Alan Blinder has a distinguished resume. He’s a professor at Princeton and he served as Vice Chairman of the Federal Reserve.
So I was interested to see he authored an attack on the flat tax – and I was happy after I read his column. Why? Well, because his arguments are rather weak. So anemic that it makes me think there’s actually a chance to get rid of America’s corrupt internal revenue code.
There are two glaring flaws in his argument. First, he demonstrates a complete lack of familiarity with the flat tax and seemingly assumes that tax reform simply means imposing one rate on the current system.
Here’s some of what he wrote in a Wall Street Journal column.
Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn’t one of them. The truth is that 100% of the complexity inheres in the definition of taxable income, which takes up millions of words in the tax laws. None inheres in the progressive rate structure. If you don’t believe that, consider the fact that the corporate income tax is virtually flat once a corporation passes a paltry $75,000 in taxable income. Is it simple? Back to the personal tax. Figuring out your taxable income can be quite an effort. But once that is done, most taxpayers just look up their tax bill on an IRS-provided table. Those with incomes above $100,000 must perform a simple calculation that involves multiplying two numbers together and adding a third. A flat tax with an exemption would require precisely the same sort of calculation. The net reduction in complexity? Zero.
I can understand how an average person might think the flat tax is nothing more than applying a single tax rate to the current system, but any public finance economist must know that the plan devised by Professors Hall and Rabushka completely rips up the current tax system and implements a new system based on one tax rate with no double taxation and no loopholes.
Heck, the Hall/Rabushka book is online and free of charge. But Blinder obviously could not be bothered to understand the proposal before launching his attack.
What about his second mistake? This one’s a doozy. He actually assumes that taxable income is fixed, which is a remarkable error for anyone who supposedly understands economics.
…flattening the rate structure won’t make the tax code any simpler. It would, however, make the tax system far less progressive. Do the math. …Someone with $20 million in taxable income pays nearly $7 million in taxes under the current rate structure, with its 35% top rate. Replace that with a 23% flat tax, and the bill drops to just under $4.6 million.
In other words, he assumes that people won’t change their behavior even though incentives to engage in productive behavior are significantly altered.
In a previous post, I showed how rich people dramatically increased the amount of income they were willing to earn and report after Reagan lowered the top tax rate from 70 percent to 28 percent.
To Blinder, this real-world evidence doesn’t matter – even though the rich paid much more tax to the IRS after Reagan slashed tax rates.
For more information, here’s my flat tax video.
And here’s the video on the global flat tax revolution. Interestingly, there are now about five more flat tax jurisdictions since this video was made – though Iceland abandoned its flat tax, so there are some steps in the wrong direction.
Makes you wonder. If the flat tax is such a bad idea, why are so many nations doing so well using this simple and fair approach?
But be careful, as this cartoon demonstrates, simplicity can mean bad things if the wrong people are in charge.
[…] Sadly, some folks on the left don’t understand the flat […]
[…] Sadly, some folks on the left don’t understand the flat […]
[…] on November 14, 2011 at 2:35 pm Alan Blinder’s Accidental Case for the Flat Tax « International Liberty […]
Read the bill.
Read the bill.
Sheeesh. It’s like all of these conservatives are off on the same tangent. Like they don’t even know that liberal good intentions are enough WITHOUT their having to read the bill
Nice blog. Thanks for articulating what Ithought when I read the WSJ article.
The Hall/Rabushka book is not available free — the link is to a preview (up to page 34).
I’m not trying to throw a monkey wrench in here, but one has to take into account the operations of the modern monetary system.
The Treasury CREATES money (credit within the banking system) via spending which then is distributed throughout the economy.
If Congress buys jets for the Air Force, medical services for the indigent and elderly, cuts checks for federal employees’ paychecks and pensions, and pays interest and principal on the national debt, all those actions involve the creation of money out of thin air (largely by marking up bank reserves).
When that money circulates via the economy (Lockheed Martin pays its employees, suppliers and investors, who in turn pay THEIR employees, suppliers/investors; the same holds true for physicians offices, brokerages and insurers as well as countless other businesses) Congress then taxes that income to RETIRE dollars (again, bank credit, not necessarily greenbacks) from the system.
Federal Deficits (which is another way of saying private sector surpluses) occur when dollar retirement is less than dollar creation; Treasury securities are issued throughout the banking system (and brokers, insurers and individual savers) to soak up the excess reserves.
So in light of that operational model, it is imperative to note:
[a] governmental bankruptcy is not possible since the government creates the currency in which it ‘borrows’
[a1] inflation is a COMPLETELY different issue (which I can’t really address here)
[b] governmental debt is not necessarily bad, and even highly desirable under certain conditions; reducing the debt is going to reduce the amount of capital in the economy at a time when it is likely to be needed (think about the 2000 recession)
[c] the nation (government and private sector) is at is optimal state when the tax system is primed for maximum public sector expansion and prosperity.
It is entirely possible that a flat tax can accomplish this, but the focus of taxation and spending policies should be on private sector prosperity, even if the tax system is somewhat progressive.
Without graduated rates (i.e., progressive tax rates) there runs the risk of taking too much from those at the lower end of the earnings distribution, which would be counterproductive (in my opinion).
A wage earner, starting out at $30,000/year is likely to spend a larger portion of his/her income than a seasoned worker earning $80,000/year. Taxing the lower earners’ incomes is counterproductive given the marginal propensity to consume.
Again, this is just my opinion and I am not an academic. But it helps to know how the system operates in order to make educated comments.
Have a great evening!
I agree with you jdat for the most part except that I think poverty assistance (of any form) should be handled at the state and local levels. besides remember if there is no corporate tax and the consumption tax is not a VAT the prices of goods will on the whole go down so that even the poor while now paying taxes will be spending less on necessary goods. The other problem with your third point is the definition of the poverty level. right now poverty is calculated as a percentage of the top x% of taxpayers income. As long as that is the case there will always be those under poverty level no matter how well off the lowest percentage is. Its not a problem inherent in your argument just something else that should be considered.
Consumption tax is better for the average person for the following reasons:
1. No one has to account for their income anymore – no more April 15th headaches.
2. The infrastructure is already in place in most states for businesses to collect the tax. All they have to do is add the Federal government on as a new taxing jurisdiction.
3. Everyone will get rebate checks to reimburse them for taxes on poverty level purchases. It is completely fair because rich and poor get the same rebates. The poor can use the rebates just as they do with their current additional child tax credits and earned income credits.
4. There is absolutely no dis-incentive to work and earn money.
5. There is a huge incentive to invest money (in the USA) rather than spend it on un-needed crap from China.
6. There is absolutely no need for any part of the IRS anymore. The whole department could be disemboweled overnight and the world would be a happy place.