On Taxation and Entitlements: Essay for March 17, 2012

Two articles of interest hit the New York Times this week that each of us should read. “A Nation of Too Many Tax Breaks,” by Eduardo Porter, graced the front page of the Business Section. It chronicled the seeming disparity between the collection of taxes and the distribution of tax breaks in America by quintile. The second was an essay by Thomas Friedman describing the state of American capitalism in the 21st century. They both deserve some air time.

Any analysis only provides a tiny glimpse of the complexities of the problem statement: Is taxation and redistribution of wealth in America a fair deal? First off, there is nothing simple about the distribution of government spending or about the manner in which such funds are generated through taxation. Neither is there anything fair about how it is done. Both policies reflect a complex series of compromises and programs designed to aid one sector of the population at the expense of another. Those policies cut both ways. Over time, the original intent of such policies become muddy indeed, yet we are saddled with their consequences seemingly forever.

Take the Porter article for starters. Said Porter, “Taxpayers in the top fifth of the population shoulder three quarters of the Federal tax burden and receive only 10 percent of the entitlement spending…[while] Families in the bottom 40 percent of income distribution pay about 1 percent of taxes and receive about 60 percent of entitlements.” He goes on to point out that on the tax break side, the upper quintile receives more tax breaks on an average of $214,000 in income than those in the lower quintile receive on $8400. No kidding.

This dichotomy would appear to emanate from the lower tax rates on capital gains and dividends, benefits associated with those who have investment income. They naturally reside in the upper income brackets, thus skewing any inequity conclusions that Porter asserts. The obvious conclusion one takes from this so-called analysis is that there is a disparity that can be reconciled by eliminating tax breaks for the wealthiest of Americans in the form of increasing taxes on capital gains and dividends. This timeworn and threadbare argument always suggests that the wealthy in America were all born with silver spoons in their mouths; that nobody actually worked to earn their wealth; or that they came by it unscrupulously. It is not true. Most wealthy Americans earned their money. And any distinction hardly matters.

Enter Tom Friedman. He is definitely a thinking man’s columnist. I don’t often agree with his conclusions but his presentation of fact is usually compelling. He’s the kind of man with whom I’d like to have a cup of coffee. Freidman sees, as do I, the necessity of a balance between the actions of public and private America. A country where the excesses of unchecked capitalism cannot stifle an economy and the excesses of government regulation does not strangle the private sector. It is more than that, he argues. He speaks of striking grand bargains between competing interests. Perhaps it is one like that nearly struck between President Obama and Speaker Boehner last summer.

There are many such bargains to be struck that involve repairing a crumbling infrastructure increasingly incapable of moving goods to market; invigorating an educational system that has become the most expensive in the world but is producing only mediocre results; that addresses the growing gap between the needs of the youngest against the needs of the oldest in our society.

Most importantly, the Federal budget deficit must be closed. And it must be done without smoke and mirrors and without demonization of the advocates on the revenue side and on the spending side. The truth is that the tax system is severely broken. Spending must be decreased through Mr. Freidman’s grand bargains and revenues must be adjusted through tax reform. Corporations do not need the special treatments the currently receive. They are quite capable, or should be quite capable, of competing on their own. If they are not, they should be left to mercy of market forces.

Capitalism was not invented in America but it reached pinnacles of greatness in the 20th century, a greatness that has lost some luster as we claw through this 21st century. Our objective in this political debate in 2012 should not be to paint either side as evil, unless they really deserve it. I am willing to recognize that eliminating a special tax break for a privileged constituency might actually result in them paying more taxes. Now that is what I call fair.

Let the spending cuts begin.

Press on.