Tax day musings

You know, I'm as capable of ranting about waste, fraud, and inefficiency in government as any other self-respecting economic conservative.

But when I read a story like this, I sometimes reflect that it's a good thing we're not getting all the government we're paying for.

An American VAT?

Bruce Bartlett, guestblogging at Andrew Sullivan's this week, is a big proponent of consumption-based taxes (a Value Added Tax, or VAT, such as is in common use throughout the European Union.)

He gets off a pretty good line at the end of a post, paraphrasing Lawrence Summers:

To put the issue more succinctly, let me quote Larry Summers, who once said something to this effect. We don't have a VAT because liberals think it is regressive--it takes more in percentage terms from the incomes of the poor--and conservatives think it is a money machine. We will have a VAT, Summers went on, when liberals figure out that it is a money machine and conservatives realize that it is regressive.

Wiser words were never spoken on this topic.

Cashing in on the Carry

The most controversial tax break on Wall Street, known simply as the Carry, is not authorized by any law and was never approved by Congress.

Instead, it grew quietly over several decades, hinted at but never directly addressed in obscure court cases and arcane regulations issued by the Internal Revenue Service.

Unchallenged by lawmakers, it swelled into a benefit that, by one back-of-the-envelope estimate, spares a small band of the country's richest and most powerful financiers $6 billion a year in personal income taxes.

Wall Street's Lucrative Tax Break Is Under Fire (Washington Post, 3 August 2007)

In a nutshell, here's how it works: fund managers and venture capitalists and those sort of folks arrange to receive much of their compensation as "carried interest," which is then taxed at capital gains rates (15%) instead of the twice-as-high (for their income bracket) personal income tax rates.

I agree with Judge Learned Hand on the subject of taxes: "Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

Further, I think that low capital gains tax rates, which encourage investment, are a social good.

But the private-equity managers who are cashing in on the carried-interest loophole are, for the most part, not investing and managing their own money; they're performing services on the behalf of others. In other words, they're doing a job and being compensated for it.

As a society, we would do well to abolish the fiction that fees earned for managing hedge funds and performing other feats of financial engineering aren't "income" or shouldn't be taxable as such.