The Power to Tax

Amid fears of higher taxes, Congress has surprised everyone with a tax cut. In August Congress repealed a luxury tax on jewelry, furs, and expensive pleasure boats, like yachts. The federal government has learned a bitter lesson: that higher taxes do not always mean higher revenues. The tax on yachts is the classic example of how tax policies can backfire. Passed in 1991, it was seen as a way to target the rich. But something unexpected happened: When the tax was imposed, rich people simply stopped buying yachts. America's yacht industry collapsed, and several thousand blue-collar workers were out of work. What an eye-opener. Congress and the White House had estimated that the luxury tax would reap $26 billion in new revenues. Instead, they lost $14 billion. And those who were hit hardest weren't the rich; they were the blue-collar workers who lost their jobs. It's widely accepted today that one of the jobs of government is to manage the economy. And so Congress levies taxes with one hand, while doling out subsidies and stimulus packages with the other hand. But centralized control rarely works. Government planners act as though an economy were simply so many numbers to add up in one column and transfer to the next. But economic decisions are made by people, not ciphers-and people can change their decisions in response to new policies. That's why higher taxes don't always yield more money for government coffers. If consumer items are taxed, people may decide not to buy those items. If income is taxed, people may decide it's not worth working so many hours. If investments are taxed, companies may decide not to expand. In each case, tax money the government was counting on doesn't come in after all. As economist Arthur Laffer explains, taxes work only to a point. If they keep going up, revenue levels off and finally drops. This is the famous "Laffer curve," which shows why a government can raise taxes and still lose money. Maybe it's time to ask what the real purpose of taxation is. Classic Christian teaching on the state is that we owe financial support to the government to fulfill its God-given role: basic functions like enforcing the law and maintaining public order. But when government goes beyond that-when it uses taxes as a tool for managing the economy-it overextends its proper role and inevitably fumbles. As it did when it nearly taxed the yacht industry out of business. In the last election each candidate vowed to "fix" the economy. But the truth is that government cannot "fix" the economy-because the economy is not a machine to be fixed. It is a vast network consisting of millions of decisions made every day by individuals like you and me. And individual character is the real secret to economic growth. As Proverbs 10 says, "The hand of the diligent makes rich." Diligence, honesty, hard work-these are the moral qualities that build an economy. Public policy can backfire all too easily. The only sure prescription for economic health are the moral choices we make-one by one, day by day.

10/28/93