Government Greed

David Henderson from the April 1999 issue

(Page 2 of 2)

The earnings penalty was imposed when Social Security began, because FDR's brain trust thought that the Depression was caused by "too much labor." "So they intentionally idled seniors," Shlaes writes.

Shlaes also shows how our graduated income tax system, in which marginal rates rise with income, imposes an often large penalty when two earners get married. She leads off with a story of two blue-collar workers in Indiana named Darryl Pierce and Sharon Mallory. "They duly did what many couples in America now do when they consider a serious question like matrimony," she writes. "They went to their accountant." The swing in their tax liability, they learned, would be $3,700 a year.

Shlaes' story of how the marriage penalty developed over about 50 years is detailed and well worth reading. She sums up the quandary as follows: "You could have progressivity [higher tax rates on higher incomes], you could have low rates for the second earner, and you could have a tax arrangement that buttressed the traditional family. But you could not have all three. When you treated married women who worked as individuals, you gave them and their husbands a tax advantage over traditional couples--at least as long as there was progressivity. And when you buttressed the tax supports for married couples with a stay-at-home wife while retaining progressivity, you punished couples with working wives." Because President Clinton and most Democrats opposed reducing "progressivity" and social conservatives in the Republican Party wanted to help "the family," the mid-1990s, by default, became an era of loophole writing.

My major disappointment with the book, incidentally, is with Shlaes' failure to challenge the word "progressivity." Shlaes seems not to have learned the lesson taught by George Orwell and Thomas Szasz: Words affect the way we think about things. "Progressivity" sounds, well, so progressive. It's not.

To her credit, Shlaes attacks the idea of higher tax rates for higher-income people. She quotes George Harrison's 1966 song "Taxman," written shortly after the Beatles' success put them into Britain's highest tax bracket. Shlaes doesn't mention it, but the top British tax rate on "earned" income at the time was 83 percent, and the top rate on income from dividends and interest was 98 percent. The Beatles were shocked to be paying such taxes; thus the song, which, she notes, makes specific references to the tax collectors, Prime Minister Wilson and Prime Minister-to-be Heath. (Margaret Thatcher later cut the top rates to 40 percent.)

As Shlaes writes, "We are all Beatles now." Even those of us who are modestly successful--earning, say, $80,000 in a high-tax state like New York or California--are paying marginal tax rates somewhere between 40 percent and 50 percent. The stated purpose of "progressive" taxation, writes Shlaes, is to tax the rich. But high marginal tax rates, she notes, aren't really taxes on the wealthy; they're taxes on becoming wealthy.

Shlaes, by the way, buys into the idea that super-rich people such as Leona Helmsley don't pay taxes. This is false: Even if Helmsley was guilty of defrauding the government from 1983 to 1985--and economist Paul Craig Roberts has presented powerful evidence suggesting that Helmsley's accountants, not she, were the actual frauds ("Leona May be Guilty, but Not as Charged," Wall Street Journal, April 9, 1992)--the Helmsleys paid $53.7 million in federal taxes on adjusted gross income of $103.6 million, rather than the $55.4 million the government claimed they owed. In other words, the feds are very successful at taxing the rich, too.

The only chapter I found unpersuasive is "Baby Taxes." In it, Shlaes shows how burdensome the government's tax and regulatory requirements are for those who hire nannies. That's presumably why President Clinton's first choice for attorney general, Zoe Baird, paid an immigrant off the books for providing day care.

So far, so good. Then Shlaes cites a statistic: Even after all the publicity about Baird, the IRS recently reported that only one in 13 taxpayers who owe "nanny taxes" actually pays them. This upsets Shlaes. I sympathize with her, because I too value honesty and hate the fact that, as Will Rogers once put it, taxes have made more liars than golf.

But there's another way to look at this. There was a saying in the late 19th century West: "A man who won't cheat a railroad ain't honest." At the time, the government gave many railroads special privileges. Cheating them--breaking the oppressive law of the day--became the moral thing to do. The same principle applies today. How many teenage babysitters or newspaper delivery boys do you know who pay taxes on their income? I had both jobs as a kid and would have been shocked had someone told me I was legally liable for taxes.

One of the ways the most oppressive laws get changed, as Milton Friedman wrote in the mid-1960s, is for people to ignore and break them. So only one in 13 people actually pays the nanny tax? That may be one of the most hopeful statistics in this book.