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Both of the major political parties in the U.S. long
ago adopted the rhetoric of the socialist Left with regard to tax deductions.
The mortgage interest deduction, the state and local taxes deduction, and all
others, are denigrated either as "loopholes" that need to be
slammed shut or as sources of needless confusion.
A November 8, 2004 Associated Press story about
impending Bush administration tax reform proposals gave a glimpse of the
latest round of socialistic rhetoric to come out of Washington. The Bush
administration, the AP reports, wants "to simplify the nation's tax
laws" by eliminating tax deductions, but the AP warns that such
proposals are often thwarted by evil "Washington lobbyists determined to
protect special [tax] breaks for their clients."
In his first post-election press conference,
President Bush said he wanted tax reform that was "fair without tax
loopholes for special interests" and that was also "revenue
neutral," i.e., would not cause a reduction in total tax revenues.
Republicans in the U.S. House of Representatives, said the AP, favored
"a flat tax that gets rid of deductions," while other
"conservative" tax reformers argue for reduced income tax rates
that are "paid for" by "eliminating or scaling back tax
deductions."
To call such proposals "socialistic" is no
exaggeration, for the underlying premise of all such talk is that the state
has a "right" to all income that is produced, and that
"loopholes" deprive it of some of that income and should therefore
be eliminated. This is, in fact, the premise behind all forms of direct
taxation. As explained by Frank Chodorov in his
classic book, The Income Tax: Root of All Evil (p. 11), the state is saying to its citizens:
"Your earnings are not exclusively your own; we have a claim on them, and
our claim precedes yours; we will allow you to keep some of it, because we
recognize your need, not your right; but whatever we grant you for yourself
is for us to decide." Moreover, "the amount of your earnings that
you may retain for yourself is determined by the needs of government, and you
have nothing to say about it."
When the income tax amendment was passed in 1913,
wrote Chodorov, "the absolute right of
property in the United States was violated." And "that, of course, is
the essence of socialism. Whatever else socialism is . . . its first tenet is
the denial of private property . . . all socialists, beginning with Karl
Marx, have advocated income taxation, the heavier the better."
Academic economists – even some of those who
call themselves "free market" economists – have provided
plenty of intellectual support for socialistic tax policies. The most basic
argument they have come up with is the notion that, by creating tax
deductions, taxpayers are induced to spend time learning how to take
advantage of those deductions, which often requires the employment of tax
accountants or lawyers.
Worse yet, the existence of tax deductions spawns lobbying efforts for even more deductions. The
problem with all of this, say the academic economists, is that, compared to
an ideal world of a simple tax system, there is said to be a tremendous
amount of "deadweight loss," which is also sometimes called
"social cost" or social waste. All of that time spent trying to avoid
taxes could have alternatively been spent producing goods and services, and
is thus (supposedly) a drain on the economy.
Such rhetoric is ideologically loaded despite the
economics profession's laughable argument that it is an example of scientific
objectivity. For the underlying premise is that the government has taken too
little of the citizens' income, and that "simplifying" the tax
code, and taking more of the income of the citizens, would somehow be
"efficient." But private individuals always spend their own money
more efficiently than politicians and bureaucrats do. Thus, the absurd
premise of the mainstream economists' argument is just the opposite of the
truth: that "efficiency" can be obtained by letting government
bureaucrats spend more of the citizens' hard-earned income. (The notion that
this argument is ideologically neutral is even more absurd).
The time spent by citizens (and their tax
accountants and lawyers) trying to legally avoid taxes is in fact a good
investment: it is an investment in being able to keep, spend, and save your
own income. The very fact that citizens continue to engage in such activities
on a large scale, year after year, is a demonstration of its inherent efficiency
in the minds of taxpayers. In short, tax lawyers or accountants who assist taxpayers
in legally reducing their tax burdens are heroes of the civil society,
just as smugglers like John Hancock, the most famous signatory of the
Declaration of Independence, were heroes of their generation for helping
their fellow citizens escape the tyranny of British protectionism. That's why
the state, its court historians, and its kept media always portray tax
lawyers and accountants as antisocial parasites who seek to unfairly rig
"the system" for their undeserving clients.
As Murray Rothbard pointed
out in "The Myth of Tax Reform" (The Logic Of Action Two, p. 119), "Every economic activity that
escapes taxes and controls is not only a blow for freedom and property
rights; it is also one more instance of a free flow of productive energy
getting out from under parasitic repression. That is why we should welcome
every new loophole, shelter, credit, or exemption, and work, not to shut them
down but to expand them to include everyone else . . ."
