About a fortnight ago Gov. Jared Polis, speaking at an event sponsored by the venerable Steamboat Institute, uttered a cardinal truth of fiscal policy, saying, rather brilliantly, “In effect, when you tax something, you penalize it.” It only got better when he offered an example of something we habitually tax that we shouldn’t want to penalize — income. He positively shined when asked what he thought the income tax rate should be and replied, as though summoning the spirit of Milton Friedman: zero.
Now, it may be tempting to write this off as simply a reflexively political remark by a savvy politician offering a peace gesture knowing he was in hostile territory. But it is worth remembering that Polis, whatever his other leftist credentials, comes by some of his more palatable ideas honestly. In what would appear at a surface level an unlikely kinship, Polis has long been friends with none other than Professor Arthur Laffer, the godfather of supply-side economics and the application of whose teachings would greatly enhance the wealth of nations. Dr. Laffer’s influence is strong enough to episodically shine through the progressive cocoon that constrains poor Mr. Polis so much of the time.
There is much that is unimpeachable in what Polis said to the good folks at the Steamboat Institute event; taxation does indeed possess an inherently punitive function. It is axiomatic in a free economy that what you earn is yours, and anything taken by the government in an exaction. It follows that taxation – an instrument necessary for the maintenance of government – should be exacted in the manner which does the least harm. That has long been the argument against the income tax – why tax something you want more of? The same logic is applied to other economically retardant taxes, including those on capital gains, business, and estates. (And don’t try and get away with calling it by its alias, the “death tax”, and claiming you’re taxing death. That won’t work outside Berkeley.)
Lamentably, the governor doesn’t stop there. The rest of his statement went like this: “And there are things you might want to penalize as a society, like pollution. But if we can move away from taxing things like income – which you don’t want to discourage – to something we fundamentally don’t want, then you’ll have a more pro-growth tax structure that gets the right incentives in place.” Here we run into something of an economic minefield as we stray too far from the path Laffer and others like him carved out of the economic wilderness. Most obviously of course, is where do you go once you’ve taxed that thing you don’t want out of existence?
The more fundamental issue is what the aim of tax policy in a free economy ought to be. What it ought to be is a way to provide the government the revenue it needs to govern, in the simplest, most impartial, and least economically damaging way possible. What Polis is suggesting is a competing view, that the tax code ought to be used to grind society into whatever the vison of the day is, and to distort the market until it fits a particular mold. Needless to say, this creates all manner of complications that wind up having an impeding effect on the movement of the economy.
Simplicity in taxation is the goal to which we should endeavor. Probably the most useful entity created by the Colorado General Assembly in a decade has been the Sales and Use Tax Simplification Task Force, which continues its hero’s work on untangling the historically convoluted mess that constitutes the state’s sales tax regimen. The key to the supply side economics espoused by Dr. Laffer is similarly based on an elegant simplicity — reduce and flatten rates and eliminate loopholes, broadening the tax base while minimizing the financial burden on individual taxpayers. Not only do you grow the economy, but you grow the revenue collected by government.
Ideally the best tax system would be one that is as strictly impartial as possible, but of course in the real world the tax system is just too tempting of a toolbox for anyone to leave alone, and hence we find it riddled with all sorts of exemptions, incentives, and the like, many of which serve a useful and simplifying purpose, but not all of them. Polis is on the right path with his thinking but takes a fork which turns into a U-turn. A few more dinner conversations with his friend Dr. Laffer may hopefully be enough to convince him to simplify his post-income-tax code rather than weaponize it.