In defense of the IRC

June 9, 2021 economia

I raise my tiny Stradivarius …

to defend the faithful execution of the laws—specifically, the faithful execution of the Internal Revenue Code of 1986, as amended (hereinafter, the Code). Not that the Code itself cannot bear deep reconsideration.

Point the first

First, privacy, and it conflation, secrecy. It is no great secret that the valuation of assets held by Elon Musk, Jeff Bezos and Warren Buffen has been climbing for a long time making them what is called obscenely wealthy. Be that as it may, the Internal Revenue Service, its employees and agents ought not be disclosing the amount of tax paid on their respective income. My claim rests firmly on the slippery slope. It is not difficult to imagine a Trump II IRS weaponizing tax records against rivals or other enemies. Of course, as much as it would be tempting to argue that what they can do unto others they can do unto you, personally, sorry, chump. No one cares that much, just as no one cares about your private life enough to do anything with all your interceptable device traffic. Enough.

Point the second

The Code is all about timing. Generally, there is no tax consequence to wealth, as such. It sits there, grows in the opinion of the market, shrinks or remains stable. It is taxed, lightly, on death in the form of estate taxes. Otherwise, it is taxed only when liquidated in whole or part and gains or losses are realized and come within the scope of the tax on income. Also, the tax game is one of freeze tag; it is scored once a year, generally on an accrual basis for the dollars that count. It is, and probably realistically could not be unless virtual currency were orders of magnitude faster and we had qubit computing, scored continuously.

At a first approximation, the plutocrat-taxman game is zero sum, a race between a hundred million not paid this year vs. a hundred million in revenue not received this. Of course, at the limit a game in which the plutocrats always win is not long-term sustainable. The government provides economic goods to the plutocrats that are not for sale on the private market. Starve the beast too much and it will drown in the bathtub as Eric Cantor hoped.

In the short-term, it’s a win-a-few-lose-a-few-wait-until-next-season game. Baseball goes not. It may not persist forever but it appears stable.

Stability is a good thing in complex systems. Not so much in simple systems going bad, but in large systems, yes. What happens if we amend the Code to treat assets as income to be taxed, say at 15%?

Let the ill-gotten gains of the 1% of the 1% amount to $5 trillion. Maybe more maybe less no matter. In year 2023, if we amend right away, we reap a tax windfall of $750 billion that year. Whoopie!! Next year, of course, ceteris paribus, receipts fall on the diminished base. It never gets quite to zero, of course, but it goes down, down, down.

But the ceteris wander. One year’s $4,250,000,000 after taxes might be next year’s $6 trillion as the market’s collective opinion of the composite asset value soars. Win-win, rising-tide-all-boats, right? Well, wait a minute.

What happens when the market sours and instead of going up to $6, it goes down to $3? Stranger things have happened, even to hedge funds. Do the math and follow the money.

So, what if we do the only reasonable thing and make unrealized capital losses anti-taxed as a credit against other income? (I actually spent years in the orbit of §860G of the tax code, which dealt in this kind of tax dark magic.) There goes revenue stability. For the same reason.

A solution lies in considering the nature of money. We all think we know that should be a simple question: the more the better. Eh, why? You can’t drink it, you can’t eat it, it doesn’t warm you much if you burn it and it’s hard to accumulate enough to shelter under. It’s good for two, only two, reasons. It’s a medium of exchange and you can pay taxes with it.

For a medium of exchange, you want two things—liquidity and predictability. Liquidity means you can find someone to take it and give you something in return, reasonable quickly. Predictability means that its agreed upon value changes in a way that allows for some degree of planning. The wrap on crypto-currency is that it fails on both accounts. This represents the money-in-motion as value theory, rather than the the treasure-chest theory.

The germ of an idea may lie there. We’ve had non-stop magical thinking that reducing taxes will call forth investment from which will spring all nature of general welfare. The failure, I think, is that the rich are so risk averse. Those who have less and want more have the greater risk appetite. Jeff Bezos didn’t become fabulously wealthy from having already been filthy rich. Steve Jobs didn’t either, although he started with less. Lowering their tax rates should not have mattered a whit in producing the marketing genius the spawned their empires.

Examples could be multipled.

The tax policy idea is not to tax capital to raise revenue directly. Tax idle capital to incentivize risk taking. Do nothing and watch the value of assets erode perhaps slowly. Take a risk and possibly reap a great reward. From success flows income, not only to the risk-taker but from hangers on. From income, assuming an otherwise level playing field, flows tax revenues.