On Tithing and Taxes

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Hillary Clinton recently proposed changing the way long-term capital gains are taxed. This proposal prompted me to take a look back to see how capital gains have been taxed over the past 25 years. In doing this I discovered that the tax treatment of long-term capital gains is illustrative of how the tax code grows. It also showed why one should not expect tax simplification any time soon.

Back in 1990 the tax rates applied to long-term capital gains were the same as those applied to income derived from other sources. This was straightforward enough. And, in addition to its simplicity, there was no implication that one form of income was any better or worse than another. All income was taxed at the same rate, whether it was earned by backbreaking labor or because a stock went up in price.

However, that changed in 1991. During the period 1991 to 1997 long-term capital gains received a more favored tax treatment, with a tax rate of 15 percent or 28 percent applied depending upon the taxpayer’s total income. This basic approach has been utilized since this time, although the rates applied have varied. Presently the rates used are 0 percent, 15 percent, or 20 percent (again, depending on income).

Clinton’s proposal aims to add more tax rates, with the particular rate depending on the length of time the taxpayer holds the asset. Under the Clinton proposal those taxpayers in the highest personal income tax bracket would face six long-term capital gains rates. For assets held less than two years the rate would be 39.6 percent, for two to three years the rate would be lower at 36 percent, and so forth, on down to a minimum of 20 percent. The low rate of 20 percent is suggested as appropriate for capital gains on those assets held longer than six years.

How Clinton determined the aforementioned rates for optimal social engineering purposes is unclear. After all, why is a 36 percent tax rate for assets held over two years the best tax rate? Why not 34.8 percent or something else? The rates are purely arbitrary assignments. The only obvious reason behind them is that Clinton is grasping for more tax revenue

But arguing what might be the best tax rate schedule is not the purpose of this article. Deciding on the optimal number of long-term capital gains tax rates to most strategically direct investment in the U.S. economy is way too difficult of a problem for me. Thus I will leave those choices to the political elites who imagine themselves capable of making such important determinations. My point is to illustrate how the tax code expands over time, and to contrast it with the elegant simplicity found in the law of tithing.

Notice that millions of Americans voluntarily tithe 10 percent of their income to their churches. There is one and only one rate. This is clearly laid out in the Scriptures and among the faithful this is understood. There is no need for armies of lawyers and accountants. The applicable rule is simple: Pay 10 percent on your “increase.”

The simplicity of God’s plan leads me to this question. How is it that tithing is so straightforward and so easily collected when the federal government’s tax code is so complex and unwieldy and extremely costly to collect? The obvious distinction is that one is voluntarily paid as a matter of personal choice, while the other is involuntarily extracted at the threat of imprisonment.

I am not going to suggest that the expanding and bewildering tax code can be “fixed” and work as smoothly as tithing by enacting a flat tax. Even with a flat tax folks will engage in all sorts of machinations to lower their taxable income. A flat tax might simplify one small piece of the tax code, but the issue of honestly determining and reporting income is the real snag. If people don’t want to pay taxes, there is no amount of IRS wrangling that will close all the loopholes.

The conclusion I reach is that simplicity in taxation can only arise in a world where individuals voluntarily choose to pay. A similar idea can be extended to most forms of business regulation. Free enterprise will flourish if (and only if?) ethical and moral individuals voluntarily exchange one with another. When ethics and morality vanish, governmental oversight moves in to fill the void. But such rules and regulations arise typically as a means by which some people use government force to steal from other people. With regulation comes the threat of imprisonment, the use of force, cronyism, favoritism, and the heavy compliance cost of teams of bureaucrats monitoring mountains of paperwork. The average person becomes a slave of the state.

So, can the tax code be simplified? More importantly, can free enterprise be saved? Perhaps, but the solution to many of today’s problems is most likely to be found in a religious revival rather than in the science of economics because what is most needed is an increase in moral human action rather than the machinations of an immoral people attempting to use government to vote for themselves something from someone else’s pocket.