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Tax the Rich -- a Libertarian Case

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I'm not a big government guy. Were I in charge we would have school vouchers and private tollways. I'd legalize raw milk and marijuana. I would sell Amtrack and allow private companies to compete with the Post Office. Farm subsidies and federal housing projects would be history. I'd fire an army of welfare workers and give everyone some unconditional free money instead. I might even bring some troops home and cut back on the nation building.

Nonetheless, I would increase taxes on the rich.

That's right: I would raise taxes. And every freedom-loving American should think likewise. A bankrupt America is bad for liberty, unless you honestly think you are better off living off your hoard of gold, guns, and dehydrated food. And don't think we can get out of the current mess with spending cuts alone. Repeat after me: "The money has already been spent." I got an email from Rand Paul the other day. He called for immediate federal cuts of $500 billion per year. Meanwhile the 2011 budget is over a trillion in the red. Do the math. We need more taxes. And that's assuming that the most libertarian member of the Senate gets his way. This is unlikely.

As for Miss Rosy Economic Scenario, she's getting long in the tooth. She'll need dentures soon. The baby boomers are starting to retire! We should have been running budget surpluses for the past decade. We were not overtaxed during the Clinton years. Just the opposite: on an actuarial basis were still running a deficit even as the federal government momentarily took in more cash than it spent. And we needed, and still need, actual surplus years to pay off past wars and welfare programs.

Meanwhile the middle class is already broke. The wealth gap is rising. Tax the rich: that's where the money is. The super rich have so much money they are begging us to take it. We should oblige them. Let us now dispense with the objections:

1. Making the tax code more progressive would complicate the tax code. Yes, it could. Or we could make the tax code more progressive by making simpler. Treat capital gains as ordinary income. Do the same for inheritances and gifts above a reasonable threshold. Use the cost basis instead of the market value of appreciated assets for determining charitable deductions. (This makes it a wash whether you give the asset, or sell the asset and give cash.) Eliminate deductions for margin interest. Purge some obscure tax breaks.

2. It's unfair for the rich to pay more. If we were talking about going back to 70% marginal tax rates I might agree. But as I showed above, we go a long way with the current rates, if we simply close the loopholes. Not only that, I would argue that under a truly fair system capital gains would be taxed at a higher rate than earned income. Capital gains are tax deferred, and they reflect income which requires more government services labor based income. Were we to abolish government entirely, the rich would pay enormously to protect their capital, whether they are making gains or not. Indeed, complicated financial assets could not exist at all without government protection. We know this from experience. When Rome fell, the rich traded in their villas and pleasure slaves for castles and armored henchmen. And nearly all business was family business. The only major corporation was the Church.

3. Half the country pays no taxes. This is simply a lie. Half may pay no federal income tax, but there are plenty other taxes and fees on the books. The working class pays payroll taxes, property taxes, excise taxes, sales taxes and most importantly, the working class pays for the federal deficit. If you have money to lend, the federal deficit is additional demand for your services, a subsidy. If you borrow, you pay this subsidy. When China buys federal U.S. federal debt instead of U.S. made products, the American working class pays the price.

4. We need the rich to invest more. Yes, we do need some wealthy angel investors and I agree that it's way cool that we have billionaires taking space travel to the next level. But as for the overall investment pool, tax increases on the rich to reduce the deficit have very little impact, even if every dollar taxed from the rich comes from the investment pool, because federal deficits take from the investment pool. A balanced federal budget means banks and other investors have to finance private enterprise or have no return on investment.

And a final note for my libertarian and gold bug friends: to have a gold standard, we need to deal with the debt first. Zeroing out inflation would be an enormous windfall for existing federal bondholders, and an enormous additional burden on taxpayers. We need to pay more now so we can pay less later.

And there you have it liberal readers: libertarian arguments for increasing taxes on the rich. Try them out on your tea partying friends and neighbors. More importantly, try them out those in the middle, who find some of the Tea Party arguments appealing. Let me know how they work.

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Carl Milsted is a physicist by day and dabbles in economics and political activism in his spare time. For a quarter century he was a member of the Libertarian Party, but has since realized that narrowing the wealth gap and preserving the (more...)

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