An alternative to popular faith

The November 23, 2009 New Yorker contained an article by James Surowiecki, titled “The Debt Economy.” He claims what he calls “tax breaks,” adversely skew the economy and cause people not to “make decisions based on economic fundamentals (but) on tax considerations.”

He gives the example of corporate interest payments vs. dividends. The former are tax deductible “tax breaks”; the later are not, which provides a “debt bias” (his words) to the economy.

Mr. Surowiecki disparages “tax breaks” as being “unnecessary” and having “nonexistent social benefits.” His solution: Eliminate tax breaks.

Consider health insurance. The government encourages companies to provide it by allowing payments to be tax deductible for the companies, and not taxable to the employees – i.e., using before-tax dollars. In contrast, people who purchase their own health insurance must use after-tax dollars. In Mr. Surowiecki’s world, the economy would benefit from eliminating the “tax break” by taxing employees’ health benefits.

This solution suggests taxes are the norm, and tax breaks are departures from that norm. That is, all the money you earn belongs to the government, and only an aberration or “break,” allows you to keep some of it.

I disagree. It is taxes, not “tax breaks,” that skew our economy, forcing decisions away from economic fundamentals. Eliminate taxes and the economy would be steered by the economic fundamentals Mr. Surowiecki craves. All taxes depart from these economic fundamentals. There are no innocuous taxes. They all make a difference. So the very act of imposing a tax, any tax, will skew the economy.

Further, there are no “fair” taxes. You can read a one-page article on this subject at: http://rodgermitchell.com/FairTaxes.html

Tax breaks are less harmful than taxes, not only because taxes skew the economy, but because all taxes remove money from the economy, thereby reducing economic growth.

Taxes are not the norm. Your money does not belong to the government. When deciding whether to tax debt or to “untax” non-debt, the economy would benefit from the later.

*Faith is belief without evidence. Science is belief from evidence.