Tax policy and inequality in America (Part 2 of 2)

If you haven't read part 1, do so here. :)

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Mellon’s Mark
Anyone taking an objective look at the American economy from 1919 to 1921 would have scoffed at the notion that the decade to come would be known in history as “The Roaring Twenties.” It certainly didn’t start with a roar. The end of World War I brought about a weak agricultural sector, tens of thousands of GIs looking for jobs, high taxes, a high national debt, a slow economy, and a fattened U.S. government (Schweikart and Allen, 2004).
Into this puddle of economic malaise stepped Warren Harding as the newly elected president of the United States in November of 1920. Harding’s secretary of the treasury, Andrew Mellon, immediately began studying the roots of the economic bleakness and sought a solution. Mellon found that the high rate of taxation had driven money underground as the rich invested abroad rather than pay the high taxes on business in the U.S. “Mellon concluded that lowering the rates on everyone, especially on the wealthiest classes, would actually result in their paying more taxes. From 1921 to 1926, Congress reduced rates…on the top income earners…. The tax take from the wealthy almost tripled, but the poor classes saw their share of taxes fall substantially…. The national debt fell by one third…in five years” (Schweikart and Allen, 2004).
When Harding died suddenly while in office, his quiet vice president, Calvin Coolidge, calmly took the helm and continued the restrained and stand-offish economic policies of his late boss. Things went from good to better in a hurry. “Unemployment reached the unheard-of low mark of less than 2 percent under Coolidge, and … union membership shrank... [due to] welfare capitalism preemptively providing employees with a wide range of benefits without pressure from unions.… With government playing only a small role in people’s everyday affairs, American entrepreneurs produced the most vibrant eight-year burst of manufacturing and innovation in the nation’s history.” (Schweikart and Allen, 2004).
Contrary to academics’ assumptions about the interaction of today’s public policies and economic prosperity, history shows that the “rising tide of strong economic growth lifted all boats. At the top end, total income grew as a result of many more people becoming prosperous, rather than a fixed number of high earners getting greatly richer….between 1922 and 1928…the number of taxpayers earning between $10,000 and $100,000 increased 84 percent, while the number reporting income of less than $10,000 fell” (Rugy, 2003). This period of restrained government and exploding wealth and prosperity across classes stands as a bright testament to the ideals of our founding: limited government and the strongest possible protection of personal liberty and the free market system.

Priorities of the Present Political Period
Robert Frank makes a compelling case that inequality does in fact harm the middle class and society as a whole. Demonstrating that the “positional arms race” engaged in by our materialistic society is a root cause of inequality, Frank argues that the estate tax and a progressive consumption tax are essential in the effort toward a more egalitarian society (Frank, 2007).
My contention with Frank is not that his proposals are necessarily wrong in their policy outcomes, but that they are wrong in their philosophical outcomes and therefore ultimately will fail. To borrow his words, I don’t think that a progressive consumption tax is “little more than a political pipe dream;” rather, the socialistic idea that man can create a perfect, egalitarian society is a philosophical “pipe dream” with dangerous consequences.
Friedrich Hayek, in his seminal 1944 work “The Road to Serfdom,” rightly wrote that
“Nobody saw more clearly than Tocqueville that democracy… stood in an irreconcilable conflict with socialism: ‘Democracy extends the sphere of individual freedom,’ he said in 1848; ‘socialism restricts it. Democracy attaches all possible value to each man; socialism makes each man a mere agent, a mere number. Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude’ (Hayek, 1944).
As a society, we must take a sober look the history of government power and intervention in the marketplace, confiscation of personal property and liberty, and attempts to create a perfect, egalitarian society. If the 20th Century’s experiments in the former Soviet Union, China, Cuba, Vietnam, and Cambodia (to name a few), are any indication, an egalitarian “workers paradise” is the ultimate philosophical pipe dream.
“Man,” wrote Declaration of Independence signer James Wilson “is intended for action. Useful and skilful industry is the soul of an active life. But industry should have her just reward. That reward is property.… What belongs to no one is wasted by every one. What belongs to one man in particular is the object of his economy and care. Exclusive property prevents disorder, and promotes peace” (Wilson, 1804). One of the lost values of the present political age is the preservation of private property as essential to a free and peaceful society. The idea that government has the right – and even the duty – to confiscate the property of the wealthy via taxes for the purpose of “equality,” is an assumption that flies in the face of all the written ideals of our founding. Yet, when it comes to tax policy, “the emphasis in Washington, DC, has once again turned to how to split up the economic pie rather than the effect of tax policy on the size of the pie” (Carroll, 2009). For our elected policy makers to continue to view the economic impact of taxation as a zero sum game is an irrational and historically ignorant viewpoint. Assuming that it is their place to allocate the servings of that pie is the pinnacle of political arrogance.
Eliminating the progressive income tax and replacing it with either a flat income tax or a national sales tax for the purpose of funding only the minimum constitutionally legitimate functions of the federal government would be a bold step toward curbing politicians’ insatiable appetite for playing god (Levin, 2009). No matter what the specific outcomes, our society must change its philosophical assumption that the government’s job is to “take care of us.” Returning to the ideas of constitutionally limited government, fiscal restraint, and the “hands off” policies of Harding and Coolidge, holds great promise for increasing the economic prosperity of all Americans.
Our beloved 16th president was dismayed at the socialistic and redistributive ideas of his day, saying, “That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another; but let him labor diligently and build one for himself, thus by example assuring that his own shall be safe from violence when built” (Lincoln, 1864). He knew that the point of taxation “isn’t to confiscate: it’s to raise revenue for things that will benefit society” (Lowenstein, 2007). That which ultimately benefits society more than all else is liberty and freedom from a tyrannical government. It is for these things our founders gave their lives, their fortunes, and their sacred honor (Declaration of Independence, 1776). Our tax policies and philosophical position towards the redistribution of wealth ought to take such a stance.
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If anyone would like a bibliography of the cited material, let me know. :)

