Monday, December 26, 2005

Flat-Out Necessary

When it comes to tax policy in America, the issue has become an extremely complex, intricate, and burdensome one to understand. The tax code contains volumes of provisions that few people comprehensively grasp. Moreover, tax policy is used to encourage certain types of behaviors over others through tax credits, exemptions, and penalties. Perhaps most importantly, the tax system is used in our country as a mechanism to redistribute wealth through progressively taxing income, coupled with an extensive welfare state that uses those taxes to provide social welfare programs for those in poverty.

Philosophically, my belief in limited government and protections against government intrusion lead me to condemn the use of government coercion through the tax code. As a rule, government intrusion is highly troubling. While this especially bothers me when the government coerces in a way that I disagree with, any coercion causes me distress. A great example for me would be with marriage - even though as a conservative I believe the government ought to protect the institution of marriage, it is precisely that the manipulation of the tax code that causes homosexual rights activists to call for marriage rights. If there was no economic benefit to marriage, perhaps there would be no debate here.

To answer the second question, as to whether the tax system ought to be progressive, I would like to devote the rest of this post to answering. Many people argue that the conservative, pragmatic view of taxes is in opposition to the liberal, idealistic view of tax policy. Quite simply, this is an unfair and wrong way to frame the debate. Both positions are based on ideals: alleviating poverty, affording equal opportunity, reducing unemployment, and gathering tax revenue for the government to provide important services (roads, defense, schools, etc.).

At this point, I'll advocate my position on taxes: the flat tax is flat-out necessary for the economic well-being of our country. In terms of effectiveness, many estimates have the flat tax creating roughly 5 trillion dollars in wealth in just a couple of years. The Laffer Curve is definitely not "voodoo economics." When countries drop their tax rates substantially, they collect more total tax revenue! If anyone is unfamiliar with the Laffer Curve, just post and I'll explain it more in a comment. Purely based on economic considerations, the flat tax is far superior than a progressive tax. Progressive taxes restrain entrepreneurship and the creation of wealth by creating systemic penalties for creating wealth. As taxes are higher on those that run businesses, they can't hire as many workers, and unemployment goes up.

Need evidence? Look at how America is quickly beginning to lose our global advantage economically. As globalization takes hold of the international economic scene, investing will flow to economies that have unburdensome taxes and vibrant economies. A couple examples: Ireland has slashed its corporate taxes from over 50 percent to 12.5 percent, unemployment has gone from double digits to 5 percent (less than American unemployment). Russia has gone to a 13 percent flat tax, and their economy immediately began to turn around and grow. Romania, Georgia, and Poland have all adopted flat taxes and seen immediate results.

A flat tax upholds all of the ideals that I mentioned earlier. The primary mechanism for alleviating poverty is to reduce unemployment. The redistribution of wealth over the last half-century has proven to be a colossal failure at alleviating poverty (2.2 percent increase in poverty, and we've spent billions of dollars in the process). It is time to realize that economic freedom and prosperity, through low, uncomplicated taxes is the best way to go.

So, let's adopt a flat tax of roughly 17-20 percent. A consumption based tax that taxes income just once will promote saving and investing. Overall tax revenues will increase as wealth is created. What we have now, our taxes will continue to go up, because raising taxes causes a stagnation in tax revenues, and law makers will always increase taxes to find money for new programs. As they raise taxes, overall tax revenue will not increase, and thus the spiral toward European socialistic tax practices begins. Let's avoid this, and go with a flat tax.

In discussion, I'd love to express why I'm for a flat tax instead of a fair tax (sales tax).


At 1:05 PM, Anonymous smash said...

so under your idea there would no longer be deductions for medical and education costs or for charitable donations?

At 1:43 PM, Blogger CharlesPeirce said...

Let me say at the outset that I largely agree with you. However, I also think you also make some claims that you couldn't possibly support, that seem to make your overall argument more favorable than it is. That's not fair. Chief among these claims is this one:

"The redistribution of wealth over the last half-century has proven to be a colossal failure at alleviating poverty."

Since we haven't alleviated poverty entirely, I can't argue that the redistribution of wealth through taxation HAS alleviated poverty; but it would take books to prove that (1) the redistribution of wealth through taxation was intended to alleviate poverty; (2) all other factors considered, it was the redistribution of wealth that failed to alleviate poverty.

Perhaps the progressive taxation in this country has greatly helped poverty and those in it, and it's been other factors that have contributed to the continuation of poverty. (I'm not saying either way.)

Another such claim:

"Look at how America is quickly beginning to lose our global advantage economically."

I don't think we're quickly beginning to lose our global advantage, nor do I think that the premise "America is quickly beginning to lose its global advantage" entails the conclusion "A flat-tax is more just than a progressive tax." Either a flat tax is more just than a progressive tax or it isn't; we could generate enormous amounts of wealth by re-instituting slavery, taking all slave wages as tax revenue, and lowering our tax rates below 10%. That would jump-start our economy as well--but it's not right.

Your core argument is neither strengthened nor weakened by the addition of such overstatements.

The question I ask when approaching this issue is, what kind of taxation would make the most just society? I actually think a flat tax might be more just than a progressive tax--but in this country, when the wealthy are allowed out of taxation in so many ways, it's only our supposedly progressive tax structure that even allows us to collect as much revenue as we do.

Social Security is a great example of this, because it's neither progressive nor flat--it's REGRESSIVE, since we all pay the same percentage of our income UP TO A CERTAIN POINT. Anyone making $100,000 a year pays LESS than 6.2% of their income toward Social Security, while for someone making minimum wage, it's a huge chunk of their pay. Wealthy people tend to be homeowners and can deduct their interest; they can set up tax shelters; they can invest; they can make huge charitable donations; they can take all their pay in stock options and benefits instead of salary. When you add all those things up, starting with a regressive Social Security tax, our tax system starts to seem less progressive (but still unjust and incomprehensible, granted.)

A flat tax would only be just if we insisted on restructuring the system so that Johnny CEO really was salaried and really did pay 18% of his salary as tax. Until we do that, a change over to the flat tax and an increase of taxation on consumption would just further crush the middle class and the poor. I would LOVE to see a group of politicians cut taxes, cut spending, cut programs, and figure out other ways for their constituents to generate wealth. But since they won't, and since Republicans like to cut taxes without cutting spending and Democrats like to raise taxes without finding other ways to generate wealth, we're stuck.

To summarize:

(1) Our tax system isn't as progressive as it looks on paper.
(2) A flat tax is probably more just.
(3) Today's politicians don't seem to be doing the things it would take to switch over.

Good post.

At 3:06 PM, Blogger Barnabas18 said...

Smash - yes, this is correct. No deductions, period.


I appreciate the comment and largely agree with what you said. Of course I made some overstatements, I always do, but I also think them to be true. I purposely didn't expound on those claims, because it would take books to prove them. However, especially the first claim regarding the redistribution of wealth being a colossal failure - I think it to be true and noteworthy, so I might just post on that sometime soon.

Also, your concluding statement...

"...since Republicans like to cut taxes without cutting spending and Democrats like to raise taxes without finding other ways to generate wealth, we're stuck." right on the mark. That is our problem. A flat tax would at least make the budget-making process more transparent, and deficits will be more predictable and measurable, and more wealth will be created to handle the debt.

At 12:18 PM, Anonymous smash said...

Where you be at?
Hope all is ok.

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