On Taxes, Citizen Sean O’Kane has much more credibility than Judy Biggert in restraining federal seizure of private wealth. Why? He actually believes in smaller government. Actually believing something helps one see their way to solid policy. Illinois and the Chicago region have rich intellectual veins to tap regarding tax policy. The Chicago School of Economics has for two generations offered a free market riposte to the stale Keynesian economics still too popular in Washington, D.C.
Endorsed by both the National Taxpayer’s Union and the Illinois Center Right Coalition, O’Kane has proven that he is the true fiscal conservative in the race for the Republican nomination. Judy Biggert is a true RINO, which is why her Congressional Grade on Taxes hovers between a B- and a C: completely characteristic of her unimpressive legislative career. Despite her claims otherwise, Judy is no fiscal conservative: Citizens Against Government Waste ranks her a weak 42%.
Citizen O’Kane believes:
- The US Tax Code should be greatly simplified. Consideration should be given to all proposals such as a Flat Tax, elimination of the IRS or a National Consumption Tax. The size of the federal government should actually decrease once it is reduced back to its core proper functions.
- The Alternative Minimum Tax (AMT) should be permanently abolished.
- Tax Shelter subsidies as sops to large corporate interests should be eliminated since they are nothing less than market distortion based on political favor.
- The Tax Burden on the wealth-creating middle and professional classes should be lowered. Money left with in Naperville or Westmont is more productive than begging it back from the Government in a credit, subsidy or entitlement.[ ] As a builder, Citizen O’Kane understands the challenges to creating wealth – he’s created wealth with his mind and with his own hands.
- Taxes should not lessen entrepreneurial activity, the creation of small businesses, or conduct that lessens government obligations such as private retirement funds, medical savings plans, educational tuition plans, or general savings.
- A preference should be given in the tax code to encourage savings and investment.
- Federal taxation needs experimentation – and MOST functions of the US Government’s transfer systems should be returned to the States. Let’s be serious: with a population of 12.5 million, Illinois is almost twice the size of Switzerland, and a bit smaller than the Netherlands, and who believes that the Swiss or the Dutch can’t manage their welfare states and pension funds? The cost of the federal proposition to Illinois amounts to tens of billions of dollars that simply disappear in the US Congress – for every dollar sent to DC, less than .80c returns to Illinois. As an Illinois Representative, I could see that lower taxes and States’ Options on taxes are a good deal for my constituency.
Serious Talk About Taxes and Congress
Taxes do not exist in a vacuum, though it often seems that the common sense of Congress does. The purpose and function of Government – by definition – is to spend someone else’s money: yours. Taxes should be designed to achieve the maximal goals of economic growth and widespread prosperity. Tax cuts are a tool to encourage economic growth because money used in the private sector is more efficient by factors, and the velocity of money in the private sector is much higher. Shifting money from the Dead Hand of government to the private sector can actually increase government revenue on lower rates. This insight, called the Laffer Curve, was the basis of the Thatcher, Reagan and early Bush Tax Cuts. On lower rates, tax revenue actually increased because of higher growth.[1] A cardinal rule to remember in tax debates is that wealth is only created by private initiative [2] – the rubble of Communism in the 20th Century proves this.
The US Government has never spent less this year than last year – the rate of growth is the only variable. A “cut” in Congressional parlance does not mean spending less – as most reasonable people might think – it means spending less than the ‘projected increase.’ Doubletalk? Insanity? Mendacity? A lens distorted at the very least. Irishmen at the Blarney Stone have never told such blatant silliness as what passes for policy analysis inside the Washington Beltway. With a good sense of blarney, Citizen O’Kane will use his fine-tuned sense of wit to demand rational tax policy! After all, it is YOUR money.
Economists specializing in public finance have long enumerated four objectives of tax policy which are the responsibility of Congress to balance:
- Simplicity
- Efficiency
- Fairness
- Revenue Sufficiency
Congress has constructed a system that needs serious overhaul because the present US tax system fails on 3 of 4 of these objectives. Save the object of sufficiency of revenue, the US tax system is neither simple, efficient nor fair. Its complexity is breathlessly Byzantine, its efficiency is disruptive to wealth creation, and its unfairness is particularly felt by the hard-working and sacrificing people of our middle class. If we paid closer attention to simplicity, efficiency and fairness, then revenue would take care of itself, but we should always be aware of how these objectives conflict with each other.
- The Objective of Simplicity is long gone. Millions are now employed in the US economy simply to collect data, fill out Tax Forms, and regulate the IRS Code. It is a massively wasteful system because it impinges on the other objectives of efficiency by misallocating economic resources to a dead-end pursuit, and to fairness by creating gaps in the Code that encourages manipulation by vested interests. Simplicity also suggests predictability, and anyone who has tried to file their own taxes in recent years knows that little of the present system is simple. If the energy of America’s financial professionals were put to better use than tax compliance, we’d have even further expansion of societal wealth.
- The Objective of Efficiency means that taxation interferes as little as possible in the choices people make in the private marketplace. In simple essence, it suggests making the size of the pie bigger by expanding the pie overall. Tax law should be neutral ideally; it should not induce businesses or consumers to invest in real estate instead of biotechnology research – or vice versa. It should encourage work and investment, while remaining neutral to leisure or consumption. Taxes affect behavior, and taxes should distort the natural market as little as possible. It is obvious that the present US tax code is grossly inefficient: certain deductions encourage uneconomical choices, e.g., accelerated depreciation of SUVs, or encourage overvaluation of commodities, e.g., ethanol subsidies, which have an effect on rising food prices [which stand at 150 year highs].
