What will be the consequences of this necessary increase in the government’s take of economic surplus – and what should they be? Should tax increases be limited to what is necessary to put public finances back in order, and be cut back once the fiscal hole has been plugged? Or should this be taken as an opportunity to permanently increase the state’s control of the economy?

Some answers to this question must depend on what one thinks is the appropriate role of the state. If one thinks its role in the economy should be minimal, taxes should be reduced as soon as the deficits are eliminated. If one thinks the state should be more actively involved in shaping the economy, one may take the need for higher taxes as an opportunity for permanent reform.

The idea that taxes are such a simple thing that they are merely increased or decreased, and the notion that an active role of the state in the economy necessarily implies tax increases and big government, both overlook some of the bigger and trickier aspects of taxation that don’t get enough discussion.

To begin with, a completely laissez faire market devoid of government control and a totally state-run economy are equally absurd ideologies, if only for slightly different reasons.  Looking beyond the minutiae, both place entirely too much faith in the assured harmony and righteousness of a philosophical construct, while ignoring the essential reality of humanity.  Just because it looks great on paper doesn’t mean it’s going to pan out in the real world.

Sandbu, and devotees of the “Free Market,” are wise to choose verbiage like “[government's] role in the economy should be minimal.”  No one is foolish enough to advocate a completely unregulated marketplace and expect to be taken seriously – the question is not whether government should regulate commerce, but how it should do so.

Article 1, Section 8 of the United States Constitution grants Congress the power to “lay and collect Taxes,” to “regulate Commerce” and to “coin Money, [and] regulate the Value thereof.”  A stable currency is a basic necessity which must, by law, be controlled and regulated by the government.  The idea of a completely free market is refuted by our nation’s founding document.  Those who argue that government regulation is in itself a hindrance to liberty fail to understand the concept of “negative liberty” – that is freedom from oppression.  As our Constitution sets out limits for the power of government, so has trust-busting set limits on the power of private enterprise – both in order to preserve the basic freedoms of the common man.

It is a curious bit of cognitive dissidence that many social conservatives are disciples of free-market theory.  The apparent belief is that human behavior must be legislated and policed strictly, except when commerce is involved; people can’t be trusted to make the right decisions when it comes to family planning, intoxicants, or social interaction, but as soon as we start a business we become saints.  America’s experiments with laissez faire capitalism have been utterly disastrous, because they did not account for the human tendency towards greed and exploitation.

The communist ideology topples in the opposite direction.  When equality is enforced, the lowest common denominator becomes the cream of the crop.  Even worse, when the means of production and distribution are owned and operated by the same entity which is charged with their maintenance and health, there is no competition, no choice, no real oversight, and no higher power to appeal to when the system becomes corrupt.

In the real world, walking the middle way between competing extremist ideologies, we see a legitimate need for taxation.  The private sector generally handles resources much better than government, but there are certain things that need to be done that can’t or won’t be done by individuals or businesses.  Anyone who tithes as a part of their faith or belongs to a dues-paying organization understands this basic principle.  No one really likes paying this money, but it is an essential part of our duty as citizens to contribute to the big picture.

Taxation must necessarily be about much more than raising the funds to operate a government and provide for the common defense and general welfare – to say otherwise is to deny that tax policies have any effect on the tax-payer.  So we must ask ourselves, beyond raising revenue, what should tax policy accomplish?

