How Washington Whittles Away Property Rights

By Michael J. Boskin

Published in The Wall Street Journal

Property rights and the rule of law are essential foundations for a vibrant economy. When they are threatened, or uncertain, the result is inefficiency, rent-seeking, a larger underground economy and capital flight.

Unfortunately, individual rights to capital, land and the fruits of one’s labor are threatened—in many cases redistributed from creditors to debtors, from those out of political power to those in power, and especially from young to old. And a much larger battle is looming.

Nine years ago the Supreme Court gutted the Constitution’s “public use” restriction on eminent domain (Kelo v. City of New London, 2005), allowing local governments to take the property of some individuals for the benefit of others, especially private developers.

In 2009 President Obama trampled the legal rights of secured Chrysler bondholders to transfer billions of dollars to unions. The Environmental Protection Agency issues 1,500 wetlands compliance orders annually to halt land use. The owner can be stuck in limbo for years pending the agency’s final order. At least in this situation, the Supreme Court recently decided 9-0 that land owners can sue to block the EPA from “strong-arming regulated parties into ‘voluntary’ compliance,” with fines up to $75,000 a day ( Sackett v. EPA, 2012).

The biggest future threat will be to the fruits of one’s labor. The unfunded liabilities of Social Security and Medicare are now several times the national debt; the unfunded liabilities of state and local governments for pensions and other benefits are in the trillions of dollars and mounting. The panoply of other government programs nonetheless continues to expand. The result, according to Congressional Budget Office projections, is that federal spending will reach 36% of GDP in a generation. This implies that taxes will have to double from the current, near-historic average, 18% of GDP. All federal taxes will increase—on income, capital gains, dividends, corporate earnings, employer and employee payrolls.

Left unchecked, many middle-income earners eventually will face marginal tax rates of 70% or higher—reducing them to minority partners in their own additional work and sundering the value of the investments in their own education.

Either the next generation will be saddled with steeply higher taxes on their work and savings, or the growth in entitlement spending will be slowed. The political battles over this fundamental question will be waged between generations, income groups, high- and low-tax states, taxpayers and retirees, public employees and recipients of every other government service.

The math is unavoidable. The biggest safety-net programs, including Social Security and Medicare, began under far different economic and demographic conditions. But as economic growth has slowed and the population has aged, the ratio of people receiving government benefits to those paying taxes has been rising rapidly. Spending on these two and other entitlement programs will gobble up bigger and bigger chunks of the federal budget. They are already crowding out defense.

Against this unavoidable math is the widespread belief, as the Social Security Administration notes on its website, that many Americans believe that “their FICA payroll taxes entitle them to a benefit in a legal, contractual sense.” Politicians feed this belief but it is false. As far back as 1960 the Supreme Court (Flemming v. Nestor) ruled that benefits can be changed by Congress at any time—and they have been. The growth of retirement benefits will have to be slowed. The notion that people not yet born “own” much larger Social Security benefits in the future is a legal and practical fairy tale.

Most responsible people agree that reducing the growth of benefits should be gradual and protect current non-wealthy seniors. Benefits for the more affluent is the logical place to begin. It makes no sense to destroy their work and investment incentives with high taxes in their most productive years, only to subsidize them heavily a few years later.

Despite the recent hikes in taxes on income, dividends and capital gains, many on the left are clamoring for more: an 80% top income-tax rate and even a progressive global wealth tax with rates as high as 10%. This is exactly the wrong road to take. Such taxes will only discourage production, encourage black markets, raise far less revenue than proponents claim and—by curtailing capital accumulation—lower future wages and living standards. Over time, such rates would expropriate a sizable fraction of wealth.

Taxes explicitly designed for redistribution—instead of revenue—are “justified” by the fanciful conjecture of writers such as Thomas Piketty, who claim that wealth inevitably will become more concentrated, since the return to capital exceeds the income growth rate. This conjecture rests on a series of implausible assumptions—that the return on capital won’t fall as more and more capital accumulates; that these returns will all be saved and not spent; that fortunes won’t dissipate by repeated division across generations nor given to charity; and that capital will become far more substitutable for labor.

Ultimately, behind this and other attacks on property rights is the notion that the government owns all income, leaving to you only what it doesn’t demand. But as President Reagan said in July 1987, “working people need to know their jobs, take-home pay, homes, and pensions are not vulnerable to the threat of a grandiose, inefficient, and overbearing government.” In particular, taxation “beyond a certain level becomes servitude. And in America, it is the Government that works for the people and not the other way around.”

Mr. Boskin, an economics professor at Stanford University and senior fellow at the Hoover Institution, was chairman of the Council of Economic Advisers under President George H.W. Bush.