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Posts Tagged ‘Taxes’

Just a brief post to see if we can stir up any comments.

I’ve been struck by how much of the Republican primary has centered around Mitt Romney’s tax bill (as Mike pointed out).  It is interesting to note “conservatives” turning on one another regarding someone’s taxes being too low, which goes against the de facto party line to lower taxes in general.

But it’s the specifics surrounding the 15% rate that I want to talk about.  The President mentioned it in his State of the Union, and fan Warren Buffett has trumpeted his tax rate compared to that of his secretary for the last half year.  While the morality of this gets debated, what seems to not get mentioned as much is the economics.  15% is the number used because that is the tax rate on capital gains – or investment income for those of us who have no capital gains and may not be familiar with the term.  This is not a tax on wages earned or for work done.  This is money that was invested so someone else could start a business or to buy shares in an existing business that you think has potential for growth.  So our laws have created a separate rate to encourage people to engage in this behavior – and it has done just that.

But what could happen if the rate was 30% as the President suggests?  Well, what if Mitt Romney stops investing?  Let’s imagine he was getting dividend payments equal to one million dollars, so his tax paid at 15% was $150,000.  The government would love $300,000 so they raise the rate to 30%, only Mitt decides to stop investing in equity and buys steady ole treasury bonds.  So now, the government loses out on the $150,000 they would have gotten – gets in budget trouble because they projected $300,000 and now don’t have it, and on top of that they owe Mitt millions of dollars plus interest as part of the national debt.  Plus that entrepreneur that was starting up a little search engine called Google doesn’t have the seed money he needed to buy servers and programmers and such, and so decides to return to mother Russia and we all are left trying to browse the internet on Yahoo.  I can’t find a new job because Yahoo’s results return bogus results, so we are out on the streets and homeless with our 2-year old daughter.  Shivering and hungry.

Man… can’t we just let the people have 15%.

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I was recently finishing up a book called The Top Ten Myths of American Health Care by Sally C. Pipes, and was struck by two examples that were brought up in regards to mandates ordered for the good of public health and what the perceived results were.

One, was the Nutrition Labeling and Education Act of 1994 that mandated nutritional and caloric info be printed on all food products.  The argument was, if people knew what they were eating, they would eat healthier.  As the book points out, from 1995 to 2007 “the percent of obese Americans increased by two-thirds.”

Second, was the example of the educational efforts at informing Americans of the hazards of smoking.  Pipes includes this quote from Dr. Daniel Horn who said, “You could stand on the rooftop and shout ‘smoking is dangerous’ at the top of your lungs and you would not be telling anyone anything they did not already know.”  In fact Pipes references a study that show smokers overestimate the potential health risk, with the average smoker reckoning their risk of developing lung cancer at 43 percent, when it is actually between 5-10 percent.  So even when people are theoretically “over-informed” on a hazard, they may still well participate in it.

These are clearly not proven causal reactions, but are certainly indicative of the fact that government intervention is not a panacea for poor public choices.  These two examples (along with our cigar smoking post) caused me to try and think of other areas where mandates for the public good go unheeded.  A few quick ones off the top of my head are:

  • Auto Insurance – Around 14% of drivers are uninsured despite the law requiring it
  • School truancy – By law children of a certain age are required to be in school.  However a quick search of truancy rates in public education will show that behavior does not follow the law
  • The Tax Gap – Close to $300 billion a year is estimated to be owed, yet unpaid, to the government.  There is good proof that as taxes increase people’s tendency to evade or avoid paying taxes increases
  • California cellphone law – Anecdotally, from what I see on the freeway and roads, I can attest to a severe refusal to obey this law
  • Long Beach water prohibitions – Again, anecdotally, I can tell you that people do not follow the rules laid out by the Board of the Long Beach Water Commission, such as times to water lawn, use of hoses for car washing, etc… despite our extreme water situation

I certainly don’t mean to imply that we should rid ourselves of all laws because they aren’t all followed 100% of the time.  I mean this just to show the gut reaction to regulate something does not necessarily produce the desired results.

That said, I would love for us to start to peel back some of the laws that affect personal liberty (ie. helmet laws) and exist solely to “protect” the very individuals that they regulate.  Would love to see more thought/examples in the comments.

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