The Long View 2002-10-30: Surrender and Taxes

With the trial in Boston of Chechens acting Checheny, this is a good time to review the fact that Chechens have pretty much always been a pain in the ass to everyone who came in contact with them, and the age of air travel is exporting this fun to everyone. The great Russian novelists, like Tolstoy, wrote admiring/admonitory novels about the Chechens. Which also reminds me of Scott Adams' recent blog post against reading fiction. I'm more sympathetic to his argument than I would have thought, but I suspect that a diet of pure non-fiction wouldn't help you accurately understand the Chechens in the way that Tolstoy can.

In the years after 9/11, the Russians suffered immensely from their proximity to the Chechens. They might have deserved it, but if you think of the Chechens like the Apaches or the Comanche in nineteenth-century America, minus smallpox, you might have a better idea of what is going on.

Speaking of crazy, we still suffer from the annoyance of the North Korean zombie state twelve years later, mostly due to their possession of nuclear weapons. It seems plausible to me that something could eventually tip North Korea into union with South Korea, but the two countries aren't quite like East and West Germany. Only the power of the Soviet Union kept the two Germanies apart. China, the relevant regional power in Asia, actually seems to help keep the North Koreans reined in. They really are crazy.

Finally, we turn to the tax code. President Obama recently suffered a defeat at the hands of his own party over the 529 college savings account plans that illustrates how obscure our tax code has become. The last time a major tax reform was passed, it actually caused a minor recession, in part because of the partisan tendencies of the then Republican Congress to favor tax cuts over pruning deductions. However, the President's recent difficulty highlights the powerful pull tax deductions exert in American politics.

In principle, you should be able to craft a tax code change that is revenue neutral, but makes compliance simpler. This ought to be better, but good luck actually implementing it. Another probably necessary reform that will never happen is spreading the tax base more widely among American citizens. The strange thing is that while our tax code is one of the most progressive in the world [defined as taxing the rich the most], our welfare programs seem to be less progressive [defined as making poor people better off]. This isn't actually a paradox once you realize that tax revenues [not rates] would be higher if poorer people paid more taxes. John often made this point, but I didn't understand how it worked until recently. The populist temptation to soak the rich isn't what made America a paradise in the middle of the twentieth century.

It was the noblesse oblige of the elites that made it possible. That took a degree of solidarity we no longer possess.

Surrender & Taxes

 

Here is the Russians' Chechen problem: they already tried surrender, and it didn't work. They actually withdrew from Chechnia for a while in the 1990s, after attempts to suppress the separatist movement failed. The Russians probably would have reconciled themselves to an independent Chechnia, or at least might have negotiated a new status for the country within the Russian Federation. As it happened, however, they were not given the chance. A working independent government failed to form in Chechnia. The place was taken over by bandits. The bandits were increasingly in league with the Islamicist network, and began to infiltrate the surrounding republics. There really was no alternative to another invasion, though it should have been carried out with less indifference to civilian casualties.

Had there been no invasion, would something like last week's hostage-taking in Moscow have been avoided? Probably not: the Islamicists have ambitions for the other predominantly Muslim areas of the Russian Federation. Certainly Chechen terrorism did not stop when Chechnia was de facto independent. The pacification of Chechnia is an appalling undertaking on all sides, but negotiation is not an option.

 

* * *

The same is true of the nuclear threat posed by North Korea. The political class in the United States has yet to grasp that the 1994 agreement negotiated by former President Jimmy Carter was one of the great catastrophes of modern times. Even those who understand that something serious has happened are still determined to do nothing about.

Consider, for instance, Nicholas D. Kristof. Although a columnist for the New York Times, he has shown that he is not necessarily inaccessible to the light. Nonetheless, in column entitled "The Greatest Threat" (Oct. 29, 2002), he was capable of writing this:

 

"Donald Gregg, a former ambassador to Seoul who is president of the Korea Society, says imposing sanction on Korea 'would be crazy.' Likewise, a military strike is not feasible, given that it would probably trigger a new Korean war.

"On the other hand, how can we accept a North Korea with a large nuclear arsenal? How can we continue to ship fuel to the North as if nothing had happened?

"That leaves only one alternative, holding our nose and negotiating a deal with North Korea (without ever calling it negotiating, and possibly using proxies like China). The North would give up its nukes nd missiles, all sides would agree to end the hostilities of the Korean War (there never was a peace treaty), and Western countries would normalize relations with the North."

One does not quite know what to say to this. The one thing we know about the North Koreans is that, when you make a deal with them, they accept payment and they don't make delivery. The dismissal of sanctions is particularly bizarre. Unlike Iraq, for instance, North Korea is so isolated that it is one of the few places in the world where sanctions would be very effective. This is particularly the case because, by most accounts, "North Korea" actually collapsed a few years ago. All that's left is a post-apocalyptic government that survives on the proceeds of foreign extortion.

The "one alternative" is to drive that regime to implosion. The problem is that, thanks to Jimmy Carter, that inevitable course is now much more perilous.

 

* * *

Let us turn for a moment to a more pleasant subject: taxes. I see that the Treasury is considering yet another general overhaul of the federal income tax. I myself have rather fond memories of the last big reform bill. What was it, the "Thorough and Efficient Reform Act of 1986"? Maybe it was the "Tax Efficiency and Reform Act of 1986." Anyway, TEFRA kept me and several other editors at West Publishing Company innocently engaged for many weeks. West had the contract to edit the United States Code (and the Internal Revenue Service Code, which is actually distinct), so we cut up the 1,500-page bill into little strips and pasted them onto cards. Then we penciled in changes to make the bill's text conform to the style of the IRS Code.

As you might suppose, this could be tedious. Indeed, some of us went mad, and had to be put down. Nonetheless, the work was done, and I at least remain convinced that we made the world a slightly better place.

The TEFRA principle was simple enough. The tax code had evolved in such a way that the rates that individuals and businesses actually paid were much lower than the nominal rates. People avoided paying the nominal rates by investing or spending their money in a way that took advantage of deductions. Some deductions were well intentioned. Some were pure pork. In any case, they had grown like a coral reef, so that it was impossible to tell what effect any given change to the tax laws would have on revenues. More important, everybody was spending more and more time worrying about the tax implications of their activities, and less and less about whether those activities made economic sense. The obvious solution was to lower the nominal rates and remove the deductions, so as to keep revenues at the same level.

That almost happened. The tax rates were lowered and their number diminished. Tax forms became simpler, briefly, because the number of deductions decreased, too. The big failing of TEFRA was that Congress was keener to lower rates than to end deductions, so the result was not revenue neutral. In consequence, Congress created the Alternative Minimum Tax, one of the great practical jokes of modern accounting. It takes back some of the deductions that TEFRA kept. The Alternative Minimum Tax was originally supposed to affect only high-income tax payers with large deductions. However, the increasing incomes of taxpayers since 1986, and the addition of a new coral reef of deductions, mean that more and more people now have to pay the Alternative Minium. This, no doubt, is part of the reason the Treasury believes a total overhaul is in order.

I myself have no particular preference for what a new tax code should look like. I do, however, have one principle to guide reform. Like a machine with no moving parts, this is an ideal that the real world can only approach. Nonetheless, it is the key to life, liberty, and the pursuit of happiness. The principle is this:

 

Never do anything for tax purposes.

There, now you know. Go teach all nations.


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