Adam Smith’s Wealth of Nations is misrepresented as claiming that the marketplace is perfect.His argument was that regulation benefits the manufacturers and merchants rather than the nation as a whole. This is the fundamental market place paradox of Adam Smith: the winners get to change the rules.
For instance, Ronald Reagan fought long and hard to limit the maximum tax percentage and to eliminate the capital gains deduction. This was the central tenet of his first presidential campaign. His argument was that everyone needs incentive and that the government should not tell us how to invest.He was very upset that the owners of the film studios by buying and selling the firms to each other pay taxes at a much lower rate than the actors, such as him, paid on salary.
Bill Gates wanted to sell his stock, and today the capital gains rate is restored.When Republicans talk about tax reform they bellow that they want to eliminate the graduated income tax and then very softly say that we should end, well, at least some of the deductions.Democrats state that we should eliminate the deductions and then lose the election.
Let us take the charity deduction.In 2007, this was around 324 billion dollars.Imagine all the needy people who could be helped with 324 billion dollars.The impact on taxes doesn't seem that significant.A reduction in income of 324 billion times the maximum tax rate of 35 percent doesn’t seem that significant a shift in a tax burden of 3 trillion.What we fail to grasp is how this seemingly innocuous deduction permeates and corrupts our entire social fabric.
Examples abound.Citibank’s CEO, Sandy Weil, wanted a better rating for a bond issue.The bond analyst worked for Citibank but they are supposed to be independent. His bond analyst told him he’d oblige if Mr. Weil could get the analyst’s kid into a particular New York City YMCA day care.Weil dropped a million on the Y and the analyst upped the rating. While everything else was buttoned down, the analyst wrote an Email bragging about it, which was discovered.The analyst resigned in disgrace, Weil lost a nomination to be head of the SEC, but the YMCA was never questioned.They took the money and moved the kid, they never leaked and no one ever came back to them on it.
Smith’s argument against regulating the market place, in this case with tax deductions, is that even well intentioned preferences can have disastrous results.In large part, this is because they will be used to the advantage of those who already have the advantage.
Pick any non-profit, walk around the administrative offices, and you will find the friends and relations of generous benefactors.The benefactors thereby avoid the gift tax. The contracts, whether for supplies or services, will be given to the companies of those benefactors.Whatever that non-profits original purpose, you will find that their programs whether explicitly or subtly have grown to maximize the return and satisfaction of the contributors.Because of the tax code, the base of contributors has grown and this growth has changed the mission of the institution.Rather than directing themselves to those in need, they often find themselves meeting the needs of their base.The irony is that the tax deduction subverts whatever beneficent objective originally intended.
Take Salvation Army, probably the best charity extant.Entering their administrative offices, you will find acres of space devoted to their resale operation.Their trust administration is also huge.Hidden away somewhere you may find some space devoted to alcoholic rehabilitation.They have become what our tax laws have made them.
My wife and I were looking at temples.We found one that we thought of joining.Then they told us the dues.If I manage to drag myself to temple ten times in a year, that would be remarkable.Yom Kippur, Rosh Hashanah, maybe Passover, Purim is nice, Simchas Torah is possible I guess.For extra, I get to drag the kid out of bed on Sunday morning and suck on a bagel while he hears about the Maccabees. It seemed like an awful lot for ten shows.Then they laid it out for me.They had two Rabbis; there was something to do at that temple every single day.I guess the congregation lived in that temple.I thought they were Reform.I finally got it.They had a tax-deductible country club without the golf course.What the tax code has done is drive out the majority of us who observe fitfully in favor of the minority who are willing to build their lives around it.This is a variation of the women’s shoe paradox, where a minority of purchasers buys the majority of the product.
Religions structure themselves around their deductible status and federal grants.Any poor person will tell you that the only way to survive is to get a church. Scientology offers a decent deductible course of psychotherapy without the stigma or the medical expense limits.Latter Day Saints sets itself up as a quasi-corporate, socialist, settlement house, with barely any pretence.Federal law prohibits auditing churches unless the IRS already knows what they are going to find.
The case of Cardinal Cody is instructive.It was discovered that he was supporting a friend out of church funds.Because the Chicago archdiocese is defined under Illinois law as a corporation sole, the Cardinal is in effect, the owner or CEO. The IRS has no interest in enforcing church doctrine, but rather than coming to a financial settlement, they took the position that if Cody did not surrender the financial records of the institution that was in his name they would prosecute and jail him.Brave Saint Cody paraded up and down the North Shore assuring his parishioners that he would die in jail rather than surrender the books.Again, this is never remarked on.
Schools are no better.Regardless of size or specialty, their brazen effrontery of the laws on tax collusion is appalling.So called scholarships, work grants to the privileged, trading contracts, participating in bribery under the guise of honoraria and colloquium, for whatever reason, they have no fear of audit.
We design business systems to require collusion for theft.For instance, an invoice requires two signatures. If one of those signatures were of a subordinate, I’d say it is one and a half signatures.Even our fail-safe nuclear deterrents only require three safety officers. The other major deterrent to theft is the IRS. The IRS is not opposed to theft in principle. They just want their cut. It is difficult to pay your taxes on illegal income unless you have the help of a nonprofit.Nonprofits are modern day privateers. They can take in money as donations then wash it as salaries and services.They can buy and sell for-profit companies.They can take payments from for-profits and distribute payments through them.
Why are we such chumps?Does anyone amongst us really believe that we are going to catch the break or even the crumb?Our only hope is the support of an arbitrary authority against any preference.If you really believe differently, take yourself to Millennium Park and study the twenty million tax-deductible Bean.