- The Objective of Fairness suggests that similarly situated taxpayers ought to pay equal taxes, and that better-off taxpayers pay more tax (progressive). It is the issue of Fairness that is the most befuddling, since its measurement is more subjective than that of efficiency or sufficiency. One clear focus of fairness, however, involves intergenerational responsibility. While occasional federal fiscal deficits can be a wise temporary tool to smooth economic cycles, the persistent and perpetual deficits that balloon the debt are simply unsustainable and ultimately unfair to future generations since they crowd out opportunities in the future to simply pay for yesterday’s cowardice and timidity in aligning the various objectives of revenue sufficiency with efficiency.
The Objective of Revenue Sufficiency is always colorful when it comes to the histrionics of the US Congress. Ever know a time when they just stopped spending? Aside from the mid-1990s thwarted effort of the Gingrich Congress to close down the Government over spending issues, the US Congress has merrily just gone along spending other people’s money – even that of generations so far yet unborn. The AAA Credit Rating of the US Government (under threat for the first time since 1917) has always assured that borrowing was as easy as taxing. The flood of red ink is depressing. Somewhere, somehow, sometime, these deficits must be repaid – either through declining value of the US Dollar, depreciation of real assets, tightened monetary policy or higher taxes. (seem like yesterday’s Business section?)
The Bush Tax Cuts Worked – We Just Need to Curtail the Spending
Lower tax rates have been so successful in spurring growth that the percentage of federal income taxes paid by the very wealthy has increased – even the New York Times admitted this. According to the Treasury Department, the top 1% of income tax filers paid just 19% of income taxes in 1980 (when the top tax rate was 70%), and 36% in 2003, the year the Bush tax cuts took effect (when the top rate became 35%). The top 5% of income taxpayers went from 37% of taxes paid to 56%, and the top 10% from 49% to 68% of taxes paid. And the amount of taxes paid by those earning more than $1 million a year rose to $236 billion in 2005 from $132 billion in 2003, a 78% increase.
Congressional debate in 2008 and 2009 will revolve around preserving the Bush tax cuts. This is a debate in which not to expect Judy Biggert to be a loud voice. She simply does not believe it – her entire legislative career has been one of equivocation on taxes and spending. Few serious economic conservatives expect more than tepid support from a representative who has shown no leadership whatsoever on fiscal issues.
Most Americans pay very little federal income taxes. In fact, according to the Joint Economic Committee Report of the US House of Representatives in 2005, the bottom half of the population paid only 3.46% of the tax burden. Obvious enough, one needs income to have it taxed. But it underlines the Democratic Leadership’s obsession with transferring through the tax system. Again, an important issue of fairness in the long-run of American government is NOT to have half the population functionally indifferent to the silliness of Washington ways.
(updated October 2007)
The income distributions of the Tax Burden have only increased under the most recent tax years. High income earners today have a slightly higher percentage of the tax burden than in 1999. This is not all bad. However, most of the Bush tax cuts were offset by non-federal raises in tax burdens. State income, sales and property taxes – along with county and local taxes – have taken an increasing percentage of people’s income. The problem with state and local taxes is that they are disproportionately regressive. Consequently, the overall tax take – at ALL income levels – is as high as ever.
Unintended Consequences of Bad Policy
 An example of government intervention in markets having unintended consequences is the recent run-up of food commodity prices to historic highs, largely due to America’s subsidies for ethanol produced from corn and other grains. If you think you’ve noticed a jump in the price of eggs, milk or chicken at Dominick’s or Jewel, you are right. Despite all-time record yields by Illinois and American farmers, the US Government’s subsidies and mandates on ethanol have completely distorted a vital market. While this has an inflationary impact on American food, and costs us only marginally on the fringe, it is having a wholly destructive impact on the poorest of the poor in the Third World. In an effort to encourage American energy independence – a worthy goal – the unintended consequence may be severe malnutrition and starvation amongst the world’s poorest – a not worthy goal. This example serves as a caution against Congressional meddling in free markets. It also underscores how government policy telescopes benefits: a tiny percentage of farmers and huge agribusinesses are reaping record profits, while the entire world pays higher prices for basic goods. Of the roughly 750,000 people in the 13th Congressional District, it is estimated that no more than 3 dozen directly benefit from this market distortion – all the rest pay.
This chart shows that balancing the federal budget for several years is absolutely necessary for long-term economic health. At $238 Billion, that number is only projected to grow by present policy. The huge chunk of Medicare and Social Security are only expected to grow exponentially. We must get a hold on these promises from Congresses past! As sure as Hades will never freeze over, if we simply return the same old Congressional Dogs to Washington and expect them to do new tricks, we will be disappointed.
The importance of these charts shows that with the growth of ‘mandatory spending’ (Social Security, Medicare, welfare etc.) and Debt, the room for what is indisputably the function of the national government, i.e., the military, is slowly crowded out by lack of options. The closing of the window on federal discretionary spending imperils the vitality of American democracy due to the inability to undertake enormous tasks. For the continued strength of what Illinois’ most famous son termed “Government of the people, by the people and for the people..” we must control our fiscal affairs.
Recommended Reading on Taxes By Citizen O’Kane:
Heritage Foundation
Lowering Marginal Tax Rates: The Key to Pro-Growth Tax Relief
A Brief Guide to the Flat Tax
Beware the Value-Added Tax
The Correct Way to Measure the Revenue Impact of Changes in Tax Rates
A Tax Competition Primer: Why Tax Harmonization and Information Exchange Undermine America's Competitive Advantage in the Global Economy
The Joint Economic Committee of the US House of Representatives
Cato Foundation
The National Taxpayer’s Union
The Illinois Center Right Coalition
Fair Tax Foundation
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