Franklin once wrote in a letter to Jean-Baptiste Leroy that “nothing
can be said to be certain except death and taxes.” Taxes have
become a big part of our everyday lives.
level of government taxes almost everything that we do. We pay taxes
on the money that we earn (federal and state), we pay taxes into
Social Security and Medicare, we pay taxes for owning assets like our
house or car, we pay taxes when we buy things including airline
tickets and hotels, and if you have accumulated enough money you can
even pay taxes for dying.
are a necessary part of our lives, but taxes can cause very
unbeneficial distortions in our economy. In fact, taxes always cause
distortions. The goal is to try and implement taxes that will create
the smallest distortions. The easiest example of what these
distortions can do is the tax that was put on the purchase of yachts.
1990, President Bush signed a budget agreement with congress that
placed a “luxury” tax on yacht purchases. The theory is
that the rich will always buy yachts and so a tax on the yachts is no
big deal. The rich can afford the increased cost. What happened was
additional tax destroyed the yacht manufacturing business in the
United States and the 25,000 good jobs in that industry. Instead of
the tax creating revenue for the government, the tax actually caused
a drain on the federal treasury due to the unemployment benefits paid
to the ex-workers.
tax in one industry and 25,000 jobs are gone.
are the federal tax revenues by year (1944-2011) as a percent of
gross domestic product.
how the line looks relatively flat. It bounces between 15 and 20% of
GDP. The tax rate for the highest earners in the country has gone
from 90% to 28% back to the current rate of 36%. This indicates that
tax policies can change but the amount of revenue collected by the
government stays fairly constant.
question for the United States right now is what tax policy change
will help our current economy create jobs.
party is recommending increasing the tax rate for the wealthiest
earners. Their logic is that this will help decrease the deficit and
create more confidence in the economy.
biggest problem in this logic is that the best estimate of increased
revenue for this tax increase is $80 billion per year, and we are
running deficits right now in excess of $1 trillion a year. So this
tax will have a minimal impact on the deficit.
a tax increase is a known job killer. I am really not sure what this
tax will accomplish besides get somebody elected because he says he
is going to get the rich to “pay their fair share.”
other party is recommending a reform of the tax code — removing
some of the existing deductions and then lowering the tax rate so
that the amount of revenue collected would remain the same but people
would have more flexibility about where to invest their money because
of the reduced distortions created by taxes.
is what President Reagan did with Senator Bill Bradley in 1986 and
helped create the huge economic expansion that lasted until this
latest recession. Because this plan decreases the tax rate, it is an
easy target for the opposing political party to claim tax breaks for
the rich even though with the decrease in deductions the same amount
of revenue will be collected.
economy is never going to start expanding at a pace to reduce the
unemployment rate until the business world believes the government is
not hostile to their efforts. Some economists call this the animal
spirits in the economy or the mood of the business sector. It is not
just some underlying fundamental, but how people feel about the
the tax code by itself is not going to change the economic fortunes
of the United States. But it has to be a pillar in any economic plan
presented if we are to ever to get those 23
unemployed and underemployed people back to work. A reformed tax
code would decrease the distortions in the market and convey the
message to the business community that the government is not hostile to
Adam Smith is obviously not the actual name of the author of this column. The real author has
worked for two Fortune 500 companies, one privately held company, and a public accounting
firm. His undergraduate degree was in accounting, and he earned an MBA for his graduate
degree. He also has completed coursework for a PhD. in finance. He continues to be employed
by one of the Fortune 500 companies.
The author grew up in the Washington D.C. area but also lived for several years in Arizona. He
currently resides with his family on the East Coast.
The author has held various callings in The Church of Jesus Christ of Latter-day Saints.