Saturday, December 1, 2012

Partisanship is a most blinding affliction...

Paul Krugman is a special kind of economist. Stuff's true simply because he says so. Here he was (Thursday) asserting that the math behind raising revenue by limiting deductions, as opposed to raising rates, simply doesn't work:
Or take a subtler example, the insistence that any revenue increases should come from limiting deductions rather than from higher tax rates. The key thing to realize here is that the math just doesn’t work; there is, in fact, no way limits on deductions can raise as much revenue from the wealthy as you can get simply by letting the relevant parts of the Bush-era tax cuts expire. So any proposal to avoid a rate increase is, whatever its proponents may say, a proposal that we let the 1 percent off the hook and shift the burden, one way or another, to the middle class or the poor.

Now I'd love to see "the math"--because I've been thinking the opposite--but, alas, Krugman makes his assertion without providing the proof. I know, silly me, his word should be proof enough.

Here's what I'm thinking (no math, just real-world commonsense):

If we go with "letting the relevant parts of the Bush-era tax cuts expire", as opposed to limiting deductions--as Krugman suggests we should--the "rich" and their accountants will get right to work.

So, hypothetically, let's say you're in the "rich" camp. And let's say you own your own small business, and that you have no intent whatsoever in paying another dime in income taxes. Here are a few ideas, off the top of my head:

1. You add a room, properly partitioned, to your house, throw in a desk, and viola!--you're doing 75% of your work from home (and deducting out the wazoo!).

2. You put your 16 year-old to work at the company and he starts buying all his own stuff. Thus transferring income from your high marginal tax rate to his very low rate.

3. Being that you're the oldest and highest paid in your company, you set up a defined benefit pension plan which allows you to deduct a very large annual contribution toward your own retirement.

4. Your out of town business trips become your family's vacation destinations.

5. You refinance your paid-for home to the hilt, use the proceeds to buy rental properties, and take interest and depreciation deductions to your heart's content.

Being no CPA, I no doubt just barely scratched the surface. Therefore, don't be surprised if, after your accountant gets finished with you, you're paying even less taxes than you were before they allowed the Bush-era tax cuts to expire. 

Personally, I'm all for permanently closing loopholes, but not in an effort to raise revenue (through raising taxes)--I believe we should aim for initial tax neutrality by simultaneously, and permanently (I know, nothing's permanent in Washington), reducing rates. In other words, do away with corporate welfare, simplify the code, create certainty and watch all that now-idle capital flow into the economy. Now that's how you ultimately raise revenue.

So why would Krugman promote a plan that would inspire such creative accounting and yet more lobbying--a plan that would draw resources away from economy-stimulating production? Well, partisanship, I'm afraid, is a most blinding affliction.

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