Thursday, September 06, 2007

Does the Government really own everything?

Is my net income just a "tax expenditure" that a forbearant omnipotent government allows me to foolishly waste on my own tawdry desires?

It seems that many people would answer that question with a resounding yes!

In a long article on the costs of philanthropy Stephanie Strom writes:

The rich are giving more to charity than ever, but people like Mr. Broad are not the only ones footing the bill for such generosity. For every three dollars they give away, the federal government typically gives up a dollar or more in tax revenue, because of the charitable tax deduction and by not collecting estate taxes.

Strom says there is a growing debate over what philanthropy is achieving at a time when the wealthiest Americans control a rising share of the national income and, because of sharp cuts in personal taxes, give up less to government.

Then there is this pretty amazing statement:

A common perception of philanthropy is that one of its central purposes is to alleviate the suffering of society’s least fortunate and therefore promote greater equality, taking some of the burden off government. In exchange, the United States is one of a handful of countries to allow givers a tax deduction. In essence, the public is letting private individuals decide how to allocate money on their behalf.

So to summarize so far: (a) Philanthropy = lowering inequality, (b) too many rich people don't do the kind of philanthropy other people would like to force them to do, (c) all money belongs to the government, (d) rich people don't pay much in taxes, and (e) if we changed the tax system people would act exactly the same way, estates would continue to be the same size and the government would get a ton of new money that it would use effectively to reduce inequality so lets get a move on!

Is this a great country or what?


Josh Hall said...

Amen! Here is something I wrote on the topic some years back.

The "tax expenditure" concept rests on the assumption that tax rates should be applied to an expansive definition of taxpayer income so as to maximize tax revenue at any given tax rate.

Thus, tax provisions that shield components of this broad definition of income are viewed as depriving the government of its rightful revenues; these lost revenues are regarded as properly belonging to the federal government. Tax provisions that shield taxpayer income, expansively defined, from exposure to prevailing income tax rates are regarded as analogous to government expenditures, hence the term, "tax expenditure."

This violates the deeply ingrained principle that income, at least initially, belongs to those who generate it and that only through the democratic process becomes subject to taxation. It also contradicts with common sense perceptions of many taxpayers. For example, if a taxpayer were asked if the amount of his or her IRA deduction or 401(k) deferral should be properly viewed as the taxpayer's property or as the property of the government, the practical problems of the tax expenditure budget would become even more evident.


Implicit in the notion of closing loopholes is the idea that virtually the total income of the country constitutes the tax base. A deduction or exemption can only be defined as a "loophole" with this presupposition.

The untenable nature of this premise is illustrated by the following reductio ad absurdum. Imagine if capital gains tax rates were raised to 100 percent while tax credits were given that kept individuals' effective capital gains rate constant. Though nothing of substance has changed, an enormous tax expenditure would now exist. From this viewpoint, the untenable nature of viewing tax payments from the position of the government becomes obvious.

From "Tax Expenditures: A Review and Analysis," Joint Economic Committee, August 1999.

Anonymous said...

I just sent the following email to Ms. Strom, but I doubt if she will get the message:

I think your article "Big Gifts, Tax Breaks and a Debate on Charity" is a prime example of why the government ought to reclaim all of the income they allow NY Times writers to keep.

Angus said...

anonymous! kudos. well-done. she is big government's beeyoch if ever there was one.

Anonymous said...

KG, Totally excellent post! It made me want to renew my long expired subscription to Reason magazine.