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The Greedy Hand: How Taxes Drive Americans Crazy and What to Do about It by Amity Shlaes

In brief: a pro-rich, anti-growth, and anti-worker book.

I could spend hundreds of pages pointing out errors in this work. Let’s start with page 222: “The microchip in its way, has allowed us to postpone our date with tax reform.” False claim.

Research suggests computers harmed the nation’s overall productivity for reasons ranging from learning curves to employees playing computer games. Among the more probable candidates for small increases in productivity (if the government stats are not flat-out false) in the 1990s are:

· A weakening of unions.

· Advances in non-computer technologies.

· More flexible labor markets.

· Improved management.

· Baby boomers entering their prime years of productivity.

· Decreased government deficits, making more investment money available to the private sector. (Every dollar in surplus reduces the deficit by one dollar, saves several cents in interest payments each year, provides an additional dollar for private investment, lowers interest rates for private investments. That additional dollar for private investment providing far more economic growth than using that dollar for a tax cut. Research suggests the incentive to work harder when tax rates are lower is small, except when tax rates are collosally higher than they are now. Between 1947 and 1973 growth in hourly productivity averaged 2.7 percent. Between 1973 and 1998 it averaged 1.1 percent--using techno-utopian methods for calculating productivity.)

“Yet history—the history of the 1980s in particular—has shown an amazing thing—that lower rates on the rich produce more revenue from them.” False cause. Revenue from the rich increased in the 80s because their incomes skyrocketed for greed reasons and because we eliminated many tax shelters. If your income increases from 100 million to 200 million, and your tax rates fall from 40 percent to 25 percent, your taxes increase from 40 million to 50 million because of the increase in income.

“Taxes are for Revenue. For Fifty years we have used taxes to steer behavior” Yes, politicians created taxes to reward bad behavior. But all taxes steer behavior whether intentionally or unintentionally. Shlaes' flat taxes steer behavior in nefarious ways, just as present tax policies steer behavior in nefarious ways, punishing workers for productive labor because regressive payroll taxes and state taxes force workers to pay a higher percentage of their income in taxes than the wealthy, rewarding the childfree and deadbeat parents for parasitism.

Shlaes throws out many unclear and unspecific prescriptions. Her support for a constitutional amendment to ensure no one pays more than 25 percent of her income in all federal taxes, however, is specific. That amendment has little to recommend it. It would make the overall tax structure more regressive because millions of non-rich citizens would pay the 25 percent limit plus more in regressive state and local taxes. Kleptocrats would place most workers in the 25 percent bracket to prevent massive deficits.

Her breezy, small sample style concludes that the tax structure should (1) be simpler; (2) be lower; (3) eliminate estate taxes; (4) give taxpayers an option of paying at their old rate or paying a 20 to 25 percent flat tax (an idea proposed by Stephen Moore); (5) not “steer behavior.”

Not only does Shlaes find progressive taxes wrong, she promotes regressive taxes because we are not “the czar’s Russia.” It is evil, according to her, to expect the rich to pay a higher parentage of their incomes in taxes, but acceptable for the non-rich to pay a higher percentage of their incomes than the rich--an evil, familiar, irrelevant conservative argument. You see, the non-rich are better off than Russian peasants a century ago, therefore screw them. Funny, they never argue that the rich are colossally better off than Russian peasants and autocrats were, therefore the rich should not mind higher taxes. If a rich individual owns 50 cars, but not 58, a tragedy results. If a non-rich individual lives in an atrocious apartment, she should be thankful she liveth not in ye olde Minsk.

Shlaes alleges estates are “double taxed,” but most income subject to the estate tax is not double taxed. If you build a company from $10,000 to fifty million dollars net worth, no tax on that lifetime capital gain exists unless you sell the company. If you die, giving the company to your child, the estate tax is the first tax on that income. Eliminate the estate tax, and the $49,990,000 will not even be single taxed. Shlaes, the anti-double taxer, seems not to care, however, that the incomes of ordinary Americans are double and triple taxed with federal income taxes, payroll taxes, etc.

An “across the board” federal tax reduction is not a general across the board tax reduction. Payroll, state and local taxes are not federal income taxes. Seventy-four percent of American families pay more in payroll taxes (work taxes) than federal income taxes. When all taxes are counted, taxes are already remarkably flat. (Whatever happened to conservatives who cut spending? Now we have conservatives who fight merely for flattening and simplifying, that is, lower taxes for the rich.)

