America’s Taxation Tradition, sans scapegoats

America’s Taxation Tradition, sans scapegoats

Economist Paul Krugman became something of a celebrity when he won a Nobel prize for economics in 2008.  His opinions are now cited as economic canon in certain circles, including the White House.  Krugman is also a regular contributor at the New York Times.  His articles are frequently of interest to an Americanist, usually because some distinctly un-American aspect of it calls for rebuttal.  His recent piece proclaiming the estate tax as a wholesome and worthwhile American invention is particularly worthy of critique.

Krugman presents “America’s Taxation Tradition” as an article about income inequality and a proposal to help combat it.  He argues that as an increasingly large portion of our national wealth becomes concentrated in the hands of just a few Americans, our nation risks becoming “a society with a hereditary aristocracy of wealth.”  Krugman insists the idea of “limit[ing] inherited wealth through heavy taxation of estates” should be openly discussed in America, as it was by Progressives at the turn of the last century.  He even wonders, “how did such views not only get pushed out of the mainstream, but come to be considered illegitimate? … Such talk isn’t un-American; it’s very much in the American tradition.”  He explains that the United States may have been the first country in the world to establish an estate tax.  He even tries to lead his readers into what he believes is an intellectual trap:  He offers a quote from someone who strongly supports “a graduated inheritance tax on big fortunes,” implying that the speaker is inherently un-American, then reveals the quote is from Teddy Roosevelt.  The trick is on Krugman.

Roosevelt was patently un-American in a great deal of his thinking.  The man was a firebrand of the Progressive movement; a big-government statist who favored imperialism, Prohibition and massive government regulation.  He was hardly a man of classic American ideals.  Of course he favored some aspects of the American tradition, but to suggest the man was a model American is absurd, and smacks of deception.  Krugman goes so far as asking his readers, “How did [thinking like Teddy Roosevelt] become an unforgivable political sin?”  To be blunt, it always was.

Progressive policies have always tended to hurt more people than they help, and true Americans have always rejected them.  Enough misguided Progressive legislators were in Congress in 1916 to pass the estate tax law.  But just because a policy has been practiced in the United States in the past 100 years does not make it inherently American.  In fact, most political innovations in the past hundred years have been distinctly un-American.  Deliberately hurting people isn’t American, and isn’t forgivable.

The estate tax is supposed to target the wealthy, but is a source of incredible hardship for many normal Americans.  For example, imagine your parents leave you their $250,000 home when they pass away.  Maybe after many years of medical bills they had no other assets to give you, but they wanted you to have the house you grew up in.  That means you owe the IRS $70,800 on this gift.  If you’re a typical American, you don’t have an extra seventy thousand dollars lying around.  If you don’t, you’ll probably need to sell the house, or something else you own.  Can’t find a buyer?  Then you are in big trouble.  Variations of this scenario play out on a daily basis across our country.

The estate tax has forced working Americans to re-mortgage their homes and owe mountains of back taxes to the IRS.  It has forced small business owners to sell critical assets and even their entire businesses.  Of course, the wealthy are also forced to make sacrifices.  The premise of the estate tax is that our nation is benefitted by those particular sacrifices.  But even if that were true (and there isn’t much reason to think it is), it wouldn’t justify needlessly harming so many regular Americans.

Let’s assume Krugman doesn’t have more nefarious motives in promoting the estate tax, like trying to sap the financial resources of the enemies of Progressivism.  In that case he, like most economists, is either failing to consider the policy impact on ordinary Americans, or is simply ignoring it.  Either way, his failure to acknowledge how much unnecessary suffering the estate tax has inflicted is proof he has no useful opinion on the matter.

Americanism, at its heart, is about putting good moral principle before all else, including economics.  Thankfully, we don’t need to be concerned that good principle requires economic sacrifice – the reality is quite the opposite.  Part of the reason Americanism has been so successful is that good moral principle makes for incredibly strong economics.

The estate tax shouldn’t ever become a mainstream idea in America.  It is too wrong on principle, and too harmful in practice, to ever be considered legitimate.  Krugman’s inventive suggestion that the estate tax is “in the American tradition” is absurd – what tax could be a favored habit of a nation that was moved to revolution by taxation?  Krugman must be speaking of our nation’s new tradition – one that cannot be called “American” – the one distinguished by statism, economic manipulation, and social engineering.  The American tradition will always be one of minimal government and individual liberty.  That tradition can’t be redefined by a reckless President or a visionless Congress a hundred years ago, and certainly not by a celebrity economist today.

Yes, statistics indicate that income inequality is a growing problem for our nation.  Yes, one aspect of that issue is the increasing concentration of our nation’s wealth in the hands of just a few people.  But is that the most important aspect?  More to the point: is it really a cause, or could it simply be a symptom?  There have always been wealthy people in our country, and their share of national income has gone through many cycles over the years.  The income inequality phenomenon our country is experiencing is unprecedented.  Those facts don’t add up if the wealthy are to blame.  So what is the real cause?

Economists measure income inequality mathematically.  For economists like Krugman, any manipulation that produces the correct answer is good enough.  He prefers taking income from the wealthy.  Another possibility is handing free money to the poor.  The ranks of the poor have been exploding, stretching the income inequality problem downward at the same time that the wealthy are stretching it up.  If we can reduce the size of the lower class, we will again produce an income inequality measurement that is closer to being acceptable.  But again, we would be attacking a symptom rather than a cause.  The lower ranks are only expanding because that is where people are ending up after they have fallen out of the middle.

The economic and demographic changes of the wealthy and the poor are drawing our attention away from the true crux of the problem.  What is really changing in our country is the middle class; the bedrock of our nation’s political and economic stability.  Ill-equipped for the modern global economy, and shocked by the recent financial crisis, it is shrinking rapidly.  This unprecedented decline of the American middle class is the major culprit behind our alarmingly growing income inequality.  It has allowed the wealthy to capture much of the national income that the middle class used to earn, and contributed to the massive expansion of the poor.  The explanation is that simple.  Only conspiracy theorists would attribute the income inequality problem to the machinations of some cabal of super-elites, or the brazen schemes of a class of welfare abusers.  The middle class is simply shrinking, and not with any wicked motivations.

Our middle class is being squeezed by a variety of trends, of which globalization is probably the most frequently cited.  The fundamental complaint is that cheap labor and unregulated industries in other countries are putting hard-working Americans out of work.  That is true, but it’s only half of the story.  If we can buy foreign tires for half the price of American tires, we have more money in our pockets, and more hard-working Americans available to engage in work that is probably more useful and fulfilling than work in a tire factory.  Plenty of jobs are available today for Americans with the right skills.  Yet we are seeing tremendous rates of unemployment.  Middle-class Americans displaced from a job frequently can’t secure a new one they are qualified for.  In short, our country is suffering from a painful skill shortage.  That is the true driving force behind our growing income inequality.

We can’t stop globalization, but we can promote education, training and experience.  We can equip people with skills that are useful in our naturally evolving economy.  The first step on this path involves fundamentally improving our public schools.  At this point it is obvious they are failing in their duty to equip our nation with useful knowledge.

As for Krugman’s proposal that we more extensively rob the rich; the only thing we can rightfully ask from the wealthy is their support in rebuilding our middle class.  Thankfully, they have reasons to help.  A strong middle class means a strong economy, and a strong economy benefits everyone, including the wealthy.  A strong economy also helps wealthy people get out of the crosshairs of zealots like Krugman.  Rather than trying to turn the wealthy into scapegoats, let’s enlist their support in solving the real problem of systemic under-education in America.  Unlike the estate tax, that is something that would truly be in the American tradition.