“Michele Bachmann would knock 20,000 millionaires off tax rolls.” So reads the glaring headline on a blog post by Howard Gleckman of the Urban-Brookings Tax Policy Center that this Saturday was No. 2 among the “most viewed” stories on the Christian Science Monitor website. It even edged out a Weiner piece for the top spot. But on policy substance, the piece doesn’t even edge out the National Enquirer.
Gleckman tries to play a “gotcha” game with the Minnesota rep and GOP presidential candidate, who in the famous “Von Mises at the beach” interview with the Wall Street Journal’s Steve Moore decried the fact that 47 percent of Americans don’t pay income tax. “There is no tie to the government benefits that people demand,” she said. “I think everyone should have to pay something.”
Gleckman argues that this sentiment is “strikingly at odds” with her plan to eliminate capital-gains taxes and “remove 23,000 millionaires from the income tax rolls.” He is equally critical of Minnesota governor Tim Pawlenty’s plan to also scrap taxes on dividends and interest, under which, Gleckman says, “57,000 households making $1 million or more would avoid paying any income tax.”
But Gleckman reveals no contradiction here, just some deceptive writing on his part. He never acknowledges that these individuals would still effectively be taxed when the firms they invest in are taxed.
Under both Bachmann and Pawlenty’s plans, no millionaire would “avoid paying” taxes. They would pay the taxes, as they do now, when the corporations in which they own shares pay the corporate income tax. They just wouldn’t face double taxation of earned income and a tax bias against saving. And to Bachmann’s point in the WSJ, these investors would certainly still see the “tie to the government benefits that people demand” when they scrutinized the levels of taxation their firms were paying in the profit-and-loss statements.
This aspect of both tax plans is consistent with many comprehensive tax-reform proposals. Variants of the Hall-Rabushka flat tax and the FAIR national sales tax both would eliminate taxation on investment income to correct the tax code’s current bias in favor of consumption over savings. Under the free-market flat tax, earned income at the individual and corporate level is taxed only once.
Today, the rich face little tax penalty when using the dollars they have earned on mansions, luxury cars, or corporate jets. But if they instead forgo this conspicuous consumption and invest in an innovative new industry that could create the jobs of tomorrow, and take the risk of losing the money they put in, the tax code punishes them if the investment is successful.
The 2003 Bush tax cuts on dividends and capital gains did indeed spur economic and job growth that revived an economy that had been in a slowdown since the last year of the Clinton administration. Growth halted in 2000 — third-quarter GDP in that year had even contracted — due in substantial part to what economists call real-income bracket creep. The Clinton tax hikes of the early ’90s were reducing incentives for growth at the end of the decade, their negative effects having been delayed by the positive economic effects of the trade agreements and bipartisan deregulatory policies of that era.
The Bush tax cuts meant steady economic growth for most of his administration, though this growth was less strong than it could have been because of the regulatory drags — namely the Sarbanes-Oxley Act of 2002 — of this supposedly deregulatory era.
And the financial crisis of 2008 was fomented largely by the misguided pro-housing policies of both parties, as summed up by the American Enterprise Institute’s Peter Wallison in his minority report for the Financial Crisis Inquiry Commission. Even the Democratic majority report, which mostly faulted lack of regulation, never suggested that the Bush tax cuts had anything to do with the crisis.
Eliminating completely double taxation on investment income today would kick-start investment in new entrepreneurial firms. It would also have the side benefit of decreasing concentration of industry, a supposed objective of progressives, as investors would face no tax impediment to taking their money out of established corporations — either through dividends or stock sales that produce capital gains — and placing it in promising new ventures.
Perhaps it would be a slightly easier political sell (though this would no doubt be demonized too) to eliminate the corporate income tax and just have investors pay taxes on their shares of corporate earnings. This would achieve the same effect in eliminating the tax bias, though it might be more costly in terms of compliance. Regardless, critics like Gleckman should be honest enough to admit they are arguing in favor of double taxation, and let the chips fall where they may.