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Tax for Thought: Paying Less Is Not More

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They say that there are only two certainties in life: death and taxes. In a capitalist economy, many regard death as the lesser of those evils. That may be amusing but only in the same disturbing way as the NRA slogan 'gun control is hitting your target.' Given that the hot-button issue of taxes could sway the presidential elections and impact our future, it is critical to examine it more closely and dispel the absurd myths surrounding it. Broadly speaking, there are four big arguments to consider:

Portfolio and passive income should be taxed at lower rates than earnings
This one always leaves me scratching my head. Why should non-active income, such as capital gains, be taxed any differently than the salary of a construction worker, a bartender or a lawyer? Conventional wisdom says that lower tax on portfolio and passive income encourages investments, which then generates jobs. That sounds great but is nonsense. People invest money to make more money -- and regardless of whether those returns are taxed at 15 percent, 20 percent or 35 percent, they still make money. Investment income also has the added benefit of not requiring active work. Granted, double taxation, nations with friendlier tax codes and other factors do complicate the issue, but the U.S. still provides the safest and most attractive arena for investing anywhere in the world.

To boil it down, if we don't offer tax breaks to doctors to show up for surgery or cops to respond to a 911 call, there is no reason to offer it to business people to do what is already in their own best interests. It is blatantly unfair and penalizes anyone whose major source of income is wages.

Businesses should be given tax breaks to encourage hiring
The implicit (and strange) assumption here is that job creators, i.e. businesses, hire more people only if they get tax breaks. Not only is this wrong but anyone who believes it has a poor understanding of economics.

Any efficient business will hire exactly as many people as it needs to serve its customers and generate a desired level of profit -- no more and no less. If there is incremental profit in employing one more worker, the business will automatically do so. The only time that a tax incentive will make a difference is if the business is already running at maximum potential and therefore an external stimulus is necessary. But that creates artificial employment, which makes no business sense and hurts the economy in the long run.

Besides, there is little statistical evidence to support an active correlation between corporate tax rates and job creation, and so the emphasis on this is disproportionate. As I said before, bribing the business community to do business is not only bizarre but a violation of the very principles that drive our capitalist system. Tax breaks to spur investment or job creation, like oil industry subsidies, are not good solutions to difficult problems but lazy ideas that enable politicians to whip up voter frenzy.

The U.S. government could reduce taxes if it stopped spending so much
Reducing spending is a great idea, but in reality neither political party is about to do that. Plus here's a simple fact: America functions because of infrastructure. By 'infrastructure' I don't just mean our roads and railways but the entire fabric of our society, including Social Security and Medicare, public services, the water supply system and basically anything that keeps our nation humming. Since not everything can or should be privatized (look at how the airline industry fared after deregulation), taxes are needed to fund this critical backbone.

While demanding accountability from Congress is important, resenting taxes because they hit our individual pocketbook is myopic. We all benefit from a robust infrastructure. Even the rich are wealthy precisely because of a system that supports vibrant commerce in America, whether it is public schools that ensure a future workforce, the subway system which enables millions of people to get to work inexpensively, or public hospitals that keep people healthy enough to keep working. The irony, of course, is that the same people who complain about big government are happy to enjoy its largesse.

So taxes, unpleasant as they are, are a necessary evil that we need to come to terms with. The alternative would be a wasteland of a crumbling civilization.

It is unfair to increase taxes on the rich
While this argument makes for great political theater that tugs at our innate sense of fairness as Americans, it is based on selective facts and self-serving logic. The truth is that the richer a person, the more likely their income stream is to be diversified and taxed differently than ordinary earnings. Everything from deferred compensation to capital gains to income kept in offshore banks are taxed at lower rates than the 35 percent most people pay, not to mention the many loopholes that enable corporations to save on business taxes. The net result of this game of Three-Card-Monte is that wealthier people often pay lower taxes than the rest of society.
So yes, the rich should be taxed like everyone else but that entails increasing what they pay, not decreasing it. The whole point of a rational system is to ensure that everyone plays by the same rules.

Now that we have dissected the major differences in tax philosophy between the Democrats and Republicans, what will the future hold? That depends mostly on what happens in November, but it also depends on whether we continue to fear taxes more than we fear death. I am not saying that taxes are great but just remember that unlike the grim reaper, the IRS at least lets you pay in installments.

Sanjay Sanghoee is a former investment banker and the author of a financial thriller, MERGER, published by St. Martin's Press in hardcover, paperback and Kindle.