Friday, February 24, 2012

Taxes, Taxes! How I Hate Thee, Let Me Count The Ways

Taxes are a divisive issue at the moment. We are faced with an important choice: Do we cut spending, or do we find ways to finance all the government programs that a good portion of voters seem to want?

EBBrowning
[Photo of poet Elizabeth Barrett Browning from Wikipedia.]

The Democrats seem to be responding that we should tax the rich. I have yet to see any research that defeats the argument of Daniel J. Mitchell of Cato:

"... [T]here aren't enough wealthy people to finance big government. According to IRS data from before the recession, when we had the most rich people with the most income, there were about 321,000 households with income greater than $1 million, and they had aggregate taxable income of about $1 trillion. That's a lot of money, but it wouldn't balance the budget even if the government confiscated every penny — and if it did, how much income do you suppose would be available in year two?"

In Europe where the rich have been taxed and disdained for centuries (perhaps for understandable reasons given the bad example of people like Louis XIV), governments have found that, when overtaxed, the rich simply leave the country, taking their money with them. Recent policy has attempted to alleviate this phenomenon, but the current crisis is building up public pressure to attempt to tax the bums again, in spite of the known probability of counterproductive results. The same is happening here.

Another idea put forth in the US, on both sides of the political fence, is the Value Added Tax (VAT), also a European favorite. Occasionally, I write articles for exclusive publication on a website called SeekingAlpha.com, and I recently wrote one on the VAT tax, giving twelve reasons why this is a bad idea.

How else to finance what the majority seems to want? Perhaps it's going to be impossible? Yet the possibility of impossibility doesn't seem to be on the radar screen of those who want the government-sponsored goodies.

Since joining the EU, a few European governments have become seriously aware of the torturous mathematics underlying the financing of big social programs like national health care, generous unemployment benefits, and subsidies for this and that (e.g. in France: number of children, help with the rent, child care expenses, five weeks of vacation, 35-hour weeks, super-duper retirement pensions for the government "fonctionnaires," and many more). These countries are coming back from the extremes of what some have called the "Third Way" (the name given to the current European-style high-taxation compromise between capitalism and socialism).

As accounting reality is sinking in, governments are reining in both taxes and benefits. For example, in France where health care used to be free, patients are now required to pay for some part of their care and prescriptions. The Corporate tax is lower than the one we have in the US. The retirement age has been increased. The iron-clad employment contract has been relaxed to provide more flexibility to employers. Newly created jobs have kept unemployment to about the same level as here (assuming both countries are involved in an equivalent amount of statistical legerdemain--although I must admit, the French are particularly imaginative in this domain). Temporary jobs are more prevalent.

However, even these actions appear not to be enough to solve their deficit/debt problems. The current crisis should play itself out in a most interesting fashion over the coming months. Before we decide to follow Europe down their high-tax road, we should watch what happens carefully. The Third Way is full of muddy marshes and quicksand that can bring devastating havoc and even sudden demise.

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