Would you like to keep more of the money you make? Presumably yes.
Would you like it even more if you could keep all the money you make, as life was like before 1913? Presumably yes.
Some recent trends in policy rhetoric are headed in this direction. I regard this as a good thing. Once again, the people’s wishes are not inconsistent with what would be good for the entire country.
It’s common among economists, however, to decry special tax breaks as distorting production decisions.
No question that they do. They direct resources one way rather than another: away from the tax toward the tax break. The home mortgage deduction drives resources to housing that otherwise would have gone elsewhere. The child tax credit probably has the same effect to some extent. The tax code is full of such breaks for health insurance, capital depreciation, and so on.
There are reasons to think the traditional economists’ objections are plain wrong. Indeed, nothing thrills me more than to see political parties competing for who can offer the most in the way of tax breaks.
The reason does not require fancy economic theory.
It comes down to one thing only: tax breaks allow people to keep more of their own property out of the government’s hands. That is necessarily and always good for economic growth. The model of tax breaks can and should be extended as far as possible. That seems to be happening and that is a very good thing.
The trend began when Donald Trump announced that he would end taxes on tips. He says he got the idea from talking with a server at a restaurant. He left a big tip and asked about what happens. The server said that taxes were going to be taken out of it, and that annoyed him. He was tipping the server, not the government. That’s when he decided to make the call.
Then within a few weeks, the Harris campaign picked it up.
That’s when the bidding war began. Trump then said he would exempt Social Security benefits from taxes. After all, the premiums themselves are already taken as a tax. Why would getting one’s own money back again be taxed?
Then he kept going further. No more taxes on interest on car loans. No more double taxation on Americans earning money abroad. There are still three weeks remaining so there is no telling how many more such promises are coming.
At the same time, Trump is partial to the tariff as a means of raising government revenue. Historically it makes sense that tariff partisans would turn against income taxes in general. The only reason we have an income tax at all is that it was advanced against the 19th-century practice of tariff funding. It was a push for free trade. This required an amendment to the U.S. Constitution: the 16th.
This was limited at first (7 percent for only the richest) but extended quickly (77 percent only 5 years later) to the point that all property rights were attacked fundamentally. An entire generation of wealthy estates was pillaged. Eventually the middle class was pillaged too.
Have you been to Newport, Rhode Island? It’s one of the greatest towns in this country. The estates of the well-to-do who summered there were saved thanks to foundations but the families themselves had to sell them, due mainly to the income and estate tax. It’s an evil tragedy that this happened. The United States was in the process of replacing the European aristocracy with a new capitalist meritocracy when the income tax came along.
If it were really possible to replace the whole of the income tax, including all payroll taxes, with a tariff, that would be a net positive step for American prosperity.
Consider this. The income tax raised $2.5 trillion last year. Cutting that from the federal budget as it stands now would take the United States back to 2020 levels of expenditure. Does anyone really believe that the government was too small in 2020?
We could completely end the income tax without causing any real blowup in the federal budget. Yes, it would mean scaling back the government to something more approximating a Constitutional size. And the most important point: we would get our freedom back. No more tax filings! No more IRS! That’s a good step toward making America free again.
My first thought when I heard Trump’s proposal on tips is that we could reclassify many forms of income as tips. I’m sure the Treasury Department has already found ways to make this impossible but it is nice to consider. Maybe all dividends and interest could be classified as tips. Maybe corporate bonuses too. Corporations might find many ways to convert salaries and wages to tip income.
That’s a beautiful vision.
In other words, what the WSJ decries as a “bidding war” over tax rebates and deductions is exactly what we need. They are incremental steps toward the elimination of the income tax itself, which is precisely what needs to happen.
In journalism culture, the one thing reporters can think to ask any politician proposing tax breaks is to hit with the gotcha question: how are you going to pay for it?
This question is offensive because it implies that all income and property belongs first to the government and so letting people keep their own money amounts to some kind of giveaway. It is not a giveaway. It is a means by which petty theft is dialed back.
Imagine if you caught someone stealing planters and chairs from your front porch. You tell him to stop. He shoots back: if I stop, how are you going to pay for it? Your response should be: you figure it out! It is not up to you and I to figure out how best to make sure the thief still has a good standard of living after he stops stealing.
In any case, if the point is to be concerned about the deficit, it’s a bit late for that. The United States is deeply in debt and it is increasing on an annual basis. That will not be fixed by more taxation. It can only be fixed by dramatic spending cuts and sales of assets.
The federal government owns about 27–28 percent of the total land area within the country, which equates to approximately 620 to 640 million acres. Let the sales begin! This would net vast revenue for the government which could be used to pay off the debt. The math is not complicated. All that is lacking is the political will and courage to do the right thing.
To be sure, more tax breaks complicate the tax code but who are we kidding with that concern? Tax preparation is already a huge industry in this country. The only people who prepare their own are low earners who are filing the easiest possible forms. Everyone else has to use software and professional accountants. If the trade-off of more exceptions is more complicated but paying less to the federal government, most people would gladly take the trade.
I’ve not been optimistic about policy trends in the United States in decades but the turn against the routine pillaging by the tax code really does fill me with joy. What sometimes comes across as a gimmick might in fact be a slow-go method of stepping away incrementally from the income tax itself.
It is delightful to consider the possibility that the income tax itself will be gradually eliminated by means of ever-expanding exemptions of all sorts. Every distortion that comes from an exemption can be fixed with ever more of them.
As a businessperson, Trump is no fan of taxes. It would benefit everyone if he would simply ignore the annoying economists and operate from his gut instead. The more tax breaks the better off everyone is.
Policy trends over many years have made property rights ever less secure. A move against all forms of income taxation sends a signal: in the United States, you can keep what is yours. It’s hard to think of a principle that would be better for economic growth.
