Equal is not always fair

By DAVID MOON, Moon Capital Management, LLC
February 26, 2012

When Thomas Jefferson observed in the Declaration of Independence that all men are created equal, he fortunately did not fall prey to the temptation to then conclude that we should all be treated equally. The discussion about Liberty, the pursuit of Happiness and unalienable rights arguably introduced the notion of fairness, but fairness is subjective. Equal is objective.

An equal federal tax system would be simple. We have about 310 million US citizens and collected $2.16 trillion in federal taxes in 2010. That works out to about $7,000 a person. If we want an equal tax system, the government would just deduct $580 out of your paycheck each month. Instead of getting a deduction for having kids, you would have to kick in their $7,000 each year, too.

Obviously that sort of system is ludicrous, impractical and unfair. These things are obvious at the extreme.

When the numbers are smaller and it doesn’t directly impact us, however, it becomes much easier to overlook or rationalize faulty reasoning. With respect to income taxes, the problem arises as soon as we use the tax system as an active economic tool for social rewards and punishment.

Much of our problems in medical financing result from laws that allow employers – but not individuals – to deduct medical insurance premiums as a business expense. If not for that discrepancy, the debate over payment for a woman’s contraceptives would have never become a negotiation between her, her employer, her insurance company and the government.

And every bit of this problem resulted from Congress granting a favor to the insurance industry during WWII, then cementing it into law in 1954.

The government decides it likes certain people or things and dislikes others. Tax policy is born.

For example, the federal government decided it didn’t like corporate jet owners. In the name of deficit reduction, the administration proposed an additional $100 surcharge for each airplane flight. The $100 was a flat tax, applied to each aircraft regardless of size or numbers of passengers. A Boeing 747 with 500 passengers is assessed the same $100 tax as is the Beechcraft Baron 58 with two businessmen flying 600 miles for the day.

The proposed $100 flight tax doesn’t even appear to be needed. The stated intent is for these revenues to be deposited into the Airport and Airway Trust Fund, an account that has a current balance of $9.4 billion.

Equal, for sure. Fair? Depends on your perspective. Honest people disagree – and that’s why a tax system should not be a carrot-and-stick type of tool. Paying taxes should be less like buying a used car and more like buying a pair of shoes.

Should we remove the state sales tax on food? No. If we do, some goofball legislator will want to drug test people who buy cookies with pretax dollars to make sure they aren’t diabetic.

Should we drug test welfare recipients? Sure – the day we also drug test everyone who takes a home mortgage interest deduction on their federal tax return.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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