Tuesday, April 24, 2007

Taxation, the peddler class, and the StarTribune 

A story of despair...

I was in the Cities this weekend and as fate would have it a StarTribune was in front of my hotel room door Sunday morning. I could have returned it for $.88, I was told, but decided to keep it. A Sunday morning with a good sports section during baseball season, and a hearty cup of coffee, is a pleasure even if the rest of the paper is crap.

Alas, my eyes insist on busyness at all times -- this will be their ruin, I know -- so eventually I got around to the editorial page, whereupon I found this.
Politicians often find it convenient to assert that taxes are paid by two kinds of entities -- businesses and people. Economists -- and this page -- don't buy it. We maintain that all taxes are paid by people.
Search the internet for "corporations are people too" and you get a lot of leftist bilge. But the editorial is correct -- all taxes are paid by people, since entrepreneurs are people too.
Tax a business' property, payroll or purchases, and to the best of its ability, that business is bound to pass the bill along to its customers and employees, in a way that bears little relationship to ability to pay.
So it only took the third sentence to go awry. Businesses don't pass along all their taxes. Some they do, but only by willingness to pay. In a free market, when you shift a tax onto me, I can say no. I don't because I value the good more than the money I give up including the tax (what Stossel referred to last night as the "weird double-thank-you", where each party to a transaction thank the other for completing it. That still happens with a tax, just less often, proof that some social welfare is lost when you tax goods and services -- there are fewer double thank-yous.)
Of late, some Minnesota politicians -- including Gov. Tim Pawlenty -- have been giving this argument an odd twist. They argue, in effect, that the one state tax that is clearly based on ability to pay -- the personal income tax -- is really a tax on business. For that reason, they say, the Legislature should not raise taxes on the state's highest earners, even though these taxpayers now pay state and local taxes at a lower effective rate than other Minnesotans. Those fortunate few are job producers, the argument goes, and making such businesses pay an equitable share of taxes would drive this flock of golden geese away.
"In effect" are weasel words. They know we don't really argue this, as they admit:
Their contention is grounded in this much reality: Small businesses, particularly sole proprietorships and partnerships, are typically organized in a way that allows their profits to be taxed only after they have been passed through to their owners, as income.
How many could this be? It's certainly many. Of the 2.4 million tax returns filed in Minnesota in 2000 (last year I could find online), 343,249 of them listed business income on their individual returns and thus would be eligible to pay the higher rate the DFL proposes. About 47,000 of them had business income over $100,000 that year, 9,000 more than a quarter million. By comparison, there were less than 30,000 100% Minnesota corporations in 2001. So it's not an insignificant amount.
But small businesses come in all sizes and profit margins. The vast majority of their owners report incomes well below the thresholds for the new top bracket being considered by House and Senate DFLers. What's more, to thrive, these business owners need the services that tax money buys: education, transportation, public safety and more.
"You can't do it without us!" When I arrived back home after the weekend and picked up my mail I got a copy of Frank Chodorov's "The Peddler as Hero." That peddler, the old middle class, had died by the time Chodorov wrote this in 1962:

The middle class, of the earlier period, was identified by something besides economic status; one thinks of them as a people motivated by certain values, among which integrity was uppermost. The middle-class man was meticulous in fulfilling his contractual obligations, even though these were supported only by his pledged word; there were few papers that changed hands, fewer laws covering contracts, and the only enforcement agency was public opinion. In the circumstances, personal integrity in the middle-class community was taken for granted; anyone who did not live up to his obligations was well advertised and lost his credit standing. Bankruptcy carried with it a stigma that no law could obliterate and therefore was seldom resorted to.

The life of the old middle-class man was, by present standards, rather prosaic, even humdrum, being enlivened only by plans for expanding his business. If he had dreams, these were concerned with getting ahead by means of serving his community better, of widening the scope of his enterprise. But, his personal life was quite orderly and quite free of eroticisms; rarely was it disturbed by divorce or scandal. His sense of self-reliance imposed on him a code of conduct that precluded psychopathic adventures and gave him stability. Orderliness in his personal life was necessary to his main purpose, which was to produce more goods or render more services for the market; that burned up all the surplus energy he had at his disposal.

It never occurred to this middle-class man that society owed him a living, or that he might apply to the government for help in the solution of his problems. The farmer is a particular class in point; the present day agriculturist, who must be included in our present day middle class in terms of income, holds it quite proper to demand of government, that is, the rest of society, a regularized subsidy, even a subsidy for not producing; the farmer of the early part of the century would hardly have thought of that.

The merchant or manufacturer located in the area served by the Tennessee Valley Authority has no hesitation in accepting electricity at rates that are subsidized by the rest of the country, and even demands more of that handout, without any hurt to his self-esteem. The pride of the peddler, the entrepreneur, has left the industrialist who now grovels before legislatures and bureaucrats in search of government contracts, while the independence that characterized the early banker has been replaced by a haughty obsequiousness of the modern financier in his dealings with government.

