"YOU COULD BUY EVERY AD ON THE SUPER BOWL," said Phil Gramm with some asperity, "and you could never convince the American people that you ought to have a 17 percent tax on wages and salaries, but ... investment income should go untaxed."
Couldn't you? Steve Forbes is promoting just such a tax plan, and New Hampshire voters rather seem to like it. The only sizable group that doesn't seem to like it is the national press corps, which appears highly offended that Forbes would spend much of his own money to promote an idea he believes in -- and even more offended that his campaign of principle might win him the New Hampshire primary.
Among the media elite, of course, it has become an article of faith that Forbes' tax proposal is unfair. No surprise there; in the nation's newsrooms, pressing for tax cuts is always derided as extremism that favors the rich. But Gramm, the former economics professor from Texas A&M who has his own plan to flatten the income tax, knows better. There are serious failings for which Forbes can be criticized (his political inexperience, the harshness of his ads). But it makes no sense for Gramm to join in assaulting him over his tax cuts. That can benefit no one except Bill Clinton, who will use Gramm's words to attack the flat tax in the fall, when it becomes the centerpiece of the GOP campaign.
Besides: In any test of fairness, the Forbes plan wins hands-down.
If tax fairness means anything at all, it means that two people making the same salary should pay the same tax. How they spend their respective salaries should be their business -- not the tax collector's. Once they've paid their income tax, their dealings with the IRS should be at an end. Whether they use their earnings to gorge on Hershey's Kisses or open a savings account, to honeymoon in Bali or buy 100 shares of Gillette, their tax bill should remain unchanged. No one should be punished with additional taxes because he chooses to invest his wages instead of spending them right away.
But that's not how the tax code works. Instead of treating taxpayers equally, it enforces an outrageous double standard. Americans who consume their earnings are taxed once. Those who sacrifice for the future are taxed two, three, even four times.
A couple of analogies:
-- Two neighbors, Lewis and Clark, are putting in vegetable gardens. Each decides to grow wax beans and buys a packet of 25 seeds for $2 from the nursery. From those seeds, Lewis and Clark grow 25 plants apiece, watering and weeding them until the yellow beans have ripened. At that point, Lewis picks the beans and serves them for lunch in a tasty three-bean salad. Clark waits for his plants to go to seed and harvests 20 new wax bean seeds from each of his 25 plants. The owner of the nursery then shows up at Clark's door, demanding -- in the name of "fairness" -- to be paid an extra $40 for the 500 seeds Clark has grown.
-- Little Genevieve wants to learn French. You pay $300 to sign her up for language classes with Mme. Defarge. She studies well and does her lessons and keeps working at them after the course has ended. Before long, Genevieve can read "Waiting for Godot" in the original French -- whereupon Mme. Defarge claims another $300, as payment for the higher language skills Genevieve has mastered.
Madness would be more like it. Yet it's exactly such madness that the tax code inflicts on savers and investors. And exactly such madness that Forbes -- by ending the taxation of interest, dividends and capital gains -- would abolish.
Two workers labor side by side. They are paid equal wages, have equal income taxes withheld and end each week with equal take-home pay. Worker A spends his after-tax income on food, bills, gasoline, and fishing trips to Vermont. Worker B forgoes the fishing trips and instead puts $50 a week in a stock fund. At the end of the year, Worker A has enjoyed every nickel of his take-home pay. Worker B, by denying himself the fun of fishing, has been able to invest $2,600 in a start-up company called Microhard.
Actually, Worker B has done more than defer his personal gratification. He has also taken a risk. It is possible that Microhard will fail (most new firms do) and that Worker B will lose everything he saved.
But Worker B will be punished even if Microhard succeeds. Though he will have helped create new jobs and produce goods that consumers want -- though his sacrifice and risk-taking will have borne fruit for society -- the tax code will batter him with multiple penalties.
Instead of reaping the full value of the money he put aside, Worker B will lose most of it to the government. If Microhard earns a return on Worker B's investment, the IRS will skim off 34 percent in corporate income taxes. (He's just been taxed a second time.) If the company distributes the remaining profits as dividends, Worker B will pay up to 39.6 percent in new income taxes. (Taxed a third time.) Should he decide in a few years to sell his stock, he'll be slammed with a 28 percent capital gains tax. (Taxed a fourth time.)
Go fishing -- pay taxes once. Scrimp and save and put your money at risk -- pay taxes four times. Whatever else that may be, "fairness" it isn't.
(Jeff Jacoby is a columnist for The Boston Globe).
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