Must

“Don’t tell me what I must do. The only things I must do are pay my taxes and die.” – Popular twist on Ben Franklin quote

It’s tax day in the USA, and when matters of money come up, the international gripe machine swivels its cyclopean head to focus on those richer than us.  For the delectation of the howling masses, CNN trots out this predictable analysis of Mark Zuckerberg’s fortune, complete with the line “he’ll never have to pay taxes again.”

What? Unfair! We the people, innately born with virtue and made equal by dint of the fact that This Is America, squat in our upside-down condos and lament our fortune.  You know what would really make us feel better? Improving our lives? No; that can wait – what we really want to get into is negativity about one of those who succeeded. Because nothing says ‘a better future’ like denying that it’s possible for people to make it here in the now.

I had a good friend whose interest is supposedly economics tell me the other day, “You know, I don’t have any sympathy for those guys who lose or have to pay billions of dollars and then squeal about it. If they’re making billions of dollars, it’s not like they’re hurting.”  I raised an eyebrow at the paradox here: billions lost is still billions lost no matter what else goes on, and would horrify anyone who actually understood the worth of billions.  (Most of us, as innumeracy reports have suggested, can’t actually wrap our heads around such large figures.)  But this is the sort of thing that folksy popular belief foists upon us – as long as you’re able to keep a roof over your head and food on the table, gosh darn it, you’re doing pretty well, and ought to be ashamed for aspiring to more.

While we might brush this off as the attitude of one who only studies economics as a hobby, this attitude is, alarmingly, to be found in people who really should understand money. Writer Ed McCaffery should qualify:

Tax-law expert McCaffery is a professor of law at the University of Southern California (USC) and director of the USC-Caltech Center for the Study of Law and Politics.

Instead, his article is full of demagoguery. “You heard that right.” “So should we feel sorry for Zuckerberg? Before we start crying, let’s step back a bit.” “The really rich leave wages and the W-2s that go with them to the little people, like us.”

The little people, like Ed, with his degree from Yale and J.D. from Harvard, his four published books, his law firm position, and his professorship. Got it. I’m not going to say he shouldn’t be proud of these accomplishments – I’m saying that he’s going far out of his way to downplay them and blend in with his theoretical audience. I get why they’re bitter, but Ed, why are you bitter? You have all the training and connections they don’t.

Anyhow, buried in that article is this gem:

He is playing what I call Tax Planning 101, simply holding onto assets as they appreciate without paying tax on them.

So, far from this being shady, dodgy, or illegitimate, Zuckerberg is doing exactly what he is supposed to do. The author is the one acting like Zuckerberg is somehow hacking the system.

What is this writer selling, anyway?

In clear, easy-to-understand language, Edward J. McCaffery proposes a straightforward and fair alternative. A “fair not flat” tax that is consistent and progressive would tax spending, not income and savings. And if it were collected at its lower levels through a national sales tax, most people would not have to file a return. A supplemental tax on spending for the wealthiest individuals would make the national sales tax progressive. Under McCaffery’s system, a family of four would pay no tax on their first $20,000 in spending, and 15 percent on the next $60,000. Only the few families who spend more than $80,000 a year would be subject to the supplemental tax. Necessities would be taxed less than ordinary and luxury items. No one would be taxed directly on savings. The estate and gift or so-called death tax would be abolished, for the simple reason that dead people don’t spend.

Further details are presumably found in his older article here. While I am no economics professor, I am fairly sure that his grand scheme can be summarized as “disincentivizing spending.”

Zuckerberg, under the author’s tax scheme, would not have been responsible for paying that 1 billion+ USD in taxes due to exercising his stock options.  He would not be responsible for any taxes until he spends money on products, and gets hit with sales tax. Far from making it harder for him to avoid taxes, it makes it trivially easy. As he has no kids, Zuckerberg can – if he desires – spend less than that hardworking family of four that gets taxed because they can’t help but spend 80k a year. For fans of a progressive tax, that is not an improvement.

Disincentivizing spending, like calls for austerity measures in the Chinese Communist Party, makes good theatre – but is more or less the opposite of what you want in behavior from the rich. Rewarding rich people for saving, rather than spending, is going to help the economy? Don’t get me wrong – I personally would benefit from this, in the theoretical case where I become fabulously wealthy: I’m not really a flashy character and was taught from youth to disdain big spending, so even if I made it big I doubt I’d incur the oversized luxury taxes he talks about. But is this really a good plan for the people?

At all levels in decision making we must think about whether we care about our feelings – if it will hurt us somehow to see people flaunting wealth – or if we care about actual numbers and results. McCaffery’s proposal makes it simple for wealthy people to avoid being taxed by curbing their spending – and that in turn harms the economy and removes some of the splendor from life without providing any real benefits.

Life is pain, Highness. Anyone who says differently is selling something. – The Princess Bride