Suppose you had no job and no investments.   All of your assets existed in your checking account.  The only tax you paid was a six per cent sales tax.  A friend of yours has a job and pays 25% income tax.  He complains that since you are paying just a six percent tax on your purchases that you are not paying your fair share.

You could argue that you already paid taxes on your income, or that the sales tax does not compare to income tax.  But the emphasis on fairness seems silly in the light of these two different taxes.

This example was used by Neal Boortz on his radio show to explain the ludicrous comparison of Warren Buffet’s income to his secretary.

Some rich pay a lower percentage of their total income because a bigger percentage comes from investments that are taxed at a lower rate.  They can avoid taxes with tax free municipal bonds.  Do we want to eliminate that favored status and raise the financing costs of our cities and states?

Buffet’s income is largely capital gains tax while his secretary is likely to have mostly earned income.  Is Obama suggesting that capital gains tax should be as high as income tax? If he is then this would surely drive us into another recession, longer and deeper than the one we just left.  We compete in the world market for capital. We have one of the highest corporate taxes in the world and China has a capital gains tax rate of zero. I doubt if he could even get the  Democratics in Congress  to raise the taxes on capital gains as high as the income tax or eliminate tax free munis.

If he is not suggesting an equalization of capital gains and dividend tax rate to income tax rates, or the elimination of tax free bonds, then his whole argument is intentionally false and misleading.

This whole debate has become a distraction from the serious work of reducing the deficit and shrinking the size of government.  There are reforms in the tax code that have merit and should be considered.  A limit on mortgage interest deduction would be at the top of my list.  But this is far secondary to the more urgent and important task of reducing the size and expense of our government.

Even Warren admits that this higher tax rate will not seriously impact the deficit.  And Obama has admitted that higher rates may reduce revenue. But both are so enamored with a sense of fairness that they are willing to make a public deficit problem worse. How is that fair for anybody?

“Could free markets have sorted out the mess without extraordinary government action? Yes, but only by destroying the remains of the financial system and possibly putting tens of millions of people out of work. Despite virulent public opposition to the Bush bailouts, society would not have tolerated the price that a sudden free-market correction of decades of financial excess would have exacted. The consequences of standing by while the markets did their work, correcting their own and government’s mistakes, would have been disastrous.”

“The administration’s response may have staved off depression, though that outcome is not assured. But the government has severely damaged four elements upon which free markets and the future well-being of the nation depend: prices, disclosure, failure, and fairness. Lawmakers and regulators have harmed the faith of global investors and regular citizens alike in American free markets- a faith essential to growth and progress. President Obama has made the problems worse.”

From After the Fall:  Saving Capitalism from Wall Street- and Washington by Nicloe Gelinas

If you have to read only one book about the recent financial  fiasco, this is it.