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September 2, 2008
Book Review: A World of Wealth
Joseph J. Thorndike

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A World of Wealth: How Capitalism Turns Profit Into Progress by Thomas Donlan. Published by FT Press. 240 pages. Price: $24.99.


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Some people want taxes that do everything: raise money, regulate business, reform society -- you name it. Many of these people are Democrats. Other people want taxes that do nothing (or at least not much). Many of these people are Republicans.

Consider the raft of tax preferences cluttering up the Democratic presidential platform: a special exemption for senior citizens; an expanded child care credit; a new college tuition credit; a special exemption for start-up businesses. The list goes on.

Republicans seem hellbent on hobbling the revenue capacity of the federal government. John McCain hasn't endorsed any "starve the beast" theories of public finance, but he might as well. According to the Tax Policy Center (TPC), his proposed tax cuts would cost $4.2 trillion between 2009 and 2018. That should leave the beast pretty hungry.

Of course, Barack Obama's tax proposals will cost the Treasury $2.9 trillion over 10 years, according to the same TPC estimate. Apparently, Democrats are unwilling to cede the feel-good politics of fiscal irresponsibility to their rivals. And Republicans, meanwhile, are hardly pikers when it comes to using the tax system to dole out favors; the parties battle over the objects, not the existence, of legislative largesse.

Perhaps, then, the partisan divide between tax activists and tax minimalists is more apparent than real, evident in rhetoric but absent in reality. Perhaps, but probably not. There is, in fact, a genuine ideological divide. For at least 50 years, Democrats have treated tax policy as the means to an end -- the crucial funding mechanism for a modern welfare state. And since at least the 1970s, they have made taxes the instrument of that state, too (as political scientist Christopher Howard has argued persuasively in The Hidden Welfare State). Tax preferences have become the leading vehicle for social welfare innovation, both among lawmakers and among liberal intellectuals and policy entrepreneurs.

Republicans, on the other hand, dislike the hidden welfare state almost as much as the evident one. As a group, they have retained an ideological commitment to the notion that taxes should be used for revenue, not reform. Of course, GOP lawmakers routinely sacrifice that ideal on the altar of political expedience. But a certain stripe of conservative intellectual clings to it. A conservative like Thomas Donlan, editorial page editor of Barron's.

In his recent book, A World of Wealth, Donlan has offered a fine, and very nearly pristine, case for minimalist, revenue-only taxation. Fine because it's such a joy to read: well-organized, legible, and polemical in all the best ways. Nearly pristine because Donlan tolerates remarkably few deviations from his free market thinking.

Donlan begins by staking out his territory. There are two kinds of economists, he writes in the introduction: "Those who think the free market works, except when the results don't suit them; and those who think the free market never works, except when the results do suit them. In my view, the free market always works."

Well, almost always. In scarcely more than 200 pages, Donlan tours the world economy and America's place within it. He considers energy, the environment, trade, immigration, healthcare, retirement security, and (of course) taxes. At almost every turn, he insists that the free market can provide the most efficient solution to the world's most intractable problems.

The title of Donlan's chapter on taxation is revealing: "The Capitalist Take on Taxes: Keep Taxes Low and Equal." Low and equal does not mean distributionally neutral; Donlan endorses tax cuts on the rich, offering a concise briefing on what he unabashedly calls trickle-down economics. Lower tax rates will spur growth, he contends, raising the standard of living for everyone. He seems largely unconcerned by inequality -- and firmly opposed to using the tax system to do anything about it. Indeed, at various points he reveals a moral aversion to progressive taxation. "It is unjust," he writes, "to tax a dollar of income differently depending on who earned it."

Not surprisingly, Donlan is no fan of the individual income tax. (Is anyone? I suppose there must be a few.) "The United States Congress has labored for almost a hundred years to produce a fair tax code, with impressively awful results," he declares. And who can argue? In Donlan's view, the search for perfect fairness has become an obstacle to good tax policy. "Just about every line on the tax form," he writes, "attests to the quest, in which each attempt to be fair to someone results in a dozen new ways of being unfair to someone else."

Donlan is particularly dismayed by the proliferation of "tax-exempt citizens": Americans spared by high exemptions and ample deductions from having to pay income taxes. "Is it fair for a class of working people to have a relationship with their government that entirely consists of receiving benefits, with no contribution required?" he asks. "Is it good for society to create that class, and with it a distinction between makers and takers?"

That is a reasonable complaint. Low-income Americans pay plenty of taxes, including the Social Security payroll tax, as well as several state and local levies. But the income tax is more than just a revenue tool. It's also, as Donlan points out, an element of the relationship that citizens have with their government. To be exempted from it is to be exempted from one of the most visible duties of citizenship. And that is never good. Donlan contends -- reasonably, in my view -- that people should have to pay at least some token amount of income tax, even if they ultimately get everything back in the form of social welfare benefits.

In recent decades, the notion of tax consciousness has been co-opted by conservative ideologues. But once upon a time, even advocates of big government believed that people should be encouraged to pay attention to the price they pay for civilization.

Predictably, Donlan calls for wholesale tax reform. He endorses a flat rate tax on either income or consumption, and perhaps a VAT. He even writes approvingly of a national retail sales tax, reveling in the discomfort that it produces among tax experts. For Donlan, the sales tax holds out the promise of horizontal equity. "For at least a while," he suggests, "the sales tax might not be subject to the host of special tax breaks that pollute the current tax code and deform the economy."

Ultimately, Donlan doesn't seem much concerned with the details of tax reform. He knows what he doesn't like (today's tax system) and he knows what he wants (almost anything else). But I wish he had explored the alternatives more deeply; I suspect he would have interesting things to say.

Every once in a while, Donlan deviates from his free market party line. For instance, he endorses a congestion tax like the one recently proposed for New York City. "We should make it a priority to tax what drags down the economy," he writes. And if a tax on driving can help free the wheels of commerce, then let's have it.

Of course, Donlan might also have considered a variety of other taxes similarly designed to compensate for market failures. But his faith in the free market is nearly perfect, and at least when it comes to taxes, he doesn't make room for other innovations.

Obviously, this is not a book written for tax experts. It lacks detail and nuance at almost every turn. But that's the joy of a polemic, especially one aimed at a popular audience. And lest you tax experts out there are tempted to dismiss it, it's worth remembering that laws are written by the sort of people who read -- and write -- polemics. John McCain would find much to like in Donlan's book. And so would a lot of voters.


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Joseph J. Thorndike is a contributing editor for Tax Notes. Email: jthorndi@tax.org.