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Taxes, Part I

What's wrong with the current system...


by James Leroy Wilson
August 22, 2001

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Taxes, Part I_James Leroy Wilson-What's wrong with the current system... The checks 90 million Americans are receiving, tax refunds of $300-600, may boost consumer spending. I think, if nothing else, the Christmas season will be better for retailers than last year's.

But President Bush's overall tax cut does not look like it will be the economic-growth bonanza that previous tax cuts for the wealthy - Reagan's, Kennedy's, and Coolidge's - proved to be. Under these Presidents, the cuts were sharp and sudden; with Bush, they are mild and incremental. Small businessmen would behave differently if the top marginal rate was cut immediately from 39% to 28%, than they would if it was cut, over the course of years, to a mere 35 - or 36% (whatever was passed). Steep cuts cause a brief dip in government revenue, but over time the economy expands because businesses have a lot more money to work with, meaning greater expansion, innovation, and hiring. Mild cuts do not have the same effect; seeing one's taxes reduced by one percent will hardly alter economic behavior. There would be decreasing tax revenues with no economic stimulus.

There's something troubling about this whole discussion. If income tax rates affected the economy so much, it seems to me the best thing for the economy - and thus for taxes - is to minimize the impact of taxes.

Currently, taxes do a lot of damage. Not just on the federal level, either. In some of Chicago's neighborhoods which were once lower-middle class but, because of their location, have become trendy, the process of gentrification has taken over. Developers with an eye toward selling condos to yuppies drive up the property values, and as property taxes are linked to property values, long-time home owners of modest means lose out. Unable to afford paying the property taxes anymore, they try to sell their homes and must move to worse neighborhoods or a poor suburb.

This is the epitome of social injustice, and government tax policy is entirely to blame. Homeowners are not real-estate speculators seeking profit, they're just seeking a place to call home. The time to tax property is at its sale. Taxing people for what they had purchased decades ago, at the value the government itself judges would be the current price, defies any principle of justice or fairness. In Chicago, and, I'm sure, many other cities, a lot of victims have been created: people neither poor nor rich, but made poor just because the government assessed the value of their property too high for them to afford the corresponding taxes.

Federal tax policy isn't any better. Exercising compassion on those who own homes by giving a home mortgage deduction on income taxes, the feds are basically expressing favoritism for owners instead of renters. Since when is it the federal government's responsibility to care whether people buy or rent homes?

The FICA payroll taxes hurt the working poor, rob the middle class, and don't affect the super-rich much at all. Taxing interest income, corporate income taxes, and capital gains discourage savings and investment, at the very time when the looming Medicare and Social Security insolvencies should encourage these very things.

The tax code is so complicated, no two accountants can take the typical suburban home-owning, two income-earning family and file identical tax returns for them. Which means an IRS auditor could discover something wrong. There's always something wrong. You'd almost think the entire system was designed to give IRS bureaucrats the pleasures of exercising power over other people's lives.

Not to mention the corporate welfare of tax inducements to encourage some kinds of activity, like producing clean-burning coal or ethanol. Or the social engineering whereby you get breaks on interest payments for college loans - encouraging a culture of indebtedness - or for having installed solar panels.

Don't get me wrong. I'm all for solar panels. But there is a better way. We can abolish property taxes and income taxes and replace them, at municipal, county, state, and federal levels, with a just and fair tax that encourages not only savings and conservation, but also affirms the principles of personal liberty. We shall discuss this next week.

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