Money: It's Not Peanuts
"…nothing is certain but Jimmy Carter and taxes."
Contrary to a common misconception—and one which we may hope will have been dispelled by the time this column sees print—Jimmy Earl Carter has not been vague about his economic program, particularly his tax plans.
First the good news: Carter wants to tax corporate earnings only once. They are currently taxed first to the corporation and then again when paid out as dividends. Carter isn't clear on whether he prefers the tax to fall at the corporate or individual level.
While this sounds like a good plan, it could have a hooker in it. For example, it could result in higher taxes for the owners of small corporations who presently divide earnings between the corporation (as retained earnings) and the owners (as salary or dividends) to take advantage of the lower progressive tax rates.
All the rest of the news is bad. Carter considers the deduction of interest for home mortgages to be a loophole benefiting high-income taxpayers. (Why it should be wrong to benefit high income taxpayers is not discussed, it being no doubt one of those self-evident truths to which the Founders alluded.) Carter prefers mortgage guarantees and interest rate subsidies which can be limited to low-income home buyers.
This is merely one case of the general liberal dislike of the tax deduction device of the Internal Revenue Code. Because the income tax is progressive, any given deduction has a greater effect on tax savings for higher-income taxpayers. Thus, a $100 deduction is worth only $15 in tax savings to a person in the 15 percent bracket, but is worth $50 to someone in the 50 percent bracket.
This measure, if adopted, could be a real stinker. If it applied to existing mortgages, it would be a serious blow to home buyers who contracted for 20-25 year mortgages with the expectation that their interest payments would be tax deductible. If it only applies to new mortgates, it will create a privileged group of middle-income people who have existing mortgages and discriminate against other middle-income people who happen not to have mortgages. Since a lot of Congressmen are in this category of present or potential mortgagors, we probably shouldn't worry about this one in the near future.
Carter also wants to tax capital gains at the same rate as ordinary income. This idea is so bad that it might even be good if it has the effect of spurring tax rebellion and stripping the system of any semblance of legitimacy. As a matter of information, this was tried from 1918 to 1921. As students of praxeology and common sense (i.e., non-liberals) would anticipate, investments on which there was a gain were not sold, while those with a loss were, with the result that the Treasury suffered a net revenue loss.
Continuing his descent, Carter is adamant on "maintaining the soundness" of the Social Security scheme, chiefly by increasing the tax base from the first $15,300 of salary, as at present, to the first $20-22,000. The fact that the higher-income people get no more benefits from the system does not seem to weigh on the fairness for which Carter is otherwise so enthusiastic. Fairness aside, this one will probably pass.
The candidate also wants to manipulate the tax laws to discourage multinationals from producing goods overseas "when their own employees in this country are out of work." The practical effect of this demogogic slap at the international division of labor (a long time sub-theme of organized labor) will probably not be very great, since companies can spin off foreign affiliates and otherwise find a lot of room to maneuver.
Although Carter has not said anything yet on inheritance taxes (recalling, perhaps, how McGovern's plans to expropriate widows and orphans had cost him middle class and blue collar votes), one of his key economic advisors is Lester Thurow, an outspoken advocate of confiscatory estate taxes.
On balance Carter's tax proposals offer no encouragement and are typical examples of the distorted world view of a mainstream, Humphrey-type liberal. His plan to tax corporate earnings only once is still a pig in a poke. Congress and the Treasury are unlikely to be enthusiastic about major new tax changes, particularly since the Reform Act of 1969 hasn't been digested yet. His proposals are radical enough that we should have two or three years warning before they become effective.
The tax-deferred retirement plans (HR-10 and ERISA) seem to have escaped his reformist glare. If the tax treatment of capital gains is worsened, these programs (whose earnings accumulate tax free) will be even more appealing. If you want to be pessimistic, you could posit a time when these would all be "nationalized" under a guise of "guaranteeing" them through Social Security, but that's not visible on the horizon and it may be that not even the villainy of the Democrats is without limits.
BARBAROUS RELICS NEED LOVE TOO
While everyone seems to be bailing out of the gold market, there are a couple of points to keep in mind:
1) When gold prices fall, the mines shift to higher-grade deposits, so there is no necessary proportionality between the drop in bullion prices and the drop in mine earnings.
2) The Soviet Union, a major gold producer, has an economic interest in disrupting South African gold production. If successful, this will be bad for South African mine share holders but good for gold holders and non-S.A. mines.
3) The S.A. Chamber of Mines is backing a major advertising campaign for this fall in the United States to push the one ounce gold Krugerrand coins.
© 1976 Davis E. Keeler