The debate about taxes for hedge fund managers is an opportunity to consider the rationale for taxing various kinds of income at different rates. The narrow issue is that hedge fund managers pay capital gains taxes instead of income taxes on their earnings, even though their livelihood comes from managing other people’s investments. The broader issue is that we tax income, capital gains, consumption, property, and various imports at different rates. I’m inclined to say:

1. The degree to which we deserve the money we make and spend varies enormously, depending on risk, effort, and especially the public impact of what we do. You can work hard producing a product that is bad for other people’s security or health (or for nature), and in that case, I hardly think you “deserve” your income–in the moral sense of desert. Or you can sit back and accrue interest on your trust fund, in which case I am unmoved by your claim to deserve what you have. However …

2. It’s problematic for the government to tax at different rates depending on the moral value of people’s work. I don’t deny that moral distinctions can be made, but can we trust the legislature to make them? Can Congress manage to make distinctions across the whole of a modern economy, without lumping behavior into crude categories? And do we want the government to collect all the information it would need to make really wise judgments?

At best, Congress would have to review all kinds of private behavior and readjust taxation constantly. In fact, that’s what it does, and the result is a tax code that hardly fits in one bookcase and that shifts every year. As Hamilton wrote in Federalist 62, “a mutable policy … poisons the blessing of liberty itself. It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. Law is defined to be a rule of action; but how can that be a rule, which is little known, and less fixed?” Hamilton understood the kind of “liberty” that Friedrich von Hayek championed–the ability to plan without having to guess what some other power will do. For Hayek, the rate of taxation was not as important as its stability and transparency–and he had a point.

3. But the government needs money. In fact, it needs more money than it collects. It’s a terrible waste to borrow almost $9 trillion, on which we must pay $400 billion in annual interest. It is immoral to pass that debt to our kids. No one really argues that we can cut federal spending deeply enough to close the annual deficit, let alone pay off the debt. And society would work better if the government actually picked up an additional expense (paid by our taxes): universal health insurance. Even if you disagree with the last point, you pretty much have to concede that the government needs somewhere in the neighborhood of $2.5 trillion per year to operate.

3. If the government needs money, it ought to take it from the people who will miss it least. Losing one dollar matters a lot more to someone who lives on the minimum wage than it does to a hedge fund manager.

Thus I’m for raising taxes on hedge fund managers. There’s an argument that we ought to “incentivize” risk-taking, but I suspect that managing a hedge-fund would be adequately rewarding even if the effective tax rate were 15 percentage points higher. As for the argument that risk-taking is virtuous, I think that’s quite beside the point. Any urban public school teacher exhibits a lot more courage than a hedge fund manager, but we don’t and can’t tax income in proportion to personal virtue.

A better system would actually tax wealth (not annual income) at one smoothly graduated rate, regardless of the source. That’s the fairest way to raise funds, given the declining marginal utility of money. But I’m not sure how we could measure accumulated wealth well enough to tax it.

Since yesterday afternoon, about 300 people have reached this site after searching on Google for the words “Nabokov” and “heroine.” They are reaching an old post of mine about Lolita. I can’t find any website that links to that post; all the visitors are coming straight off Google. Their IP addresses indicate that they live all over the English-speaking world, from Cape Town to California. Something must be prompting interest in this combination of two words; my wife suggests it’s a crossword puzzle clue.

I often receive visitors looking for “Lolita,” thanks to my article on Nabokov and various posts about him. I don’t think most of these visitors are expecting to find what I provide. No pictures or videos here, just a stern reminder that Dolores Haze, Nabokov’s great heroine, is an orphan child taken prisoner and raped by a middle-aged pervert. There is no evidence whatsoever that she wants to have sex with Humbert Humbert, but plenty of signs that he physically abuses her. She is remarkably resilient; Nabokov once said that he admired her more than any of his creations. It is amazing that this scion of the Russian aristocracy, educated at Cambridge, multilingual and erudite, could have made a gum-popping suburban American “tween” into his tragic heroine. Stereotypes dissolved in Nabokov’s acute and humane vision.

[8/17/2009: Several people have emailed to confirm that the occasional popularity of this post is due to crossword puzzle clues that seem to pop up in different newspapers every few months. By the way, if you need a Nabokov heroine with a three-letter name, try “Ada.”]

According to David K. Kirkpatrick in The New York Times, “The new law [on ethics and lobbying that awaits President Bush’s signature] has quickly sent a ripple of fear through K Street. … ‘They might as well just pull up the paddy wagon outside the Capital Grille,’ one lobbyist said, referring to a clubby steakhouse near the Capitol that is a well-known K Street hangout.”

We shouldn’t hate or hound lobbyists. “Lobbying” means professionally petitioning the government, which is an explicit First Amendment right. I was a registered federal lobbyist myself (for Common Cause in the early 1990s), and I’m rather proud of that record.

Common Cause spent no money at all to benefit politicians: not even snacks that might cost pennies. We were Puritans in Gomorrah. At its best, lobbying is simply an exchange of ideas and information. But I don’t think it ever can be only that. There must be an interface between the public sector and the organized private sector (businesses and associations). The latter will always use money to influence the former. Walling policy off from money is like separating love, sex, or religion from commerce–never entirely successful.

But that doesn’t mean that any rules are as good as any others. In fact, we need reforms that go much deeper than the new ethics law. The obstacle to fundamental reform is political. Organized special interests benefit from being able to use money to influence policy. All incumbent lawmakers have some interest in preserving the status quo. The public dislikes money in politics, but this is a classic issue that pits very diffused, abstract public interests against tangible private interests. It’s no contest.

Our best chance is to preserve and strengthen the moral norm that money isn’t proper in politics. Love is not prostitution, the temple is not the marketplace, and lawmaking is not a business exchange. It is, or ought to be, shameful to mix any of these things.

Unfortunately, norms are fragile. When, for example, Mitt Romney chose to launch his presidential campaign before a symbolic backdrop of 400 fundraisers dialing for dollars, he flaunted–and threatened to destroy–the norm that money and government don’t mix. It was like an aristocrat bragging that he has bought his title; if he gets away with it, there is no more aristocracy. The same could easily happen to the spirit of republican government and rule of law.

This is why the new ethics law is important. It makes people uncomfortable about paying for influence. It makes money in politics seem shameful, or at least shady. It therefore preserves the ethic of republican government.

According to Kirkpatrick, some lobbyists are afraid of unjust prosecution. For example, under the new law, a lobbyist could be criminally liable if his employee failed to disclose something of value that he had given to legislative staff. I don’t want people to be unjustly prosecuted. But the tensions and fears that lobbyists are feeling right now result from the fundamental tension between the rules of a market and the rules of democratic government. A better solution would be more radical reform–for example, public financing of political campaigns. Perhaps the only way to achieve such a reform is to make explicit the moral tensions that currently arise at the border between the market and the government, to burden lobbyists with rules and prosecute them for violations; in short, to make them symbols of our deeper problems.

Michael Hill wrote a profile of me in Sunday’s Baltimore Sun. He gave me quite a lot of space to talk about my usual obsessions: public participation, civil society, youth, and so on. His biographical sketch probably makes my life seem more coherent and “purpose-driven” than it has actually been–but I guess I led him to that. Hill is an interesting reporter, in any case, who has written several previous pieces about the public’s role in politics in which he quotes Matthew Crenson and Benjamin Ginsberg (authors of Downsizing Democracy), Harry Boyte, and others.