A Trip Down a Slippery Slope

A Trip Down a Slippery Slope March 7, 2018

My recent article on tax-exempt municipal bonds was attacked by one commenter who claimed that eliminating the tax-exempt status would raise the costs of government. DUH. It certainly will raise the interest cost of bonds. But it also will increase tax revenue, and the people who benefit from the funding provided by the bond are the ones who will bear the increased cost. That seems fair.

A more fundamental question is: Why are municipal bonds (and some state bonds) tax-exempt, and not other bonds? Why do munis merit this special treatment? Are the projects or programs they finance more worthy than those paid for with state bonds or Federal Treasuries?

I was mulling this over on my daily walk today, and my brain led me down a slippery slope, greased by the comments I received. So, get ready…here we go.

If tax-free status is good for munis, why not for all bonds? Think of the savings in interest payments! It would encourage all levels of government to take on more debt. Um, well, maybe that’s not such a good thing.  Oh, but the reduction in interest payments would make more money available for other programs…or even allow taxes to be cut. Oh, good! Cut taxes and take on more debt. That sounds like a wonderful idea for government, right? After all, that’s what our current geniuses in Washington are doing.

Why stop there? We could make bond buyers’ purchases tax-deductible too. That would make even lower interest rates possible, because now the government is picking up part of the cost of the bond in reduced taxes payed by the bond investor.

Uh oh. Stock investors will scream…rightly…that they are being discriminated against. Dividends on stocks should also be tax-exempt. In fact, conservatives have been bleating about this for a long time, claiming that taxing dividends is double taxation, since the corporate earnings are also taxed. Furthermore, if bond investors’ purchases are tax-deductible, then shouldn’t stock buyers get the same tax break? How about eliminating capital gains tax? Imagine what that would do to the stock market!

And then finally, corporations raising money with bonds will scream that they are being unjustly punished if their bond buyers don’t get a tax deduction and have to pay tax on the interest.

And down the slippery slope we go. Every special interest group will complain if other groups get a tax break, but they do not. So why shouldn’t they ALL get a tax break? The result would be lower costs to government, lower tax revenue, and insanely higher stock and bond markets. The rich would become fabulously richer. And government would get a lot less tax revenue to fund things like social programs.

All of this would concentrate wealth in a small group of powerful elites. With wealth comes political power. They would run our government even more than they do now. And our path down that slope to a Third World nation will be enormously accelerated.

Even though tax revenue would be much smaller, government will need a lot less money because all those social programs will be eliminated. Workers’ wages will be controlled to maintain them at or slightly below survival level. Best of all, that pesky Middle Class that was insisting on the rich paying their fair share of the costs of government will finally be completely eliminated…and silenced.

Our nation will then become the richest Third World nation in history, as wealth distribution achieves a brutal symmetry: Less than 1% of the people will own more than 99% of the wealth, while more than 99% of the people own less than 1%.

And the rich will live happily ever after.

The rest of us…uh, oh well.

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