The rich pay more in "federal" taxes. Big deal. Labor, fiscal, election, financial, monetary and educational policies are heavily biased toward the top one percent. If the rich want, we can redesign fiscal, labor, election, monetary, financial, and educational policies to maximize benefits to the non-rich. Alan Greenspan does not change interest rates to serve the interests of most Americans. He changes them to serve the rich. Let's try a couple decades where the incomes of the rich stagnate or decline while doubling the incomes of the non-rich.

Shlaes judges that Social Security should be privatized using “at least three of the percentage points individuals carry” [on payroll taxes apparently] because “Markets have taught us that they can do a better job than governments in providing public pensions.” Markets have not. Social Security is one thing the government does efficiently, sending ninety-nine percent of Social Security money to recipients. If privatized, much money would be lost on profit, advertising, financial fraud and other costs. Shlaes proposes privatized Social Security should be in “unguaranteed” accounts to prevent moral hazard. I do not see how moral hazard can be prevented. Some individuals will find good or lucky investments while others will lose everything. Is the government going to throw 80-year-olds out into the street and say, “Sorry, but Warren Buffet you are not.” No, the government will greatly expand SSI or create a new program to cover those whose investments fail to cover a lengthy retirement--increasing moral hazards. Individuals will take their three or more percent and invest in risky investments because they know the politician who says “go starve” to 80-year-olds has a death wish. Plus retirees must devote enormous time, energy, and expense to managing investments.

According to William Gale, the Moore plan provides the top one percent with mean tax cuts of $30,000. Those earning $30,000 or less receive an $80 mean tax cut. For most non-rich citizens, Shlaes overhaul would not change much other than exploding future taxes and turning retirements into a risky mess.

The Greedy Hand is typical plutocrat populism: Complain about how shabbily the government treats working individuals, then, with lots of cheerleading, promote poorly explained policies that treat workers worse. Let’s see how the Shlaes plan works for individuals:

· Person A: Rich person who pays no taxes because she has renounced her U.S. citizenship or decided not to file a return. Result: No change.

· Person B: Rich person with terrible tax advisers, does not care how much he pays, and no income is capital gains. Result: Tax cut from 33-39.6 percent to 20-25 percent in all federal taxes, plus same six to seven percent paid in state and local taxes.

· Persons C and D: Parent who inherits $10 million business, then business increases in value to $5 billion. Parent leaves business to child who never worked a day in her life, who spends $5 billion on the world’s biggest party and bank rolling terrorism. Result: Federal tax cut (estate taxes) from 55 percent to zero percent. Child pays six to seven percent in state taxes. The 4.99 billion dollar capital gains increase in business value does not get taxed by the federal government.

· Person E: Non-rich young working class person. Result: Pays 25 percent in all federal taxes (payroll taxes for current retirees plus federal income taxes would put him at the constitutional amendment limit), pays three to eight percent in new, unguaranteed retirement program, pays eight to 14 percent in state and local taxes (lower income individuals pay a higher percentage of their incomes in state and local taxes because they spend a higher percentage of their incomes on items subject to sales, property and other taxes). In short, say goodbye to a total of 36 to 47 percent of income.

Rich individuals complain that capital gains are not indexed to inflation. Big deal. Capital gains taxes are deffered and often not taxed if part of an estate, making up for many inflationary losses. Even if many of the inflationary losses were not made up, other flaws of setting capital gains taxes at a rate different occur: If we create a lower rate for capital gains, taxpayers engage in economically inefficient efforts to label other sources of income capital gains. Michael Kinsley notes it is like having a special tax rate for people named Newt. Many will change their names to Newt. As for deficits created by the Shlaes' scheme, that is someone else’s problem.

The tax code did not primarily reward good behavior (steer behavior) in the past. Over 600 billion dollars in annual tax entitlements (corporate welfare, housing deductions, etc.) exist. The adoption credit, the EITC, and the child tax credit are among the few minor rewards for good behavior. An even more regressive tax system will steer behavior toward the even worse--more kleptocracy--Amity’s shrill horror. Not recommended.

—Book review article by J.T. Fournier, last updated July 27, 2009

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