In the famous “Bridge of Death” scene in Monty Python and the Holy Grail, some of the knights are asked to name their favorite color. One of them mistakenly says blue instead of yellow and is hurled into the Gorge of Eternal Peril.
I can sympathize with the unfortunate chap. If asked my least favorite part of the tax code, I sometimes get confused because there are so many possible answers.
Do I most despise the high tax rates that undermine economic growth?
Am I more upset about the pervasive double taxation of income that is saved and invested?
Or do I get most agitated by a corrupt and punitive IRS?
How about the distorting loopholes for politically connected interest groups?
And the anxiety of taxpayers who can’t figure out how to comply with an ever-changing tax code?
Depending on my mood and time of day, any of these options might be at the top of my list.
But I also might say that I’m most upset about the way that the tax code facilitates a perverse form of legalized corruption in Washington. In this FBN interview, I explain how even small tax bills often are vehicles for lining the pockets of lobbyists and politicians.
To elaborate, some taxpayers may pay more when there’s new tax legislation and some may pay less. But this “winners” and “losers” game only applies outside the beltway.
The inside-the-beltway crowd always wins. Whether they’re lobbying for or against a provision, they get very big checks. Whether they’re voting yes or no on legislation, they’re getting showered with campaign contributions.
This chart, showing the growing number of pages in the tax code (by the way, we’re now up to 76,000 pages of tax law), also could be seen as a proxy for how the Washington establishment has gamed the system so that they always profit.
Or, to be more specific, it’s an example of how government has become a racket for the benefit of insiders. All of us pay more and endure less growth, but Washington’s gilded class lives fat and happy because there is always lots of money changing hands.
So how do we solve this problem?
The answer, at least for a period of time, in the flat tax. This video explains how this simple and fair system would operate.
But even though I’m a big advocate of tax reform, the flat tax is only a partial solution.
Simply stated, there’s no way to reduce Washington corruption until and unless you shrink the size and scope of the federal government.
That means somehow figuring out how to restore the Constitution’s limits on Washington. 
For much of our nation’s history, federal spending consumed only about 3 percent of our economic output.
And when the public sector was small and government generally focused only on core competencies, there wasn’t nearly as much opportunity for the graft and sleaze that characterize modern Washington.
P.S. The bad news is that all the projections show that the federal government will get far bigger in the future. So before we shrink the burden of government, we first need to come up with ways to keep it from growing.
P.P.S. The national sales tax is another intermediate option for reducing DC corruption, though that option requires repeal of the 16th Amendment so politicians don’t pull a bait-and-switch game and stick up with both an income tax and consumption tax.
The progressive element of the current income tax is the worst feature. A flat tax, if we retained personal income tax, would be more realistic.
[…] a sector of the economy? Since I’m a fiscal policy economist, I’m tempted to say that bad tax policy is the fastest way of causing damage. And France might be my top […]
[…] a sector of the economy? Since I’m a fiscal policy economist, I’m tempted to say that bad tax policy is the fastest way of causing damage. And France might be my top […]
Income should not be taxed. Period. The more productive you are the more taxes you pay. We have no state income tax in Texas and we seem to be doing ok. I was just in Florida where there is no state income tax and the wealthy are flocking there in droves. There are many ways for the governments to steal our money without having to tell them how much money we earn, how many kids we have, how much debt we have, where we live…etc.
Ned,
The lump giveaway sum is an interesting proposal, but the claim that it does not decrease incentives to produce is deceiving.
To see why incentives are still affected, consider that your statement “everyone has the same marginal tax rate” is true regardless of whether your unconditional giveaway amount is 10k or 100k per person. But clearly, at 100k nobody would work, as most families with 200k in free money has better things to do their high quality time (and money) than working.
This is because while technically the marginal tax rate stays the same, incentives depend on the superimposition of marginal tax rates and what an economist may perhaps call the “marginal utility of money”. Economists probably have other terms, but I’m not an economist, I’m just someone who understands simple arithmetic, fundamental incentives, the inexistence of a perpetual motion machine of prosperity, and the all overriding long term effect of growth rates, or lack thereof.
