Tuesday, March 9, 2010

Dangerous tools

The recent elections in Oregon in which supporters of tax increases argued that the increases would only affect 2% of the population reminded me of some "poetry" I wrote (but did not claim authorship!) and included in my 1981 college textbook:

Theft by government still is theft
and it matters not how much the victim has left;
Goodbye, liberty, farewell, rules
taxes which discriminate are dangerous tools.

When I wrote these lines I was thinking of graduated (or "progressive") taxes in which the percentage paid increases as income increases. I think such taxes smack of pseudolaws, though some thoughtful people do not agree.

Since our income went down considerably for a few years after I retired, I came to see the practical upside to progressive taxes, since our taxes went down so much that our after-tax income did not take as much of a hit as it otherwise would have.

But whatever the merits of progressive taxes, my "poetry" also condemns regressive taxes, in which the rich pay lower percentages of their income than do those with more modest incomes. There is just no excuse, for example, for allowing hedge fund managers to get away with paying capital gains tax rates (very low) on their billions of dollars of income by calling it "carried interest."

For that matter, I am not so sure that having lower rates for capital gains than for wages and salaries should be tolerated. True, it may be seen as an attempt to avoid the injustice of taxes capital "gains" that only reflect decreases in the purchasing power of money---inflation. However it opens the system up to manipulation as the wealthy and well-connected connive to convert their regular income into capital gains.

It might be better to index capital gains for inflation or, if that would be too complicated, just tax the gains at the same rate as wages and salaries, figure that a little injustice is inevitable even in the best of worlds, and figure that it wouldn't be all bad to create a class of wealthy and influential people with a vested interest in discouraging inflationary governmental policies.

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