Some have criticized Minnesota Republican gubernatorial candidate Tom Emmer for accepting $511,000 in public campaign funds. But those who condemn him on this point are engaging in ‘mere cant.’ So are critics of the Wisconsin candidate whose business got a government-subsidized loan decades ago.
Scholars of law and history will recognize that phrase from the famous federal judge Billings Learned Hand. He debunked the idea that people should voluntarily avoid using advantageous loopholes in tax laws: “Over and over again Courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor, and all do right, for nobody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”
To an economist, there is little difference between a government tax and a government subsidy. Both are government policies that transfer money between an individual and government. Only the direction of the flow is different. One is a negative version of the other. Saying that a politician who opposes public campaign financing should not accept such funds is like saying that an economist who criticizes the deductibility of mortgage interest expense thus should not take the deduction herself.
At its root, of course, the question has a moral component. And modern economists flee questions of right and wrong e way vampires flee daylight or the true cross. But there also are practical questions of how you can best manage your own resources while opposing a policy that you think unwise for our society or even fundamentally unjust.
Consider a personal example. I argue that the “step-up in basis” tax treatment of capital gains on property held until death is both economically inefficient and unjust. Our society would be better off, both in terms of equity and efficiency if it were abolished. But until that happens, I will arrange my affairs to take advantage of it.
A quick explanation of my own situation is the best way to explain step-up in basis. I purchased farmland from my mother 35 years ago at an advantageous price. It is now worth much more. If I sold it, the difference between the selling price and my “cost basis” — essentially, what I paid for it adjusted by a few details like depreciation and improvements — would be capital-gains income. I would owe personal income tax on that capital gain at the preferential rate for such gains.
However, if I continued to own the farm until I died, it would pass to my heirs. Their “cost basis” would be the market value of the farm on the day I died. The basis would have “stepped up” in value.
If my children immediately sold it, as I expect they would, no tax would ever be paid on that increase in value. It would be a gift from the government to our family. The same applies to any other capital asset held until death, including houses, stocks, bonds and other financial instruments.
The provision promotes economic inefficiency because it freezes ownership of the assets involved, even though people would find it advantageous to sell and put their money to other uses if not for the law.
It is unjust because it lowers the effective income tax rate for income from a specific source and disproportionately benefits a small group of high-income, high-wealth people like me. Advocates of the incentive effects of lower capital gains rates often overlook the fact that more than a third of all the capital gains “realized” in our country are exempt from any income tax because of this provision, and the bulk of that is enjoyed by the wealthiest 5 percent of all households.
(If you plan to write telling me that capital gains from sales of farms and corporate stocks include a large measure of inflation, save your time. Yes, that is true, but then the fair thing to do would be to index all such gains by inflation, rather than making a complete exemption for items held to death while applying the full rate to assets sold before death.)
I have repeatedly argued that step-up in basis is a bad policy, just as Tom Emmer has repeatedly criticized public campaign financing. Should I thus try to sell the farm before my death so that the government can get its rightful due? Should Emmer pass up the $511,000 he is due under current law? I think not.
If I believe our tax laws embody many inefficiencies and injustices, I can do more to change them by optimizing our estate plan under existing law and giving some of the money saved to think tanks or advocacy organizations trying to improve the tax code. If Emmer wants to abolish public campaign financing, he should take the money to get elected governor and send a bill doing just that to the Legislature. Voluntary stinting in either case would make society worse off, from my individual point of view or his, than if we take the money and use it.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.