Tax Reform is Not Redistribution

We are all watching in rapt attention as the Congress of the United States of America tries to respond to the mandate of the 2016 presidential election as it regards tax reform.

Now, I am a huge fan of abolishing the IRS and starting over again.  I am out over $10,000 in CPA fees I'll never get back, to defend an IRS audit that ultimately was dropped by the Government without my having to pay the IRS one stinking cent.  I hold the IRS in the same esteem as I hold the left, or the Legionnaires Disease bug, or the Yankees.

But this is not exactly about the IRS.

The House of Representatives and the Senate have each gotten a bill together that they respectively will be voting on shortly.  Ostensibly they are each about tax reform, particularly the reform of the personal income tax, the abolition of the inheritance tax, and the lowering of the corporate tax rate.

They are not the same, of course, the two bills that will likely be voted on shortly.  The Senate bill is weaker, less reform-minded, sort of like 100 senators felt forced to write a bill and wrote it to do as little as possible.  Given the inertia of the Senate these days, I have to think that was probably it.  The House bill is at least "better."  That it leaves any rate over 25% for anybody is absurd; there is no reason on earth anyone should have to pay over 25% of any dollar he or she makes to the Federal government.

Either way, it is the rhetoric, both in Congress and in the press, that is the topic today.

Naturally, we are seeing all manner of analyses of how these plans would play out.  Examples abound.  A married couple earning $75,447 with two and a half children, a garter snake and a ferret would pay $466.07 less under the Senate plan, and $501.11 less under the House plan.  That sort of thing.

And, of course, we have to believe that the person creating the model that generated those numbers is actually interpreting the plan properly.  You know, like we can trust their interpretation of the bill -- they're the media, after all.  But that's not exactly the point.

I saw one such encounter over the weekend; someone was showing the impact as they interpreted it, of each plan vs. what such a person or family would pay relative to the current law.  What did not get stressed is the simple math of taxation:

If you're paying $1,000 in taxes under the current law, you can't get a $1,001 reduction in your tax bill under tax reform.  Period.

Once we accept that reality, we can start to understand what the leftist press -- who wants everyone to pay triple because, in their view, all earnings belong to the state anyway -- will use to batter whatever bill gets passed.  The press and the Schumer/Pelosi types will kick and moan that someone making $150,000 will get a bigger tax cut than someone making $50,000.

Well, duh, Chuckles.  If the new law cuts the $150,000-earner's tax bill by $4,000, then you have to understand that he's going to do better than the other guy, if the other guy wasn't paying as much as $4,000 in the first place.  Tax cuts only cut taxes to the extent that you were paying them in the first place.  Let's remember that nearly half the country doesn't pay any income taxes at all -- you can't lower a count that was zero in the first place.

So the income tax, which is one of several methods to fund the operation of the United States government, is not a redistributionist tax; it is a decision now in the Constitution that one way in which the government will raise revenues is to tax people in proportion to their income, a distinction from the logical alternative, taxing according to their possessions and assets.  In other words, we don't tax the wealthy based on wealth, we tax all wage-earners and investors based on their earnings.

I'll digress for a moment because apparently Bill Gates, Warren Buffett and some other billionaires wrote a letter to Congress begging them not to cut their own taxes because they "make enough."  Of course they do.  They've already made their billions.  Since we tax income and not wealth, taxing huge incomes higher keeps other people from getting as rich as Gates and Buffett! It's called "preventing competition."  Duh.

I do not like the fact that there are multiple rates.  I would prefer that we exempt the first $25,000 in income (but have a mandatory minimum $100 "fee" for those under $25,000 so they have at least some contribution to the nation) and flat-rate the rest at maybe 17% (potentially a separate rate for investment income, separate column), no exemptions, no deductions, no favoring of having children or not having children, no favoring of mortgages over renting, no use of the tax law for any purpose to encourage or discourage activity -- that's social engineering.

But I detest most of all -- and it is based on the opinion in the previous paragraph -- the partisan notion that tax cuts can possibly help people any more than what they are already paying.  If you have a tax system that is structured so that the preponderance of the tax payment is by people who actually earn a lot of income, tax reform is going to align that way.  Duh again.

There are a lot of moving parts to this.  If indeed "90% of people can file on the back of a postcard", I'll be impressed enough to lean toward supporting it, as long as the reform gets rates down substantially, and the business rate drops to 20%.  That will result in huge economic gains, which should be the goal anyway.

I'll be monitoring this a lot, and writing about what I see often, as the tax reform process wends its way through the Swamp.

Congress, we're watching you.

Copyright 2017 by Robert Sutton
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