There are two editorials in today’s Financial Times, one by the editorial staff of the paper and one by Lawrence Summers, former chief economic adviser to President Obama. Both are of similar subject matter as both notes the need for an overhaul of the tax system in the United States. These articles are written, the first with the credibility of an internationally recognized financial trade publication, the second with the gravitas of a man respected in many economic circles and yet, both completely miss the point.
There is no doubt that the US tax system needs overhaul. It seems that both sides of the debate can agree on that but for very, very different reasons. The “progressives”, most in the current Obama administration, argue that it is not progressive enough and the “rich” must pay their “fair share”. The other side, supported by “conservative” leaning economists like Veronique de Rugy, argue that we already have the most progressive system in the industrialized world and are stifling economic growth via this penalization of success.
The fact of the matter is that both sides are correct and wrong at the same time because they have completely different visions of what the role of government is in society. If you are a “progressive” and believe that the government should provide healthcare for all, retirement income, economic support to “equalize” earnings, plan and control the economy on a national level, you support higher taxation to provide the government with the required economic strength to accomplish that end. If, however, you take a more conservative view that the Constitution actually means what it says and government should be constrained to the enumerated powers, that the free market and free enterprise should be allowed to determine the track of the economy and that through economic freedom we can have individual liberty, you believe that government tax collection should be limited to funding these specific actions.
Both the FT and Summers are wrong because of their acceptance that the current American paradigm is both correct and unalterable. They have accepted the logic that historical actions are unquestionable and we must honor precedents even if they have been proven wrong. The fact is that we can alter our future – nothing is predetermined in this world – but we won’t change until one basic question is answered, until then both opposing arguments are merely superficial and can never be resolved. If you followed my descriptions in the proceeding paragraphs, the real question is clear – and that is this: what is the role of government in American society and how should it be funded?
Out of the many economic advisers that the President has had, Summers would seem to have been the most reasonable. While he didn’t really argue against the “stimulus”, he did argue that spending in wastefully and on political patronage would guarantee failure of any “stimulative” economic benefit. Summers actually hones in on the issues with our current budgetary problems – entitlements and health care (and he notes that health care spending will be the majority of the problem):
The rising number of retirees to workers means that Social Security benefits at the current ratio to wages and salaries will not be sustainable without some kind of tax increase. Sooner or later revenues will have to rise or outlays will have to be curtailed.
But it is the trajectory of healthcare costs that will be the single most important determinant of the budgetary picture. While almost everyone agrees on the desirability of containing federal spending, achieving this is likely to be more difficult than many suppose.
Without any apparent sense of irony, Summers continues his analysis noting that the two out of the three solutions that he offers are just more taxes whether through increased rates or a combination of rate changes and economic growth.
Second, the current tax system is in certain ways manifestly unfair at a time of rising inequality. As is well recognized, America’s rich have become richer with the share of income going to the top 1 per cent increasing from about 10 per cent to about 20 per cent over the last generation while middle class incomes have stagnated.
The accepted logic of “progressives” is that all of the ingredients of this collectivist soup are legitimate functions of government and thereby “rights” of the citizens. They know that if they can have these things confirmed in the mind of the electorate as such, there is no undoing them once they are done and embedded in some sort of program or policy.
The evidence of this process is legion – Social Security is termed as the “third rail” of American politics for exactly that reason, welfare payments are there in the “rights” column, unemployment benefits are becoming enshrined as such and I have no doubt that even if Obamacare is found to be unconstitutional (which I now believe is a 50/50 shot even as the majority of polls show support to overturn it), the passage of time will have allowed too much of it to be imbedded in contemporary culture and economic life that it will never truly be killed and removed from our society.
As more and more of people are removed from the tax rolls through direct government action (setting brackets and exemptions) and economic factors, they are incentivized to accept increasing amounts of “assistance” from government and in turn the burden falls on a smaller and smaller segment of the population. Under any description or definition, the transfer of wealth from one based on his ability to one based on his need is redistribution – and that is the basis for a communist economic system. One can argue the motives but one cannot argue the method.
Until we resolve this core question, debate over taxes and tax policy on both sides of the aisle is pointless. Tax policy is now nothing more than a political ping pong ball, a tool used by opposing views to attempt to accomplish their desired ends. “Progressives” seek more taxes from an ever shrinking base to “control” the “rich” and to create more dependency and illusions of “free” stuff, thereby increasing their power through growing government. “Conservatives” seek to cut taxes to “starve the beast” with the idea that government can be reduced by cutting the money flow.
This is the root cause for the visceral hatred of the institutional left toward the Tea Party – it isn’t racism, the racism is imputed because 1) the TPM opposes more taxes, 2) lower taxes mean less money to government, 3) less money to government means less money for targeted social programs, 4) ethnic minorities take advantage of these programs disproportionately, so therefore, 5) the Tea Party is obviously racist. The only problem is that #4 is a lie – there are more Caucasians on the federal dole than minorities. If #4 is false, then the whole line of reasoning is faulty and exposes the only true reason – the fear of losing power over the people on the dole if the money dries up.
There is no doubt that our constitution does not support the actions of our post-1900′s political and judicial processes and their drive toward collectivism, but it is just as clear that the “”progressives” will fight to the death to prevent losing the source of their power, redistribution through government. The path we are on is just as unsustainable as any of the collectivist states of the past, ours the more devastating because the work of Wilson, FDR and the “progressives” of that era and ours are antithetical in total to the celebration of individual liberty enshrined in our founding documents and first principles.