were a bit more thoughtful here he would suggest separating Social Security into two pots - the first a welfare transfer which could be financed with something less than the existing tax (which is both on employers and employees). But then a system to offer workers real security using private accounts that would add to their net worth rather than enlarging the pool that politicians can prey on. As other nations have shown, that approach build the national capital pool.

Lowenstein repeats the shibboleths about the inheritance tax "The justification for this tax is that while the country allows -- and encourages -- citizens to accumulate great wealth on Earth, some of that fortune should be redirected to society once they enter the hereafter. The practical argument is also important: Repeal of the estate tax would be a death knell to charitable contributions and to this country's unique network of private foundations." There are a lot of assumption in his quote. Here he suggests in one breath to raise tax rates, thus discouraging the accumulation of wealth, and on the other hand proposes that when people die great fortunes should be redirected. I guess it depends on the definition of great and on who should do the redirecting.

Lowenstein's article also raises an unresolved argument about charitable contributions and the tax code started by Duke's Charles Clotfelter. He argued that there is a direct relationship between giving and tax rates. I believe the relationship is a bit more oblique. The deduction does encourage giving but raising tax rates does not increase charitable donations. For the last year they released a report, Giving USA found that charitable giving increased by all measures (including as a percent of GDP) even at a time when the inheritance tax was being phased out. Thus as inheritance taxes were being decreased giving went up. The Bush Tax Act treatment of inheritance taxes was silly - there should be some modest taxes on estates at very high levels. And the tax policy should be consistent. But Lowenstein goes way too far here.

Finally we come to the raising of rates and eliminating the capital gains preference. Many in Washington claim that the Clinton tax bill proved that raising rates on the wealthy does not harm incentives. An objective review of the effects of the Clinton tax bill which did not account for the stimulative effects of the fall of the Berlin Wall and increased productivity caused by technology (much of which was spurred on by the Reagan tax cuts) is missing a lot. It could be argued that the economy would have grown even further had not the tax bill been passed.

We need to look at the tax system, carefully, but going back to the old time religion of simply raising taxes is not the way to do it.