Or consider what Mises said at a 1952 conference in which people were
complaining about loopholes: " Let us be grateful
for the fact that there are still such things as those the honorable
gentleman calls loopholes. Thanks to these loopholes this country is still a
free country and its workers are not yet reduced to the status and the
distress of their Russian colleagues. "
The opponents of tax deductions not only deny the
right of private property – the very definition of a socialist –
but they also appeal to egalitarianism, the second most defining feature of
socialism. They do this by complaining that not every single citizen in
society benefits from all tax deductions, therefore, no one should ever
benefit from any of them. Of course, the same can be said of all economic
phenomena – we don't all benefit equally from the workings of
capitalism, nor would it be desirable for such a world to exist.
The "fairness" argument against tax
deductions is the worst kind of utopian, egalitarian nonsense. Rothbard took the right approach to this topic as well:
Proponents of a free and prosperous society should not complain about the
alleged "unfairness" of tax deductions, but should work instead to
see to it that more and more citizens can enjoy them.
Rothbard also pinpointed another flaw in the arguments of
"mainstream" economists with regard to tax deductions. They typically
argue that if tax deductions are given only to some industries but not all of
them, then such policies will lead to more resources flowing to those
industries than would be the case in a genuinely free market where no tax
deductions at all existed.
This is true as far as it goes, but a vigorous
application of opportunity cost reasoning reveals the fallacy of this
argument. The mainstreamers leave out the crucial point, said Rothbard: "[W]hat is the alternative? If investment,
energy, or other [tax] credits or deductions are abolished, resources will
not automatically go into more productive areas; instead, they go into
government, via higher taxes" and "will simply be wasted, thrown
down the rat hole of unproductive and profligate government spending."
The academic economists usually ignore this argument
completely and, indeed, they tend to ignore the entire expenditure side of
the government's budget whenever they discuss tax policy. This allows them to
pretend to be "objective" when in fact they are anything but. And
whenever they do hint at discussing government expenditures, it is usually to
proclaim the alleged desirability of "revenue neutrality." This is
a, well, neutral-sounding phrase, but it means that under no circumstances
should government expenditures ever decline as a result of any tax reform. In
other words, in the name of "efficiency" they argue quite absurdly
that no "good" tax reform should ever result in the citizens
keeping more of their own income or the government being reduced in size and
activity by even one-tenth of one percent.
"Conservative" tax reform advocates are
sometimes either incredibly naïve when it comes to politics, or they are
duplicitous liars. I refer here to the argument that was made on behalf of
the 1986 federal tax reform, and which is being repeated today, namely, that
it would be desirable to reduce income tax rates if any loss of revenue to
the government can be "paid for" by eliminating loopholes and
deductions. The basic assumption here is, once again, that all income belongs
to the state and, once in the grasp of the state, should never be
relinquished.
But aside from that, it does not take a political
genius to recognize that such proposals could never be anything but a giant
bait-and-switch scheme. "Give up your deductions, and we will reduce
your income tax rate," the state tells us. This is what happened in 1986
and then, once most deductions were eliminated, the state proceeded in the
next seven years to raise the top income tax rate from 28% to 39.6%, and
institute an "alternative minimum tax" that was not indexed for
inflation, so that today it ensnares millions of middle class Americans.
This is the oldest tax trick in the book, and was
first played when the income tax was adopted in 1913. After 50 years of
Republican Party protectionism in which the average tariff rate was in the
40-50% range, the promise was made that, in return for accepting the income
tax, tariff rates would be sharply reduced, which they were. Then, within
seven years the top rate of the "modest" income tax was increased
from 7% to 70%.
Tariff rates escalated as well, first with the 1922 Fordney-McCumber tariff, which restored a high protective
tariff rate that averaged 33.22%, and culminating with the
Smoot-Hawley-Hoover tariff of 1930 which raised the average rate to 59.1%.
"The historic fact is that tariffs rose higher than ever after income
taxation was ultimately constitutionalized,"
wrote Chodorov (p. 40).
With Washington increasingly abuzz with talk of tax
reform, Americans should expect to be bombarded with all of the same old
myths about the evils of tax loopholes, the alleged imperative of "tax
fairness," and the desirability of "revenue neutrality." All
of this rhetoric merely masks the fact that taxes will be going up, making
citizens poorer and the economy weaker, while the state continues on as one
gigantic, overbloated parasite.
Thomas DiLorenzo
Article originally published on www.LewRockwell.com. By authorization of
the author
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