Posted 7:23 am Monday, April 16, 2012
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Basic Tax Principles Lost On Politicians
Tuesday is Tax Day — the day when your federal income taxes are due. As Washington officials await your money, perhaps they could brush up on their tax facts — courtesy of a new report from the American Legislative Exchange Council, authored by economist Arthur Laffer.
The report, also authored by the Wall Street Journal’s Stephen Moore and ALEC’s Jonathan Williams, ranks the economic competitiveness of states (Texas comes in at 16th in the nation).
But it also serves as an effective primer on tax principles. They’re put simply, they’re easy to understand, and there’s no telling why Washington just can’t seem to grasp them.
“When you tax something more you get less of it, and when you tax something less you get more of it,” the report says. “Tax policy is all about reward and punishment. Most politicians know instinctively that taxes reduce the activity being taxed — even if they do not care to admit it. Congress and state lawmakers routinely tax things that they consider ‘bad’ to discourage the activity.”
Smoking, for example. And they “reward” positive behaviors, such as home-buying, with tax breaks.
So by this clear and irrefutable logic, the “Buffett Rule,” which essentially taxes and penalizes success, will result in less … what?
Exactly.
The next principle the report explains is so obvious that it shouldn’t need stating (though it does): “Individuals work and produce goods and services to earn money for present or future consumption.”
They don’t work in order to pay taxes. That seems to be lost on some politicians.
“Taxes create a wedge between the cost of working and the rewards from working,” the report continues. “This is why all taxes ultimately affect people’s incentive to work and invest.”
Again, that’s deceptively simple. It must be terribly complicated, because so many politicians don’t seem to get it.
The next principle they list isn’t so much as a stand-alone rule, as it is a conclusion based on the previous propositions. It’s something of a syllogism. But its truth is proved by the truth of the prior statements.
“An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues,” the report states.
Yes, that’s good old supply-side economics. The school of thought has been out of favor since President George H.W. Bush abandoned his “no new taxes” pledge. But years of tax increases have proven the first part of the principle, and history proves the second.
The states that rank high in the report’s survey all accept the truth of the following rule: “An economically efficient tax system has a sensible, broad base and a low rate.”
That’s why states (such as Texas) with no “progressive” state income tax rank higher than states that punish wealth and success.
The report concludes with the deceptively simple rules that “If A and B are two locations, and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A.”
Someone forgot to tell California Gov. Jerry Brown about that one. He’s planning to raise sales taxes and income taxes on high earners. The result? An exodus of earners and producers from his state (Texas has benefited greatly).
The economic rules that govern taxes aren’t that complicated. But they’re a little like gravity — a fixed law you ignore at your own peril.
The report, also authored by the Wall Street Journal’s Stephen Moore and ALEC’s Jonathan Williams, ranks the economic competitiveness of states (Texas comes in at 16th in the nation).
But it also serves as an effective primer on tax principles. They’re put simply, they’re easy to understand, and there’s no telling why Washington just can’t seem to grasp them.
“When you tax something more you get less of it, and when you tax something less you get more of it,” the report says. “Tax policy is all about reward and punishment. Most politicians know instinctively that taxes reduce the activity being taxed — even if they do not care to admit it. Congress and state lawmakers routinely tax things that they consider ‘bad’ to discourage the activity.”
Smoking, for example. And they “reward” positive behaviors, such as home-buying, with tax breaks.
So by this clear and irrefutable logic, the “Buffett Rule,” which essentially taxes and penalizes success, will result in less … what?
Exactly.
The next principle the report explains is so obvious that it shouldn’t need stating (though it does): “Individuals work and produce goods and services to earn money for present or future consumption.”
They don’t work in order to pay taxes. That seems to be lost on some politicians.
“Taxes create a wedge between the cost of working and the rewards from working,” the report continues. “This is why all taxes ultimately affect people’s incentive to work and invest.”
Again, that’s deceptively simple. It must be terribly complicated, because so many politicians don’t seem to get it.
The next principle they list isn’t so much as a stand-alone rule, as it is a conclusion based on the previous propositions. It’s something of a syllogism. But its truth is proved by the truth of the prior statements.
“An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues,” the report states.
Yes, that’s good old supply-side economics. The school of thought has been out of favor since President George H.W. Bush abandoned his “no new taxes” pledge. But years of tax increases have proven the first part of the principle, and history proves the second.
The states that rank high in the report’s survey all accept the truth of the following rule: “An economically efficient tax system has a sensible, broad base and a low rate.”
That’s why states (such as Texas) with no “progressive” state income tax rank higher than states that punish wealth and success.
The report concludes with the deceptively simple rules that “If A and B are two locations, and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A.”
Someone forgot to tell California Gov. Jerry Brown about that one. He’s planning to raise sales taxes and income taxes on high earners. The result? An exodus of earners and producers from his state (Texas has benefited greatly).
The economic rules that govern taxes aren’t that complicated. But they’re a little like gravity — a fixed law you ignore at your own peril.
