Sunday, April 22, 2012

Eat The Rich

A witticism enjoyed by "fairness" advocates goes, "You can tell Monopoly is an old game because there’s a luxury tax and rich people can go to jail."

Ah, but there was a luxury tax not all that long ago, more than a half century after the creation of Monopoly. George Will tells the story.

The Omnibus Budget Reconciliation Act of 1990 was the budget agreement by which President Bush broke his "read-my-lips" vow not to agree to new taxes. The act was, as omnibus bills tend to be, an eye-of-newt-and-hair-of-toad brew of this and that and some other things, and it included--in the name of fairness, of course--a stern tax on "luxury items."

Those items included automobiles, aircraft, jewelry and furs over certain prices. And yachts costing more than $100,000.

In 1990 there were no luxury excise taxes, all of them having been repealed in 1965. But perhaps every quarter-century or so government--it cannot help itself--must go on a "fairness" bender, the memory of the hangover from similar misadventures having faded.

In 1990 the Joint Committee on Taxation projected that the 1991 revenue yield from luxury taxes would be $31 million. It was $16.6 million. Why? Because (surprise!) the taxation changed behavior: Fewer people bought the taxed products. Demand went down when prices went up. Washington was amazed. People bought yachts overseas. Who would have thought it?

According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal 1991, which means the government projection was off by $38.6 million.

This illustrates the shortcomings of "static analysis." Concerning which, consider an imaginary case.

It has been calculated that if the federal government imposed--in the name of fairness, of course--a 100 percent tax on all the earnings, from the first penny, of all millionaires, which is to say if the government confiscated all their earnings, the sum would suffice to run the government for just six weeks. The problem with that calculation is that it reflects "static analysis." That is, it does not allow for behavioral changes the tax would provoke: No one would earn the one-millionth dollar, thereby triggering the confiscation, so the revenue yield from the 100 percent rate on millionaires would be zero.

But back to reality. "Practical politics," Henry Adams famously said, "consists in ignoring facts." But facts are famously stubborn things, particularly when they involve unpleasantness for one's constituents. In 1993 Congress repealed the excise taxes on boats, aircraft, jewelry and furs. It also indexed, phased down and scheduled the expiration of the tax on cars.

The delicious irony of this story is that the tax was pushed hard by liberal New England senators (Ted Kennedy, George Mitchell, et al) and it was their constituency (northeastern boatbuilders) that suffered most by its passage. Passed with great fanfare, the tax was repealed quietly with its former sponsors favoring its demise.

Fast forward to today's current "fairness" fetish - the "Buffett Rule". The Buffett Rule would raise at most $5 billion a year over the next 10 years - less than 1 percent of the $1.2 trillion federal deficit gap this year.  This calculation, of course, is a "static analysis" as explained by Will. The actual effects of the Buffett Rule would include a slowing of the economy and job destruction and an increase in the deficit. No matter. Liberals support it in the name of fairness. 

As for the second part of the Monopoly quote – no argument there. Rich people are difficult to incarcerate these days. One example - Tim Geithner, who not only remains free but was appointed by President Obama to head the agency (Treasury) which is responsible for preventing, investigating and prosecuting the very crime that he committed (tax evasion).
And of course there's Bill Clinton, who committed perjury testifying to a Federal Grand Jury (a felony) and not only was not jailed but didn't even lose his job.  

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