Saturday, March 17, 2012

Owning versus Earning

There are two ways to make jingle: own something, or earn money.

Our tax code favors ownership. I'm not an economist, so I can't begin to explain why that would or wouldn't be justified for the health of our economy (there's already plenty of economists doing that, here's a liberal leaning one talking about a right leaning one). I'm not a historian, so I can't tell you why it is the way it is, although my intuition is it is a vestigial policy of agrarian society where preservation of property was essential. But that's just a total guess.

What I do know is this - most people are not owners. Most people are debtors. The only two things debtors have going for them are: inflation and their income. As a person who's spent a good deal of time and effort trying to jump from the bottom 25% to the top 25% of economic classes, I can also tell you that the biggest hurdle is income tax. Government sponsored loans and grants, individual generosity, and a healthy portion of good luck, gave me my education, which transformed my life in every possible way (met nearly all my business partners in school, including my wife!). So, I can't really complain about paying my taxes. If you're old enough some of your taxes put me through prep school and college (thanks btw).

So, I'm not complaining. It is perfectly just for the society that aided me to expect me to pay taxes to do good for the other members of society. Nope, I'm not complaining, I'm just saying the tax code is flagrantly unfair and completely boneheaded.

The American dream, or at least my version of it, is everyone gets a fair shot at making it to the top of the economic strata, while enjoying generous freedoms along the way. The only rule is you will not be stopped based on color, creed, disability, gender, or other immutable personal traits. The problem is ownership, and the favorable taxes in bestows, is inherited. You don't have much control over what you own at birth. So, by favoring ownership with taxes, I think we've basically legalized a bias against an immutable personal trait: the economic circumstances into which you were born.

I'm not saying you need to disallow the transfer of property between generations. You earned it, go ahead and give it to the kids. But do we need to throw a huge headwind in front of everyone who wasn't born with it? Income tax is the largest barrier to accumulating property. It directly inhibits people from enjoying the same right of bestowing property on their own kids. By taxing income from labor twice as much as property, we block the only avenue to generating new wealth for those born without it. How can that be good for society?

My career has ended up being about startups. Very luckily, startups are all about creating new property to own as a founder. I happen to think creating new property from practically nothing is a very good thing for society, and if you have the gumption, I think you should go for it yourself. It may be the only realistic (not necessarily easy) way to make the leap from the bottom to the top. Maybe there is something to be said for encouraging that. But, I just don't think anyone understands the effects of taxes on the economy nearly well enough to justify social engineering with tax policy. So, in the absence of a more perfect understanding of the way taxes affect society, I think we have to default to the most simple model that would provide a level playing field: everyone pays the same tax rate.

Given the huge concentration in wealth and ownership, and hence the higher portion of tax receipts from the wealthy, we could probably maintain our tax revenues by making a small increase in cap gains, and a huge reduction in income tax. How about we make them both 20%? That seems fair to me. And if federal lawmakers can't find a budget that allows for the defense of the country, dignified retirement years, healthcare for everyone, and adequate national infrastructure investments with 20% of what we all produce then... can we just fire them? please?

Oh, speaking of lawmakers - and I mean you Congress - everyone knows you only use taxes to do favors. It is codified patronage. Tax policy is a joke, and frankly I don't think you guys should be able to make it evermore byzantine. Instead of the flash bomb politics at play debating whether the constitution should be amended to define marriage (for the record, my definition is: willing submission of your personal decisions to the will of one other person. Free advice - if by some miracle you find someone with whom you can mutually do that, marry them.), how about we do something practical and change the constitution to stipulate a flat tax rate and a limit on the national debt. Congress still gets to decide how to spend the receipts, but we stop pretending they can do good for anyone but themselves with tax policy. If they want to raise the tax rate, then amend the constitution again and raise it (see my notes above regarding firing, I wouldn't expect you folks to fair well in an election following a constitutional amendment to raise taxes).