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Taxing

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In recent days I have – likely like you have – heard and read several media reports on Trump’s tax plan (or what we know of it so far).  Nearly all of these reports are juvenile: changes in tax rates are evaluated by the media according to changes in the legal tax liabilities of various groups of people.  For example, Trump’s proposal to cut the top federal personal income-tax rate from 39.6% to 35% is assessed only by its effect on high-income earners.  Specifically, of course, it’s portrayed as a ‘gift’ to high-income earners.  Eliminating the estate tax, as well as the alternative minimum tax, are likewise portrayed as benefits for the rich.

My purpose here isn’t to praise or to pillory Trump’s tax plan; I’ve yet to examine it in any detail.  My purpose, instead, is to lament this popular approach to evaluating taxation.  This approach, as Deirdre McCloskey might say, is that of a lawyer and not that of an economist.  The lawyer focuses on legal liabilities; the economist focuses on systemic consequences, both immediate and ‘seen’ as well as distant and ‘unseen.’

It’s true that if Smith’s last (say) $10,000 of annual income is currently taxed at a rate higher than a proposed new lower rate, Smith is made better off if this proposed lower marginal tax rate becomes reality.  (As an aside, I refuse to go along with the common-in-many-circles description of such a tax cut as a “gift” or a “giveaway” to Smith and other high-income earners.  Smith is the person who earned the income.  It is his property.  This income belongs to Smith.  The government takes it away from him.  For the government to reduce the amount of money that it takes away from Smith is not properly called a giveaway to Smith.  But let’s here say no more about this particular linguistic battering of reality.)

In contrast, serious students of the economics of taxation understand that taxation is not simply a slicing up of an economic pie the size of which is independent of the details of the system of taxation.  The core economic case for tax cuts is that they reduce the obstacles to creative and productive activities.  When Smith’s taxes fall, Smith works harder; Smith spends more time on the job and less time searching out tax shelters; Smith takes more economic risks; Smith saves and invests more; Smith acts with more entrepreneurial energy.

Smith’s increased contribution to the economy helps to “grow” (as is now said) the size of the pie.  So even if Jones’s taxes aren’t cut, because Jones is a worker and a consumer in the economy of which Smith is also a participant, Jones’s welfare, like Smith’s, is increased by the cut in Smith’s taxes.  Ditto for Williams who also experiences no change in her tax rates or tax base.

Whether or not you find this supply-side-economics story compelling is here beside the point.  The fact is that this account both is grounded sufficiently well in economic theory and common sense, and is one that many people (including me) do find to be compelling.  This supply-side account is, therefore, a plausible justification for cutting taxes.  It’s a justification frequently mentioned in scholarly assessments of tax policy.  Yet this supply-side-economics case for tax cuts is typically ignored, or buried in a single paragraph near the end of each report, in most mainstream-media accounts of tax cuts.  Such reporting is simply bad.  Biased.  Benighted.  Blind.

Suppose that freedom of the press were reported in the same way as are tax cuts “for the rich.”  In particular, suppose that a government that, until now, routinely suppressed the freedom of the press announces that it will be less censorious.  What would you think of a reporter who describes the change as a “giveaway to the press”?

Most people, of course, do not own newspapers or other media outlets.  Most people aren’t reporters or editors or paid pundits.  So a reduction in press censorship might be said to help only the relatively few people who own and who work for the news media.

But clearly the case for freedom of the press is not centered on the benefits such freedom has for press barons, news reporters, and paid pundits.  The core of the case for freedom of the press is that it bestows benefits society-wide.  When the press is free, the chief beneficiaries are the general public.  Anyone who assesses changes in the press’s freedom exclusively by how such changes affect “the press” would rightly be called out as missing the point.

Yet, regrettably, far too many mainstream-media assessments of changes in tax policy focus exclusively on how such changes affect those who earn the incomes and who own the wealth that is legally subject to the tax changes.

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