Libertarian Tax Plan

I am not sure if libertarians are blind elephants, or some other kind of blind creature.  Anyways, this one is filed under “Rule of Unreason”, because that’s the only way to describe this proposal by Megan McArdle.  Here is the money quote:

“…I can think of a lot of uses for that cash [taken from her by force for taxes]. That, however, is the price of living in a free society. What bothers me is that it’s so bloody complicated.”

Agreement that armed robbery is OK, check.  Belief that this is necessary in a free society.  Check.  Objection on grounds it’s complicated(!)  Double-yoo, Tee, Eff!

So here is her “solution”:

1) Get rid of all our poverty programs, except [her pet favorites], and institute the negative income tax. That is to say, the system should be continuously progressive, from a steep negative rate of up to 100% on very low earners, gradually declining until it zeroes out around $28,000 a year, and then rising gradually until it maxes out around 35% on the top brackets.

So let me get this straight.  Handouts are not OK, except when they are?  What is the principle that determines which handouts are OK?  “Negative income tax” would be a new kind of welfare handout.  But that’s OK, because you propose to steal 35% of my money by force to pay for my right to live in a “free” society (and to pay for the right of the negatively-taxed people to live free also).

2) Eliminate FICA and pay for Social Security and Medicare out of general revenue.

What’s the point, if you’re not proposing to get the goverment out of the pension game?

3) Eliminate the corporate income tax

OK, but how does this fit with everything else you propose?  Don’t you realize that “the rich” will just form corporations, where they can accumulate profits tax-free?

4) Eliminate the special treatment for capital gains. All income should be taxed at the same level, regardless of its source.

At the least, index capital gains to inflation.  If I sell today a house I bought in 1970, not all of the $500,000 difference between the 1970 and 2008 price is “capital gain.”  But more importantly, a tax on capital gains is more destructive than a tax on labor.  All taxes are destructive (which is one reason why they should be abolished), but some taxes are more destructive than others.

If you had $50,000,000 what would be your first consideration: (a) making another $10,000,000 or (b) protecting your capital?  It wouldn’t take all that much capital gain tax to eliminate most of the capital available to be risked today.  Risk capital is how people quit jobs to start businesses, and how smal business become large businesses.  High capital gains taxes prevent class mobility; low capital gains taxes allow upward (and downward) mobility.

5) Eliminate all deductions.

At the 35% rate you proposed, this would be a substantial tax increase for the most productive people.

6) Just say no to the Value Added Tax. In theory, it’s a good tax. In practice, because it is extremely hard to tell what proportion of the price of anything represents the tax, it removes the good and natural pressure upon tax rates.

I had to re-read this several times to guess what she means.  I think you have to be an initiate in the libertarian cult in order to accept this at face value.

My first response is what the hell is wrong with your theory that it calls bad things “good”?

I think her objection is on the grounds that the most important characteristic of a tax (aside from being simple) is that it be hated.  This is what she means by “removes the good and natural pressure upon tax rates.”  People won’t hate a VAT because they won’t know it’s there.

How is this different than the case of someone in her proposed system who is paying “negative income taxes”?  What happens to the minority when a majority of the voters don’t pay tax?

Blank out.

7) Get rid of the estate tax, and tax the capital gains on whatever is sold.

What is the difference between transfer of ownership to a son or grandson vs. transfer of ownership to a stranger in exchange for cash?  Why is only the latter deemed to be a price for the right to live in a “free” society.

McArdle goes on and on to rationalize all this tinkering.  She even gives an example of a blind elephant arguing with a blind donkey.

Elephant: the rich pay all the taxes

Donkey: what about FICA?

But she fails to identify, much less discuss, a single principle.  She seems to realize this, with her repeated caveat that this proposal won’t satisfy anyone.  She’s right.  Principles are universal.  Without principles, this is only so much (uninformed) tinkering.  No one will be satisfied by it, other than those few who have the same kind confusion.

The principle is that taxation is armed robbery.  No matter how you rationalize it, taxation means threating people with a gun to give up their hard-earned money.  You have no right to take my money at gunpoint, and neither has the government.  It’s interesting that McArdle calls private income “loot”.  Actually, it’s loot when it’s taken by force.

Income is not loot.  Please make a note of it.

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