John C. Goodman

If the White House has its way, the next election will be about taxes on the rich. Or, rather, the super rich.

The amount of money involved will be trivial. But this isn’t about money. It’s about envy, resentment and class warfare. The very same president who won the last election by promising to bring us all together, will try to win the next one by dividing us. The candidate who last time around promised to appeal to our highest motives, will appeal to our basest instincts on the next go around.

In his corner the president will have Warren (I’m-not-taxed-enough) Buffett, who claims he pays a lower tax rate than his secretary. I and other economists disagree with that assertion. But here’s the problem: How does an ordinary mortal wade through the labyrinthine provisions of the tax code to understand who is right and who is wrong?

Answer: I’m going to help you by showing you the right way and the wrong way to levy taxes.

Imagine an evening at a casino. We carefully keep track of who comes and who goes and record their winnings and losings. Let’s suppose that among the winners, someone really cashes in big — netting, say, $100,000 for the evening. Most people, however, lose. In fact, if most people didn’t lose, the casino would go out of business.

Now here is the question: How should the IRS treat this information? If you think of gambling as a sort of investment, you might be inclined to think of the winnings as the profit on that investment. If so, you might conclude that the winners should pay income taxes on their winnings — especially the $100,000 winner. But, if you think that, consistency would require you to allow the losers to deduct their losses as business expenses. Otherwise, the tax code would be rigged so that it’s heads-the-IRS-wins-tails-you-lose.

Since losses exceed gains at most casinos, however, the Treasury would actually lose money if it treated gambling winnings as ordinary business income. Our federal government has a solution to that problem: It’s inconsistent. Uncle Sam wants to share in all your winnings, but wants you to take the full hit on your losses (net of gains).

If this doesn’t seem self-evidently absurd to you, imagine sitting in a bar and flipping a coin for $100. Even though no income or wealth is being created and even though no product is being produced, the IRS position is that the winner of the coin flip owes a tax and the loser gets no deduction!


John C. Goodman

John C. Goodman is Senior Fellow at The Independent Institute and author of the widely acclaimed book, Priceless: Curing the Healthcare Crisis. The Wall Street Journal and National Journal, among other media, have called him the "Father of Health Savings Accounts."