Raising Taxes

Many on the American Right are reflexively against increased taxes. I don't think they should be reflexive about it, but I understand their core assumption--we pay too much already to a government that wastes our money, and don't want to pay more. I agree with that, believing wholeheartedly that government must be cut, that entire departments must be closed or blended with others, that entire programs need to wither away. Once we've identified the core functions of government, then we can determine how much it costs to pay for that government (including the interest on what we've already borrowed), and set tax rates accordingly. Unlike the president, I don't believe that the purpose of taxes is to create "fairness" or to redistribute wealth or to change behavior, but to pay for the legitimate functions of government. If, after we've cut out all the crap, our current tax rates won't pay for what we want, then, and only then, should tax rates be raised.

So it was with great interest that I read this article in The Economist, about raising taxes on the rich:

Tapping the rich to close the deficit is “not class warfare”, argues Mr Obama. “It’s math.”

Actually, it’s not simply math (or indeed maths). The question of whether to tax the wealthy more depends on political judgments about the right size of the state and the appropriate role for redistribution. The maths says deficits could technically be tamed by spending cuts alone—as Mr Obama’s Republican opponents advocate. Class warfare may be a loaded term, but it captures a fundamental debate in Western societies: who should suffer for righting public finances?

In general, this newspaper’s instincts lie with small government and against ever higher taxation to pay for an unsustainable welfare state. We reject the notion, implicit in much of today’s debate, that higher tax rates on the wealthy are justified because of the finance industry’s role in the crunch: retribution is a poor rationale for taxation. Nor is the current pattern of contribution to the public purse obviously “unfair”: the richest 1% of Americans pay more than a quarter of all federal taxes (and fully 40% of income taxes), while taking less than 20% of pre-tax income. And knee-jerk rich-bashing, like Labour’s tax hike, seldom makes for good policy. High marginal tax rates discourage entrepreneurship, and no matter how much Mr Obama mentions “millionaires and billionaires”, higher taxes on them alone cannot close America’s deficit.

So the debate is poisonously skewed. But there are three good reasons why the wealthy should pay more tax—though not, by and large, in the ways that the rich world’s governments currently propose.

It's not a long article, taking up only a single page in the print edition, but it's powerful. Two points jumped out to me as seeming reasonable:

Public spending should certainly take the brunt: there is plenty of scope to slim inefficient Leviathan, and studies of past deficit-cutting programmes suggest they work best when cuts predominate. Britain’s four-to-one ratio is about right. But, as that ratio implies, experience also argues that higher taxes should be part of the mix.

Why raise taxes? Because we've got to pay down that debt. And the other valuable point?

Indeed, the third argument for raising more money from the rich is that it can be done not by increasing marginal tax rates, but by making the tax code more efficient.

The scope for doing so is most obvious in America, which relies far more than other countries on income taxes and has a mass of deductions on everything from interest payments on mortgages to employer-provided health care, so taxes are levied on a very narrow base. Getting rid of the deductions would simplify the code and raise as much as $1 trillion a year. Since the main beneficiaries of the deductions are the wealthy, richer folk would pay most of that. And since marginal rates would be untouched (or reduced), such a reform would do less to discourage them from creating wealth.

I won't support a single tax increase until we start cutting government--and I mean cutting, not snipping off a corner here or there. Once we're serious about cutting, the proposals put forth in the linked article would be a grand place to start when considering taxation.