A Call for New Taxes

In Roman times, the elite aristocracy paid no taxes but was expected to build walls, aqueducts, or other public works periodically, while the populace was mercilessly taxed.

What is the difference between the modern structure wherein foundations are a tax dodge, and the taxes of small businessmen are higher than they otherwise would be to subsidize the deification of the über-rich through monuments to their generosity, or worse, their political ideals, especially when these are anti-American? Why should not the upper – middle class be livid?

Certainly the richest of society should be praised for philanthropy. But to accomplish this through shifting economic resources away from the middle class is demoralizing and destructive to our economic fabric.

To push the concept to the max by calling for higher marginal tax rates, whose full effect is felt by small businessmen, and insisting they are advocates of social justice is a shameless deception. F. Scott Fitzgerald was right that the rich are different from you and me, but he could have added that the difference is not softness but arrogance, for they can manipulate the strings of government to their benefit just as their Roman counterparts did nearly two millennia ago.

A call for new taxes on the top layers has been workable historically when small amounts of new spending are required, but if a crisis such as a war or the default of government-backed banks or mortgages triggers a massive need for funding, someone astute might notice that the socialist scheme to confine the new burden upon just the rich might fail.

It would not fail because a sleepwalking Congress did or did not act; rather it would fail simply because the numbers don ’ t add up, regardless of which bipartisan solution might be contrived to achieve an incremental fix.

We have been living in a fantasy in which our country is so rich that it may raise spending indefinitely, that the bottommost 50 percent of taxpayers may be nearly excluded from the burden of paying for this, that the upper echelons can afford to underwrite it, and that the capital markets accept the deferral of any payment through granting the nation an unlimited credit line. The truth is that we are flat broke.

Each household or individual filing taxes would owe about $80,000 to extinguish the federal debt, and it is on the hook for a total of $520,000 including future entitlements.

The effect of shifting this burden to specific subgroups of tax payers quickly escalates the per household obligation to ludicrous heights. The picture does not look much better if we spread the pain to the bottom half as we used to decades ago. Concentrating the burden upon the very richest Americans is equally shaky.

While flat or fair taxes may improve upon progressive taxes, a more fundamental question needs to be asked. Have the less than 100-year-old experiments with income taxation and centrally managed fiat currencies begun to produce a situation that might alter society by causing catastrophic economic depression?

At its last instance, the 1930s, socialism resulted as measured by income and estate taxes, which only temporarily abated under Reagan. And in fact on inflation-adjusted terms, the upper-middle class was not anywhere near as penalized in the Great Depression as it has grown to be over the decades that followed.

During the 1930s, the super rich were singled out for taxation. In contrast, in the downturn that begun in 2008 the unintended consequence might be punitive confiscation of wealth held by the upper-middle and middle classes, and the entrenchment of the super rich, who can operate partly outside the conventional income tax mechanism and wield heavy political influence through 527 groups, while the populace is restricted in the political process.

Flat income taxes cannot address the inequity of permitting a very select elite group to accumulate its wealth largely outside the grasp of ordinary income taxation, aided by inflation, leverage, and derivatives, while those who aspire to the same lifestyle are incessantly restrained in good times and held responsible for cleaning up the toxic mess that inflation, leverage, and derivatives inevitably produce.

Only a flat tax on wealth itself could fairly bridge this divide. Sadly, a century of centrally managed fiat currency and progressive taxation of income has incubated a pernicious sentiment of class warfare that has pitted the lowest half of society against the upper-middle class.

An objective stress test of the progressive tax code placed upon a population that has borrowed heavily in response to the inexorable inflation of investible assets stimulated by fiat currency shows that the casualty of this class warfare is the financial security of a generation and perhaps another to follow.

But it is faux class warfare, for its natural endpoint is the mutual impoverishment of nearly all citizens through the languishment of incentives and the ascendance of a ruling plutocracy.


Bill Baker,
for The Daily Reckoning

[Editor’s note: This passage is reprinted from William W. Baker’s book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy here.]

The Daily Reckoning