Tax policy and inequality in America (Part 1 of 2)

Studying political science at what might be the most liberal academic institution north of Berkley has given me a lot of opportunities to observe, listen to, and digest a large volume of hyper-liberal ideology. Unfortunately, I have had far less opportunity to respond, as my silence is frequently critical to my grades and even, I suspect, my health.
One of the classes I am finishing up has been focused entirely on the issue of inequality in the United States. I decided to share with anyone who cares to read my thoughts on tax policy and inequality in America. This is the first of what will be a two part series. Your thoughts and comments are welcome. :)
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An Introduction to Inequality
A great academic focus of many in today’s intellectual class is on the distribution of wealth and government policies of redistribution. The literature on the issue of inequality is staggering in its breadth and depth. It is not the purpose of this brief essay – were it even possible in any space of pen and page – to settle or presume to answer in any definitive way the myriad of questions about the extent of inequality in America and what the government might do about it. Rather, this essay will focus specifically on the role of government tax policy and its correlation with inequality in American society. What is the historical relationship between tax policy and inequality across all social strata, and how should these historical relationships influence future tax policy? More importantly, what is the philosophical rationale of government redistribution of wealth policies? No essay this breif could be expected to fully answer such questions, but herein I will make the case for a reduction in government involvement in wealth redistribution policies as the preferable method to increase liberty, economic growth, and societal happiness, these being preferred to the costs associated with the government imposition of a more egalitarian society.

Inequality’s Inherency
Thomas Piketty and Emmanuel Saez teamed up in 2003 for The Quarterly Journal of Economics to document the top shares of wages from 1913 to 1998 in the United States. Their work shows that as early as 1913 (and others have shown it to be substantially true even earlier), the wealthiest percentile of capital owners was miles ahead of the middle class and poor, and were still, even after experiencing large and permanent losses during the Great Depression and World War II. They argue that “steep progressive income and estate taxation may have prevented large fortunes from fully recovering” after World War II, but that the gap in equality was still vast, and did grow in the post-war years. Theirs is far from the first study outlining inequality of income or of taxation, but it does make the important case that “long-run inequality trends are the consequence of real economic change, and… a short-run perspective might… attribute improperly some of these trends to fiscal manipulation.” In other words, though government policy is influential, one must carefully consider that inequality is too complex of a social condition as to be contained or controlled by “fiscal manipulation” (Piketty and Saez, 2006).
Other authors and researchers have gone to great lengths to demonstrate a rising inequality in America and its (debatably) harmful affects on American society (see Bartels, 2008; Frank, 2007), arguing for aggressive government intervention in pursuit of a more egalitarian society. Still others (Iyer et al, 2008) have dug into the issues of tax rate progressivity and its affect (or lack thereof) on real inequality, the hidden “excess burden” of high tax rates (Carroll, 2009), the necessity of high employment and union involvement in eradicating inequality (Kenworthy, 2009), and the affect of “changes in labor supply, savings, and portfolio decisions as a result of revisions in the tax code” (Karoly, 1996; Sanyal et al, 2000).
In spite of the vast quantities of time, effort, and money poured into researching inequality and what can be done about it, it strikes this author as rather odd that the basic assumption by seemingly every academic is that the government should do something about inequality, without really making the case that because action is possible, that action is inherently good. For that matter, the basic assumption that inequality is harmful is scarcely argued at all, save for the work of Robert Frank in his book “Falling Behind” (Frank, 2007).
It is my contention that the eradication of inequality by government redistribution of wealth is a fruitless and foolish endeavor. As such, we ought to look to history as a guide on to whether the societal welfare can be maximized without the obtuse intrusion of government on economic affairs and personal liberty and property.

Economic Recovery

It is a slow day in the small Minnesota town of Marshall , and streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.

A rich tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.

As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Farmer's Co-op.

The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the rich traveler will not suspect anything.

At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves town.

No one produced anything. No one earned anything... However, the whole town is now out of debt and now looks to the future with a lot more optimism.

And that, ladies and gentlemen, is how the United States government is conducting business today.