Just because I go ballistic on people who claim that tax cuts increase tax receipts doesn’t mean I think the conservative case on taxes is wrong. In fact, I think people like Stephen Moore and Larry Kudlow are actually damaging that conservative case in a big way by spouting such obvious nonsense about the impact of changes in tax rates. So here’s an example, from Jim Manzi, of what I’d call a non-bogus conservative view on taxes:
[I]nternational competition is likely to become much more severe over the next several decades, and increasing economic efficiency will be a required to maintain American growth and the resulting standard of living. So, growing, not just maintaining, the incentives for work, risk and entrepreneurship need to remain central to the conservative project. As somebody who has been an entrepreneur for some time, it’s not clear to me that further reducing the top marginal income tax rate is nearly as important for encouraging this as is the capital gains tax rate plus tax simplification more generally. An advantage of focusing on capital gains is that it encourages an ever-broader slice of the electorate to become entrepreneurs, who tend to be natural conservatives, or at least become so as they manage a business. The information revolution, in ways we don’t yet fully understand, appears to be lowering efficient firm size. Focusing on gains to entrepreneurship as opposed to salary is one part of getting in front of the wave of a changing economy. One of the advantages of being out of power is that it becomes easier to champion reform proposals that hurt incumbents but help the country. Legislators like an excessively-complicated tax code because it allows them to sell tax breaks in return for campaign contributions. It is shocking how much deadweight cost this creates, and what a deterrent this is to small entrepreneurs, for whom tax compliance it is not just a cost of doing business, but a barrier to entry.
The argument about entrepreneurial income vs. salary is interesting. One of my concerns about having the capital gains rate so much lower than the top marginal income tax rate (it’s currently 15% vs. 35%) is that encourages lots of people to pretend to be entrepreneurs in order to get the lower rate. Manzi’s argument is that it encourages people to become entrepreneurs. And when you look at the controversial case of private equity partners and their carried interest, I guess you could say it’s a little bit of both.