Indeed, it has become a "right" to demand a special privilege from the authorities � as, for instance, the urgency of professional athletic organizations for publicly financed stadia in which to display their wares; and the man who secures such a privilege does not feel humiliated by its acceptance, but rather holds his head as high as did the earlier entrepreneur who made his way on his own steam.

Perhaps the StarTribune editorialist is correct: We have raised a generation of middle class entrepreneurs that are willing to game the system, seek favors from government to line their pockets. If so, they have only themselves to blame. You now must share your wealth with the other guys in the bargain, and the other side has a monopoly on using the police to enforce their will. But there are certainly some that do not. Why are they to be punished by the force of taxation? The editorialist continues,
The argument that those who have profited most handsomely in the environment those services helped create deserve to pay a lower effective tax rate than other Minnesotans, including most other business owners, doesn't wash. Neither does the presence of business owners among the state's top earners, a group that includes ballplayers, CEOs and top professionals of all kinds, warrant a lighter tax burden for the lot.
No, you must all pay to Leviathan. Bow before your master.
What Pawlenty and other Republicans are invoking is trickle-down economics, a theory that has remarkable staying power in this country given how poorly it has aligned with experience.
And yet count the countries of Eastern Europe that have adopted a flat tax! These countries are run in many places by ex-communists. And it really fooled this guy:
Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits� In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.
This is not Reagan, but John F. Kennedy, 45 years ago.

The editorialist continues,
According to trickle-down notions, states with high taxes and progressive tax structures should be flagging economically. The evidence is otherwise. The state with the highest per capita taxes, Connecticut, had the highest per capita after-tax income in 2006; conversely, low-tax states such as Alabama and West Virginia also rank at the bottom in after-tax personal income.
This is of course the post hoc (or perhaps in this case post non hoc) fallacy. There's ample evidence to the contrary, if you wanted to look. In short, any paper that shows no effect of state tax rates on growth also shows no effect of state spending on growth, meaning all those "investments" the DFL wants to make have a zero return. Those things that made high-tax Connecticut grow also made Christine Whitman's New Jersey grow after she passed 30% tax cuts. The same can be said for southern states. This helps explain the last paragraph of the editorial:
But Minnesota doesn't have to look to other states for a model. It need only look to its history. Decades of higher-than-average taxes and spending on public services helped Minnesota become the most prosperous state in the Midwest in the 1990s. Only since big tax cuts began to squeeze those services in this decade has state income growth lagged behind the national average. That trend needs to be altered, and pinching public services in order to perpetuate sweetheart tax treatment of the wealthy won't do it.
There is no sweetheart tax treatment. Nominally, we've built in a good deal of progressivity; the "sweetheart tax treatment" is the ability of Minnesota businesses to shift taxes onto labor and consumers. I keep coming back to the same point -- raising the taxes to compensate for shifting only leads to more shifting. The only way to control shifting is to control prices and wages. That's been tried before, and the Soviet Union now lies in the dustbin of history.

The reason Minnesota is lagging behind the nation now is a shift in demographics and in comparative advantage. Minnesota used to have 16% of its workforce in manufacturing; now it has less than 13%. This is a national trend, but it hits Minnesota (and most of the upper Midwest) harder than it hits the rest of the nation, and St. Cloud harder than most of Minnesota. This is about 50,000 jobs lost in that region. What area is growing? Health care. You can say this about any state in the old Rust Belt. It has nothing to do with tax cuts or Ventura or Pawlenty or our own history. Welcome to the country that is getting older, particularly if we keep trying to keep immigrants out of it.

Those older people will remember the simpler time, and may be the people who are remembered by Chodorov,

And so it has come to pass, during the second half of the 20th century, that the ethic of the peddler class has been replaced by the ethic of mendicancy. I am inclined to the thought that the change indicates a deterioration of the American character; but, then, I am loyal to my youth, as is every older man, and may be prejudiced.

It may well be that social security is an advance over self-reliance, that the individual prospers better under the ministrations of the bureaucrat, that juvenile delinquency is a social rather than individual malady, that individual proficiency is a social curse, that freedom is indeed the right to feed at the public trough. The young people, those who were born or got their rearing during the New Deal era, do not question that concept of freedom, and the professors of economics, psychology, jurisprudence, sociology and anthropology write learned books in support of it. Therefore, it must be so.

Any attempt to revive the old concept of freedom � that it is merely the absence of restraint � would be a fatuous undertaking; it would be like trying to "turn back the clock."

Yet, one cannot help speculating on the future. When the present generation, well inured to the Welfare State, shall have grown old, will it not also write books on the "good old days," even as this book speaks lovingly of the ethic of the peddler class? And what new ethic � every generation has its own � will these books decry? Maybe it will be the ethic of the totalitarian state. Who knows?

I'll link again to Chodorov and to the StarTribune and ask, has that ethic already come to pass?

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