• It should be simple, and deter avoidance – Currently, our tax code is just complicated enough to frustrate the common man and leave him feeling robbed blind, while allowing the savvy to exploit countless loopholes and benefit greatly.  Surely one of the most pressing needs with our tax policy is a sweeping overhaul and massive simplification.  Many so-called “fair tax” and “flat tax” proposals have been made, but they often still overlook the inherent inequalities of our economic system, and can place an undue burden on one group of tax-payers.
• Promote economic development - There are several factors to address here.  Most will agree it is unfair to heavily tax the poor, just as quickly as they will agree that it is unfair to create a tax policy which punishes success.  Tax laws relating to individuals should motivate upward mobility, savings and continuing education.  Corporate taxes should encourage job creation and reinvestment over inflating stock prices.
• Reward good behavior – Beyond the tax credits and refunds that can be used to stimulate the economy, they can also provide incentives for volunteer work,  charitable donations, healthy lifestyles, adoption and family planning, living “green,” etc.  There is no end to the list of positive behaviors which benefit both the individual and society that can be profitably subsidized through tax credits.
• Punish bad behavior – This is admittedly a tough line to draw sometimes.  “Sin tax” is a poor name, as it implies the enforcement of morality via the tax code.  But there are undeniable social costs to things like drugs, alcohol, tobacco, junk foods, etc.  These things are luxuries, and should be treated as such.  The soaring cost of healthy food in the face of cheaper and cheaper junk food is a damning failure of tax policy.  In the bigger picture, problems like pollution and waste, unsafe working environments, shoddy workmanship and improper inspections can be reduced by imposing heavy taxes and fines, or at the very least cover the cost of the damage done to society and the environment.
• Corporate tax policy should act as a trust-buster – With a very progressive corporate tax, the chance of companies becoming “too big to fail” can be nearly eliminated.  If a behemoth conglomerate like GE were to be taxed at an incredibly high rate, the likelihood of divisions spinning off into smaller, independent companies will increase, and the likelihood of mergers that leave tens of thousands unemployed while raising the stock price a few points will decrease.  Monopolies will be reduced, and the consumer will enjoy more competition in the marketplace and greater choice. Higher corporate taxes on profits encourage reinvestment in the company in the form of more efficient technologies, higher wages and benefits – all with the added bonus of reasonable CEO compensation and a more risk-averse corporate environment.

I personally believe we need to abolish the income tax, and look at better primary methods for generating revenue.  Henry George’s genius “Single Tax” is worth bringing back into the contemporary debate in this regard.  Even Milton Friedman describes George’s concept of the land value tax as the “least worst” tax possible.

Finally, I find it interesting that the concept of progressive taxation has been pigeonholed as a liberal or “socialist” concept.  Teddy Roosevelt was a fierce advocate of a progressive tax, and saw it as a direct counterpoint to the values of socialism.  What’s more, to hear the modern right ideologues explain it, Reagan must have been a socialist, Nixon a communist, and Eisenhower… oh don’t even get them started on Eisenhower’s 91% top marginal rate.

“When I hear the constant vilification of corporate America, I personally don’t understand it. I would ask a lot of our folks in government to stop doing it because I think it’s hurting our country.”

Now, cheap populism is easy, and its getting a bit tired.  But let’s look at this rationally.

First of all, what Mr. Dimon means is “it’s hurting the stock market,” and it’s arguable whether he has a point or not.  As discussed in my last money article, it appears we’re on the inevitable downside of a massive bubble, and losses in the market probably have almost nothing to do with current government action.

Second, there have been some very real villains in corporate America in recent years, and many of them have been partially involved, in deed or in spirit, in this latest bubble-and-bust economy.  If Madoff and Stanford can be prosecuted for running ponzi schemes, why not AIG, Citibank, Bear Stearns, Lehman Brothers?

I’m not claiming anyone’s guilty who hasn’t been proven so. But do we not have an obligation to root out and punish those who have broken the law?  Shouldn’t we make an example of them?

Supposing Dimon’s right about this, and the government’s pursuit of justice for criminal behavior is hurting the stock market, I still think it’s a price worth paying.

Those whose fortunes are largely in the markets will have to tighten their belts and be patient with their investments.  Meanwhile, all Americans will receive the benefits of a properly-regulated financial sector and a more secure future.  On this point, even Dimon agrees.  Read more at Bloomberg.

But here’s where I’m still at odds with Dimon:

“If we act like a dysfunctional family and we don’t finish these things and we’re forever debating them, I think this will go on for several years. It’s completely up to us at this point.”

Cheap populism and vilification of the rich are lazy and counter-productive, but let’s be clear: if we don’t put checks on greed, it will always come back to haunt us.  This notion – that if we don’t let corporate America do what it wants without questions, and if we continue to debate how to maintain and regulate a healthy market in the years to come, it will hurt the country – is just a lazy and counter-productive excuse to continue business as usual and not make the hard changes and investments our economy needs.