The strange direction for the tax policy debate

Ever since the gas tax holiday idea floated by John McCain - an idea that will not resolve America's financial problems, but one that really can't hurt, either, and very well may help - the tax debate in Washington has taken a strange turn.

Steve Chapman's article, in Reason magazine of all places, demonstrates that strange turn.

Republicans and Tax Realities

"Sensible people might not mind the lost revenue if the change strengthened the economy. But chances are it does just the opposite, by encouraging taxpayers to jump through hoops to reduce their tax liability.

A low capital gains rate hinders the free market by inducing people (especially very wealthy ones) to find ways to take earnings as capital gains instead of ordinary income. In other words, it encourages them to do things that would not make economic sense otherwise. A modestly higher rate would discourage such wasteful avoidance.

Like all taxes, capital gains taxes are a burden. But given that the federal government spends nearly $3 trillion a year, taxes are a regrettable necessity. When we cut capital gains taxes, we have to raise other taxes to make up the loss. Or we have to borrow more money—which means raising taxes in the future.

Republicans may abhor the obligation of paying for the welfare state they helped preserve. But for the moment, the only real choice is between doing that job better and doing it worse."

What?

A capital gains tax rate gives people an incentive to pay the government less by offering a way for people to pay less tax and channel resources into capital gains - the basis for investments that grow the economy - rather than into discretionary income - where it is more likely to be spent rather than invested - and this undermines the market?

What exactly is Steve Chapman smoking that the folks over at Reason, rightly, advocate should be legalized?

The budget needs to get balanced. That is a priority. But it can be done in many ways. We could raise taxes. But doing so, generally, undermines economic growth both because it coerces money from other purposes and because one of those purposes, in particular, is the investment of those same limited resources into ventures that can expand those resources to become less limited and thus produce more long-term tax revenue.

It is perfectly conceivable that an enormously bloated Federal deficit and Federal budget could be cut in any number of ways and taxes can remain low or lowered, given a genuine commitment to a balanced budget and limited government instead the charade that is masquerading as such in this debate.

The truth is that those who are looking to raise taxes either do not want to make the budget cuts necessary or they have grown so cynical about all of the political maneuvering on such questions that they behave like such cuts cannot be made, rather than the truth, which is that legislators and constituents, often, do not want to make those cuts.

It's irrational that people would look to pork rather than building the economy, both for themselves and for others.

But Americans - Americans from all walks of life; not just those on welfare - have this irrational sense of entitlement to someone else creating financial opportunities for them rather than creating them in the market, themselves, which is the only place that sustainable and honest wealth can be built.

And it is that wealth that is the basis for both Federal revenues and paying off that enormously overbloated budget. It is also that market, and the democratic conversation around it, that offers the greatest hope in our efforts to offer the best quality services in our non-profit commitments, like health care.

Americans need to come to terms with a simple fact about the economy: the only and best way to create wealth, for profit-based endeavors, but also to more generously and effectively support decentralized, diverse, and better quality non-profit commitments, is through taxes low enough to support the most limited government we can safely and wisely to support.

We can fail to come to terms with that fact. But that failure has consequences too. And none of them are great consequences.

And none of our failure to come to terms with this fact of life makes America or democracy or anyone great.

Facing such facts of life and building a stronger and more liberal democracy makes America, the liberal democratic world, and everyone great.

It is our liberty that makes us strong. It is our liberty that makes us great. And any empirical and clear-headed comparison of liberal and illiberal cultures and the quality of lives of those who live there bears that out.

The question is can be that honest and clear-headed in our outlook.

I think we can.

And I think doing so is what makes liberal democracy great.