President Obama believes the federal tax code should bolster the middle class and make the rich pay their fair share. I have a different view: The tax code should make no attempt to differentiate rich from middle-income taxpayers, nor should it attempt to redistribute wealth to middle-income taxpayers.
The President’s perspective assumes that income inequality results not from differences in talent, effort, risk-taking, or other “deserving” attributes but instead from unfair advantages that particular taxpayers have received.
The unfair advantages of the rich that come from government policies that redistribute wealth upward should be eliminated or modified instead of the tax code.
While this view is correct, the Obama administration’s policy prescription ignores one crucial detail: Many unfair advantages enjoyed by the rich result from government policies that redistribute wealth upward, and those policies should be eliminated or modified instead of the tax code.
Big banks, for example, earn undeserved profits because they are protected by too-big-to-fail policies along with myriad regulations that limit competition in financial services. Doctors and lawyers, too, make higher incomes than their talents alone would warrant because government licensing restricts entry and competition. Scientists and engineers earn excessive incomes because our misguided restrictions on high-skill immigration (the H1-B visa quota) exclude talented foreigners.
Sugar barons get rich because of government-imposed import quotas. Ethanol producers cash in because the government mandates the use of their product. The military industrial complex profits from government-facilitated sales to authoritarian regimes around the world.
In short, instead of making the tax code more complicated by implementing more redistribution, the president and Congress should stop redistributing wealth altogether. Then we can have a truly simplified tax code.