The Cactus Tax Proposal, Part I: What Matters More than Anything Else

Since I’ve been criticized for critiquing other people’s tax proposals without putting forward my own, I figured I’d start writing some posts with my thoughts on the subject. I’m going to start, here, in this post, by laying out what I think is by far the single most important thing, the sine qua non without which a tax system can only be the dysfunctional mess we see before us today.

Now, regular readers know I’m a numbers guy, but in the end, I think the numbers – people (or corporations) making X a year should pay Y% – are just details. Sure, they’re important details, but the system doesn’t live or die based on whether tax rates are too high or too low. The top marginal rate was 91% every year of JFK administration. (And because it bears repeating, Kennedy did not cut taxes. LBJ invoked JFK’s name to get tax cuts in 1964.) If that isn’t too high, its hard to imagine what is, and yet, Kennedy paid down the debt as a percentage of GDP and oversaw comfortably faster growth in real GDP per capita than Reagan or Clinton. The recession in 1990, on the other hand, began at a time when the top marginal tax rates were at their lowest since 1931, and we all remember what happened to debt as tax rates fell between 1981 and 1990.

So if it isn’t numbers, and rates, what is it? Simple: its the perception that there is some fairness, and that the rules apply to everyone. Fairness does not mean everyone is treated exactly the same; when the ship goes down, maybe everyone fights for a spot on the lifeboat, but if there’s cellphone video of a person pushing a child, expectant mother, or a handicapped person off the raft to save himself, that person will be a pariah forever, everywhere. Even in this dog eat dog world, we still believe in “pick on someone your own size.” And as to rules applying to everyone – for the remaining spots on the lifeboat, for those that do not go automatically to the children or expectant women – we’re willing to tolerate lines, maybe a lottery, or even a free for all, but we aren’t willing to tolerate a person shooting their way on board. Again, video of such behavior would make a person a pariah upon his return… though apparently some groups do tolerate such people.

When it comes to a tax system, most people are willing to allow the poor – the equivalent of the children and expectant mothers and the handicapped people on a lifeboat – to be given a step up. Most people are incensed when they hear of situations geared specifically to benefit those with means and everyone else. A tip to folks on the right – putting a lower marginal tax on capital rather than the sweat of one’s brow also qualifies. Most people have to work for a living, and while you can talk about how such a tax scheme would benefit people who saved and scrimped their whole lives too, even those who saved and scrimped recognize that Paris Hilton benefited from this scheme from day her parents’ accountants took care of her first first tax filing.

And there is one more unfairness, perhaps the hardest one to deal with. Long ago and far away, I once dated a girl for a while whose father owned a textile company. His wife and kids were all officers of the company, even as children, apparently. On their sixteenth birthday, each of the kids got a luxury vehicle… which was a company expense, as was the gasoline, insurance, and many of their meals. Folks on the right like to pretend that this isn’t going on, but I think most people know it is pretty widespread among the class of people who can afford good accountants.

I’m not sure how to cure the problem of crazy-high business expenses and similar gaming of the system, except to say this… we need the laws to mean something. Which doesn’t necessarily mean more auditing and investigation. Perhaps it does, but that would be meaningless without a stick. In other words, what is needed is increased punishment for offenders. Significant jail time for all involved, including the enablers (i.e., attorneys, accountants, audit directors). If a person steals ten million dollars from the public coffers, treat it like you would someone stealing the same amount by holding-up liquor stores. You have to rob a lot of liquor stores to get your hands on ten million dollars. And if that goes some way toward ensuring that white collar criminals are no longer coddled relative to blue collar criminals, well, that would just strengthen the perception of fairness in the mind of most people, which is what we need for any system to actually work.

I’m not sure when I’ll post on this topic again… I have a few random thoughts and they take a while to congeal. But expect more.