The only word to describe Friday’s job report is ugly. The private sector created only 118,000 new jobs in September, early estimates of job creation in July and August were lowered, average hourly earnings dropped a tiny bit, the labor force participation rate dropped to its lowest level since October 1977. Nothing here to justify the Federal Reserve Board’s policy gurus in raising interest rates, and much to make them happy that they withstood pressure to raise rates in the past. And a great deal of support for revising the nation’s tax code to get the economy moving ahead at a faster rate. Which all candidates for both parties’ presidential nomination propose to do. With reason.
The current tax code is a nightmare. Spread across 74,608 pages (up from 8,200 after WWII), the code forces Americans to waste 6.6 billion nerve-wracking hours and spend about $200 million filling out the many forms. One estimate has compliance costs at 20 percent of collections, which might have set Adam Smith spinning in his grave. (In Wealth of Nations, he wrote, “A tax may … take out … of the pockets of the people a great deal… [because] levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax.”) The rates are the highest in the industrial world; the treatment of foreign earnings so draconian that American companies are using a technique called “inversion” to buy foreign companies and transfer headquarters and jobs to the foreigners’ countries; and the form-filling burden so complicated that the Internal Revenue Service could respond to only 37 percent of befuddled tax-payers’ pleas for assistance, leaving 8.8 million calls unanswered. (Cf. Smith, “The time of payment, the manner of payment, the quantity to be paid ought to be clear and plain to the contributor…”). The principal beneficiaries of the current system are the lawyers and accountants who devise legal means of enabling their rich clients to avoid the full swish of the IRS axe, and lobbyists hired by companies and individuals to persuade legislators to lace the tax code with obscure clauses that reduce the effect of the government’s rapacity on their clients.
Candidates competing for their parties’ presidential nomination have a solution: put me in charge, tax reform and gifts for all, or almost all, will follow. Democratic Santas are offering a variety of goodies – college tuition, more spending on infrastructure, expanded entitlements, single-payer NHS-style health care (this goodie is also on Donald Trump’s sleigh awaiting delivery). The bills will be sent to voters in the form of higher taxes, mostly on the rich. Republican Santas are offering gifts of an entirely different sort – enabling voters to keep more of their own money by lowering a variety of tax rates. Like their Democratic counterparts, they say these gifts will come at no cost, because the growth they stimulate will generate enough new tax revenue to be self-financing. Perhaps. But if they are being overly optimistic, revenues will be insufficient to prevent the federal deficit from rising. And that means the beneficiaries of the lower tax rates will be passing the cost on to their children, who will face either higher taxes to cover interest costs on the debt, or a reduction in the purchasing power of their pay checks if future governments trigger inflation as a way of reducing the real burden of their inherited debt. In short, raise taxes and redistribute (Democrats), lower taxes (Republicans), and growth will accelerate.
Bernie Sanders, the Socialist vying for the nomination of the Democratic Party, would raise taxes on the rich and on employers to fund some $18 trillion in new spending over the next decade, a one-third increase over the current level of government spending. Hillary Clinton proposes to raise the capital gains tax rate on high earners who hold their stocks for less than six years, and spend it on a variety of new entitlement programs. That, she claims, would end “the tyranny of today’s earnings reports” and induce business to make the long-term investments needed to support rising wages.
On the Republican side, most candidates would exempt more Americans from paying income taxes, indicating that they failed to consult their undoubtedly dog-eared copies of Wealth of Nations, in which Smith advised, “The subjects of every state ought to contribute towards the support of the government…”. Typically wise advice. Already almost half of Americans pay no income taxes, instead being subject to the horribly regressive payroll tax. With the link between income tax paid and benefits received broken, voters have an incentive to demand more and more costly benefits – to be paid for by someone else.