The American Founders were deeply suspicious of Democracy, and structured a Constitution designed to protect both personal liberties and property from the tyranny of the majority. But the critical problem confronting America today is not the majority using its popular vote to seize property from the rich; it is structural tax preferences sheltering wealth that are obstructing the efficient workings of capitalism and thereby the American Dream and its Promise of Equal Opportunity.
The problem is traceable to those same Founders and a land-mine they planted in the Constitution: a prohibition against federal taxes assessed upon property. Since the Founders were all wealthy landowners – along with being white men – it’s not hard to see why they would have favored such a prohibition, even though throughout most of recorded history property has always been the obvious and primary basis for taxation. But, in the same way that the Founders’ biases against Women and Blacks eventually needed to be amended, I propose it’s time to reexamine the Constitutional bias in our tax system.
Some Historical Perspective: For much of its first 100 years America thrived without looking to property as a tax base; primarily by funding the operations of government with the sale of land. But as time passed, less undeveloped land was available for divestment, the scope and cost of government was rising, and excise, import and other consumption taxes came into favor. It didn’t take long to realize that consumption taxes were impeding trade and economic growth. The country moved on to incorporate income into our tax base. Doing so required a Constitutional Amendment in 1917. Some people today believe the shift to income taxes was the downfall of society and urge we abandon income taxes and return to consumption taxes. Since 1917 the tug of war between consumption taxes and income taxes has dominated our debate and obscured more efficient and equitable ways to distribute our tax burden.
As the country has matured, the population has aged, and the demands and commitments for government services have increased. Because we have failed to establish an adequate and equitable tax base to fund the services we demand, we are on an “unsustainable” path.
Critically, restricting our tax debate to Income vs. Consumption leaves us at an impasse on tax revenue policy. Liberals decry the regressive nature of consumption taxes. Conservatives hate income taxes and decry the perverse incentives embedded in our current tax code. If these are our only options, there is little hope for progress because they are irreconcilable; the flaws each side sees in the other are real. But they aren’t the only options. If we replaced investment income taxes with a nominal tax on net wealth, we could eliminate the perverse investment incentives conservatives rail about while more equitably distributing the burden of government at the same time.
Unfortunately, however, our leadership on both the Right and Left apparently share the Founders’ bias against property taxes and ignore the increasing concentration of wealth and income created by sheltering property from taxation. Might that be because our government is still controlled by the wealthy? Or is it simply group blindness and short memories? Has the constitutional prohibition against property taxes been in place so long we’ve stopped considering the alternative? I prefer to believe the latter… because it is just too depressing to believe that the destructive cronyism which has destabilized our economy is a willful conspiracy against the middle class.
It is time to stop ignoring wealth as a logical component of our tax base and carefully examine the merits of structural reform. The central premise of capitalism states that the productive deployment of capital is the driver of economic growth and prosperity. But the prohibition against taxing wealth directly has the unintended consequence of subsidizing returns on low profit, and unproductive capital, and is obstructing the free and fluid flow of capital to more productive uses. Our tax and monetary policies have made valuation manipulation and tax avoidance far more profitable than productive enterprise. So why is anyone surprised that we create asset bubbles instead of jobs?
Over the past two years I have attempted to engage our leadership in evaluation of structural tax reforms that would reinstate property as a component of our tax base and simultaneously stimulate more productive investment of private capital; those conversations have included three members of the President’s Commission on Fiscal Responsibility, multiple members of Congress, and more than a dozen economists at respected universities and think tanks. I have received no substantive rebuttals to the facts or logic of what I propose. I’ve been told that what I propose has many apparent merits, but it is politically impossible and therefore a waste of time. The basis of that assessment is the Constitutional Landmine sheltering property from federal taxation. Conservatives dismiss the idea without examination because it departs from the Founders’ principles. Liberals often praise the concept, but still dismiss it because it’s “not worth the brain damage of a constitutional challenge.”
So our leadership in Washington remains deadlocked in battle over competing flawed ideas while they ignore an alternative that could broaden the tax base, allow us to lower tax rates, equalize the tax burden, and stimulate more productive investment, economic growth and job creation.
If the Wealthy White Male Landowners who drafted our Constitution really were infallible, then perhaps we don’t need to look outside the framework they constructed. But I’m not convinced they were. Are you?