forbes.com / By Scott A. Hodge / 12/11/2013 @ 4:00PM
The test of any tax plan is how well it measures up to the principles of sound tax policy: Does it promote neutrality? Does it simplify the tax code and make it more transparent? Does it make the system more stable and predictable? And, does it avoid retroactive measures?
Generally speaking, a tax plan that conforms to all of these principles will promote economic growth. And that should be the primary goal of any tax plan. A plan that violates any of these principles is likely to diminish the growth effects of any plan.
While lawmakers have unfortunately violated most of these principles routinely over the decades, they have typically avoided perhaps the biggest sin—enacting retroactive tax increase. While the courts have allowed retroactive tax hikes as an extension of the federal government’s taxing authority, retroactive increases undermine the credibility of the government and cause a breach of faith that people have in the rule of law.
Retroactive taxes are not really income taxes at all. They are essentially a confiscation of wealth that was legitimately built up under a different set of rules. Sort of the tax equivalent of an ex post facto law. The only thing a government can do that is more extreme is an outright wealth tax or seizure of a private asset or industry, as we’ve seen in certain third world countries. Sort of a death tax for the living.
Why is this issue such a big deal now? Because the “staff discussion draft” tax proposal recently released by Senate Finance Chairman Max Baucus (D-MT) contains at least three measures that would impose severe retroactive tax hits on a broad swath of American businesses.