So what I’m referring to as “marginal utility of money” is that one has a lot more incentive to increase his earnings from 100k to 200k than from 1.0Million to 1.1Million, even though the increase is the same. That is why it is difficult to keep exceptional people employed, even in the absence of progressive tax rates. By doing what it takes to increase his compensation from 1.0M to 1.1M, an executive may create a whole new job, test an initial speculative idea for a whole new invention, process, production method etc. that will benefit many people. But even absent taxation, or flat taxation, he still has less incentive to do it compared to the 100k employee who will double his salary by doing the same thing. Problem is, the 100k employee is incapable of coming up with the same idea, and even a committee of five 100k employees still cannot match the innovative competence of the 1.0M executive. In other words, one thousand physicists do not make an Einstein. Voter-lemmings refuse to understand that. A 10% less motivated Steve jobs has disproportionate negative consequences, because he is one of very few who can come up with ideas on how to create novel exceptional value affordable to the masses. One hundred median salaried Apple employees cannot match one Steve Jobs in terms of their raw ability to benefit humanity.
Of course, as Western World voter-lemmings put in motion their unstoppable desire to exert ever more collective control over the economy, Solyndra cronyism (and GM, and TARP, and stimulus, and ethanol …etc.) inevitably starts setting in and this free market meritocratic/competence relationship breaks down. Voters resent the rich even more and reflexively want to exert even more collective dirigistic control over the economy. The vicious cycle closes, there is no return. But that is another story…
Needless to say, progressive tax rates concatenate to the already naturally flattening marginal utility of money and make things even worse.
Going back to the unconditional giveaway lump sum idea, one could say that having an unconditional giveaway amount does not alter marginal tax rates, but it displaces the marginal utility of money curve. I.e. the marginal utility of money at 10K is already lower than it is at 0.
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In summary, folks,
There is no perpetual motion machine of prosperity or incentives. You give stuff away for free, you flatten the effort-reward curves. Perhaps most people do not understand something even as simple as marginal tax rates. But they do empirically feel its effects. They compare notes. They compare their working lives and standard of living to the two Jones’ brothers who took their 20k in free money, shared an apartment, signed up for ObamaCare, and are surfing all day. Eventually when they are ready to go to college they will enroll in Obama.edu. When they eventually need a job, they will work at the people’s factory. I’m sure they will be very productive — so productive that the companies of four billion emerging world souls don’t stand a competitive chance of earth at outcompeting American People Inc.
The best system would be a Progressive Hybrid Flat Tax:
Progressive – A true flat tax won’t fly unless there is some way to make the effective tax rate progressive. The best way is a Basic Income Guarantee that is low enough not to break the bank, but is not lost when one earns income. For example. if you gave all citizens over 21 $10,000 [Charles Murray’s idea] and had a flat 25% tax rate on all earned income, those below $40,000 would have a negative effective tax rate, while those above $1,000,000 in income would pay close to 25%, while no one would have a marginal tax rate above 25%. For those on welfare, States could add whatever they choose, but there would be no federal welfare.
Hybrid – There are advantages to both a flat tax on income and a flat tax on sales. My choice would be earned income, however, that gives a big advantage to imported goods/components, since there would be no embedded tax on the imported portion. You could fix this by imposing a flat sales tax on imported goods, or you could just disallow the cost of the import when calculating taxable profits.
The BIG and the flat rate should be set so expenditures and revenues are neutral, to get political acceptance. However, we would get rid of 700,000 means-testing bureaucrats and cut the 6.5 billion man-hours filing tax forms.
An incremental approach to cutting government will not work, unless you first get rid of the bureaucrats and agencies creating cancerous growth.
For more, see: http://www.youtube.com/watch?v=9OaQH0CjURM
Ken,
You make a good point but the reality is that they don’t figure their own taxes and we cannot make them. Congress makes this terrible tax code with the guidance of the accountants who do taxes for them and others. How many of the tax professionals would be unemployed if there were no tax code?
How long do you think we would have this nightmare of a tax system if congress all had to figure their OWN taxes every year!
The almost impossibility of correctly calculating income tax and adjusting exemptions properly is possibly the most absurd aspect of the tax code. Even the government’s own worksheet is highly inaccurate (had I followed it, I would have owed even more this year, but my gut said to lower the number of exemptions.)
Two questions:
1) How much of government spending is paid for with taxes?
2) Why not stop all taxes and do all financing of spending the way we are doing the rest already?
Dan, the biggest problem i have with the tax code is that it’s none of the governments (or anyone else’s) business how much damn money i make.
Term limits would be a good start on this. With less career politicians, they’d have to find a way to make a living outside the government doors.