A Citizen's 2% Solution

How to Repeal Investment Income Taxes, Avoid a Value-Added Tax, and Still Balance the Budget

Archive for September, 2010

A Challenge for Alan Greenspan

Dear Mr. Greenspan,

I watched your September 24th interview on PBS NewsHour in which you described America’s fiscal options as ranging from “terrible” to “catastrophic”, bemoaned Congress’ inability to control spending, and reluctantly advocated raising taxes.  I am going to resist the temptation to analyze any responsibility you may share for the situation we are facing and embrace your apparent interest in guiding us productively forward – because I share your assessment. 

I would, however, like to challenge you to do more than simply voice your opinion about whether taxes should go “up” or “down” and ask you to please apply your experience and knowledge to reassess tax policy in a broader context. 

“Progress is impossible without change, and those who cannot change their minds cannot change anything.” – George Bernard Shaw

For decades now the economics profession has chanted (almost in unison) a false mantra: asserting that lower tax rates on investment income would place us on the Golden Path toward growth and prosperity.  It has been the justification for policies which allow the privileged and elite of our society to pay lower tax rates on their business and investment income than the working stiff pays on salary and wages and has resulted in an ever-increasing concentration of wealth accruing to the already rich. 

If it is your intention today to simply protect your reputation by rationalizing and defending your past decisions I would like to strongly urge you to embrace your retirement, find a hobby, and withdraw from further public pronouncements.  (Frankly, your comment to Jeffrey Brown, defending previous support of tax cuts as emanating from the Fed’s concern of what to do with accruing surpluses after the national debt was retired, struck me as simply silly.  You might have considered accumulating some tangible assets to replace the IOU’s in our fictional social security lock box.  Perhaps some carefully screened low loan-to-value mortgages?) 

If, on the other hand, you are sensitive to G B Shaw’s advice cited above, I think we all need to learn from our experience of the last thirty years and there is no better time to reassess our tax policies and practices than right now.  I therefore respectfully ask you to accept my challenge, broaden your perspective, and engage with the question of How can we rationalize tax policies?” 

Here’s a suggestion of one place to start.  Please evaluate and respond to the following question: 

Why don’t we tax wealth instead of investment income? 

The arguments suggesting that taxes on investment profits stifle growth and stimulate tax avoidance are widely known and largely indisputable.  But if there are similar arguments against a nominal tax directly assessed upon accumulated wealth, I’m not familiar with them.  So please educate me. 

I concur with the economists’ mantra, taxing investment income imposes penalties that distort capital allocations and discourage productive investments. We reward inefficiency.  We make pursuing tax avoidance strategies and valuation manipulation more profitable than pursuing real business growth and operating efficiencies.  Moreover, our existing tax structure provides the rich with unneeded and unjustifiable preferential treatment.  The lucky and privileged man or woman who has no need of current income can structure their investments to produce nothing but long-term unrealized capital gains – and avoid a tax bill altogether. 

So how could we remove the distortions of investment income taxes without providing the wealthy with still greater preferential tax treatment? 

We could tax wealth directly.  An annual 2% asset tax would impose equal treatment upon all holders of wealth – allocated ratably based upon their ability to pay.  I think replacing investment income taxes with a nominal tax on wealth would remove current benefits and protections that direct capital to non-productive or risk-free investments, stimulate and reward more aggressive and productive investments, and return an element of progressivity to the tax code.  Combining that with flattened and sharply reduced taxes on salaries and wages would stimulate real wage growth and consumer spending. 

It’s a simple, structural change.  It seems so obvious to me that I don’t understand why it is not the topic of wide debate.  It’s my suggested alternative.  Perhaps it’s flawed?  If so, please identify how.  De-bunk it.  Refute it.  Better it. 

If you really think our tax policies today represent the best we can do – then make your case.  But I believe it will be difficult, because our existing tax code is a disgraceful monument to unequal treatment: heavily skewed to favor the rich, while failing to adequately fund our spending requirements. 

I personally do not believe that we can return to fiscal responsibility without evaluating and imposing structural change and far more rational and equitable treatment to our tax code.  I believe attempting to do so constitutes the greatest challenge of our generation. 

I therefore, most respectfully, request that you (and the rest of your profession) stop pretending that a minor manipulation of marginal tax rates is an adequate response to the pending catastrophe of which you warn. 

I’ve set forth one alternative proposal.  If you can formulate a better suggestion, then please bring it forward – we all need to hear it. 

Respectfully

Douglas Hopkins

Author of A Citizen’s 2% Solution: How to Repeal Investment Income Taxes, Avoid a Value-Added Tax, and Still Balance the Budget.