The Tax Code Shouldn’t Steer Capital to State and Local Governments at the Expense of Private Investment

I’m a proponent of a pro-growth and non-corrupt tax code.

I mostly write and talk about the flat tax, though I’d be happy to instead accept a national sales tax if we could somehow get rid of the 16th Amendment and replace it with something so ironclad that even Justices such as John Roberts and Ruth Bader Ginsburg couldn’t rationalize that the income tax was constitutional.

But since there’s no chance of any good tax reform with Obama in the White House, there’s no need to squabble over the best plan. Instead, our short-term goal should be to educate voters so that we create a more favorable intellectual climate for genuine reform in 2017 and beyond.

That’s why I’ve argued in favor of lower tax rates and shared the latest academic research showing that tax policy has a significant impact on economic performance.

But tax reform also means getting rid of the rat’s nest of deductions, credits, exemptions, preferences, exclusions, shelters, loopholes, and other distortions in the tax code.

Why? Because people should make decisions on how to earn income and how to spend income on the basis of what makes economic sense, not because they’re being bribed or penalized by the tax code. That’s just central planning through the back door.

And if you don’t think this is a problem, I invite you to peruse three startling images, each of which measures rising complexity over time.

1. The number of pages in the tax code.
2. The number of special tax breaks.
3. The number of pages in the 1040 instruction booklet.

Today’s Byzantine system is good for tax lawyers, accountants, and bureaucrats, but it’s bad news for America. We need to wipe the slate clean and get rid of this corrupt mess.

But as I explain in this appearance on Fox Business News, we won’t make progress until we control the burden of government spending and unless we make sure that deductions are eliminated only if we use every penny of revenue to lower tax rates.

I’ve previously explained why it’s okay to get rid of itemized deductions for mortgage interest, charitable contributions, and state and local tax payments.

Let’s now take a moment to explain why the internal revenue code shouldn’t be artificially steering capital toward state and local governments at the expense of private investment.

Under current law, there’s no federal income tax imposed on interest from municipal bonds. No matter how rich you are, Uncle Sam doesn’t tax a penny of the interest you receive if you use your wealth to lend money to state and local governments.

Should the tax code steer money to Detroit politicians?

This “muni-bond exemption” has two unfortunate effects.

• It makes it easier and cheaper for state and local governments to incur debt, thus encouraging more wasteful spending by cities such as Detroit and states such as California.
• By making the debt of state and local governments more attractive than private business investment, the loophole undermines long-term growth by diverting capital to unproductive uses.

The politicians at the state and local level certainly understand what’s at stake. They’re lobbying to preserve this destructive tax break. Here are some excerpts from a story in the New York Times.

Mr. Firestine [of Montgomery County, MD] is on the front lines of a lobbying campaign by local and state governments, bond dealers, insurers and underwriters that is trying to pre-empt any attempt to limit or even kill the tax exemption. …At present, the federal government forgoes about $32 billion a year in taxes by exempting the interest that investors earn from municipal bonds. …The National Commission on Fiscal Responsibility and Reform, known as the Simpson-Bowles commission, has suggested taxing all municipal bond interest, not just the interest paid to people in the top bracket. …Officials of some other government groups, like the New York City Housing Development Corporation, have formed a coalition with Wall Street groups like the Bond Dealers of America to lobby on the issue. But there is the sense of an uphill battle. …Capping the tax exemption would cause high-bracket taxpayers to look for higher-yielding investments, he said, and the county would have to offer more interest to lure them back.

Based on the last sentence in the excerpt, I gather we’re supposed to think it would be bad news if we got rid of this tax preference and taxpayers shifted more of their money to private-sector investments.

Needless to say, that’s misguided. Only in the upside-down world of Washington do people think it is smart to create tax preferences that lead to more wasteful spending by state and local governments, while simultaneously imposing punitive forms of double taxation on saving and investment in the private sector.

By the way, this shouldn’t be an ideological issue. If this amazing chart is any indication, leftists who want workers to enjoy more income should be clamoring the loudest for a tax system that doesn’t tilt the playing field against capital formation.

P.S. While simplicity is a good goal for tax policy, you will understand why it shouldn’t be the only goal if you check out this potential Barack Obama tax reform plan.

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Another Great Victory in the Drug War

I’ve shared some very interesting commentary and opinions on the Drug War from folks such as John Stossel, Mona Charen, Gary Johnson, Pat Robertson, Cory Booker, and Richard Branson.

And I’ve shared some horror stories about “asset forfeiture,” an odious procedure that allows the government to steal private property without any finding of guilt.

• The DEA trying to confiscate a commercial building because a tenant sold some marijuana.
• The government seeking to steal a hotel because some guests sold some marijuana.
• The feds grabbing cash from innocent bystanders in legal cases.
• A local government trying to steal a man’s car because someone else drove it while intoxicated.

But sometimes an anecdote is the best way of exposing the silliness of the War on Drugs.

Here are some surreal tidbits from a Yahoo Sports report.

Bonnie Jonas-Boggioni, 65, and her husband were driving home to Plano, Texas from Columbus after attending her mother-in-law’s funeral when a pair of black police SUV’s stopped the couple a few miles outside of Memphis. “Knowing I wasn’t speeding, I couldn’t imagine why,” Jonas-Boggioni told the Columbus Dispatch. “They were very serious. They had the body armor and the guns.”

What was the supposed “probable cause” that led the police to make this stop? Ummm…..

On the back of Jonas-Boggioni’s car was a Buckeye leaf decal, similar to the one players’ have on their helmets, and cops mistakenly thought it was marijuana leaf. Yes, really. “What are you doing with a marijuana sticker on your bumper?” one of the cops asked Jonas-Boggioni. After trying to explain that the sticker was not a marijuana leaf and that she and her husband were not trafficking drugs cross-country, the police advised Jonas-Boggioni to remove the sticker as to not cause any more confusion.

As a fan of SEC football, I certainly agree that there’s something wrong with supporting the Ohio State Buckeyes. But bad judgement shouldn’t be against the law, much less a cause for a legal encounter with the government.

Particularly when the cops are showing their lack of knowledge.

Tennessee police apparently aren’t botany experts. If they were, they’d know a marijuana leaf has seven leaflets (see above picture) and a narrow shape as compared to the Buckeye leaf, which is fat and has five leaflets. …As for Jonas-Boggioni, she acknowledged the cop’s wishes, but got back in her car without removing the sticker. “I didn’t take it off,” Jonas-Boggioni told the paper. “This little old lady is no drug dealer.”

But that doesn’t mean other little old ladies aren’t drug dealers.

Click here is you want to read about a grandmother’s encounter with the Drug War.

Now ask yourself why we should be paying higher taxes to support this failed effort.

And remember that you can do something about it, as shown by some good people in Montana.

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