I’m not a fan of the IRS or it’s Commissioner, a partisan Democrat named John Koskinen.
The agency has become politicized, interfering with America’s political process. Needless to say, I’m not shedding tears that the bureaucracy is no longer getting big budget increases.
By contrast, I oftentimes applaud Senator Ted Cruz.
His shutdown fight against Obamacare was a net plus. He was one of the few 2016 candidates who took a strong stand against cronyism in Iowa. And he manages to retain a sense of humor in the fight against big government.
So it’s with considerable chagrin that I feel compelled to admit that IRS boss made a good point, at least from a technical perspective, when he criticized Senator Cruz on the topic of the flat tax.
Here’s the background. A story in Bloomberg quotes Senator Cruz about his goal for tax reform.
“Instead of a tax code that crushes innovation, that imposes burdens on families struggling to make ends meet, imagine a simple flat tax that lets every American fill out his or her taxes on a post card. Imagine abolishing the IRS,” Cruz said.
Now here’s an excerpt from a Politico report about Mr. Koskinen’s response.
IRS Commissioner John Koskinen poked holes in Republican presidential candidate Ted Cruz’s plan to abolish the IRS and create a simple flat tax so taxpayers could file their taxes on a postcard. Koskinen pointed out that even if taxpayers were to file their taxes on “a small card,” someone would have to collect the money and make sure the numbers filled out are actually correct. “You can call [tax collectors] something else than the IRS if that makes you feel better, but basically someone has to follow through on all of that,” Koskinen told reporters today after a speech at the National Press Club.
Koskinen is right. So long as the federal government intends to extract more than $3 trillion from taxpayers, there will be a tax-collection agency. That’s true even if you have a flat tax or a national sales tax.
Sure, you can rename the IRS, or even require states to collect the revenue instead, but none of that changes the fact that some coercive body will exist to take our money.
That being said, Cruz’s overall point surely is correct. The IRS in a flat tax world would be largely de-fanged. Indeed, the Tax Foundation estimated several years ago that compliance costs would drop by more than 94 percent if we replaced the internal revenue code with a flat tax. And, as pointed out in this video, the tax code today is even more complex, so the savings now presumably would be even larger.
So Koskinen may be technically correct, but only because he is focusing the conversation on the narrow issue of whether government will still have a tax-enforcement body.
But Cruz is correct on the big-picture issue of whether the IRS as it exists today will no longer exist.
Since we’re on the topic of tax reform, Amity Shlaes and Matthew Denhart, both with the Calvin Coolidge Presidential Foundation, have a column in today’s Wall Street Journal that is somewhat critical of the Rubio-Lee tax reform plan.
The authors start by pointing out that the defining characteristic of supply-side economics is lower marginal tax rates on productive behavior (work, saving, investment, risk-taking, entrepreneurship).
Signaling opportunity throughout the tax code has long been the basis of the philosophy known as supply-side economics, or “Reaganomics.” Reaganomics treats even individual wage earners as entrepreneurs. The marginal rate to which a worker is subject under the progressive tax schedule is crucial. A higher rate on the next dollar a worker earns discourages him from working more. The highest tax bracket is especially important as top earners produce the most and innovate the most. …That top marginal rate also functions as a symbol of how society rewards enterprise.
Their unhappiness with Rubio-Lee is due to the fact that their proposal does not contain big rate reductions for labor income to match the very good rate reductions for business and investment income.
…on the personal side their proposal drops the top marginal rate on individual income by a puny 4.6 percentage points, to 35% from 39.6%. …What’s more, Rubio-Lee lowers tax thresholds drastically. Singles with taxable income as low as $75,000 find themselves entering the 35% top bracket; for couples the top rate applies after $150,000. Currently, individuals don’t hit the 35% bracket until $411,501, and the same holds for couples.
So why aren’t there big reductions in tax rates for households to match the very good reforms for businesses? The answer, at least in part, is that “Rubio-Lee also raises the child credit” and this consumes a lot of money, in effect crowding out lower marginal tax rates.
As a result, you get big economic benefits from the reforms to business taxation, but the child credits don’t have any impact on incentives to create wealth, expand jobs, or boost income.
The nonpartisan Tax Foundation recently estimated that Rubio-Lee would increase economic growth so that by 2025 the economy would be 15% larger than otherwise, almost entirely due to business tax cuts. The effect of the child credit on growth is reckoned at zero.
But imagine if Rubio-Lee took their good tax reform plan and made it better by replacing the child credit with lower rates? And then made it even better by getting rid of additional tax preferences such as the healthcare exclusion?
Shlaes and Denhart quote me in their column as pointing out that if Rubio and Lee made their plan into something akin to the flat tax, the tax rate could be under 20 percent.
Dan Mitchell of the Cato Institute notes that if Rubio-Lee dropped all the preferences it contains, old and new, the plan could drop its top income-tax rate to 20% or lower.
I confess that I don’t have up-to-date estimates to confirm my assertion, but the Clinton Treasury Department back in 1996 estimated that the flat tax rate in a revenue-neutral world would be 20.8 percent.
But since the Rubio-Lee plan is a very large tax cut, amounting to more than $4 trillion over 10 years, combining that amount of tax relief with the flat tax surely would allow the rate to be well below 20 percent.
By the way, none of this should be interpreted to suggest that Rubio-Lee is bad tax policy. It’s a huge improvement over the current system. As I wrote last month, it’s a very good tax reform plan. It is especially good about fixing some of the worst features of the current tax code, such as worldwide taxation, depreciation, and double taxation.
But that doesn’t mean it is as good as the flat tax, which does everything good in Rubio-Lee, but also has a low rate for households and fewer tax preferences.
No. Actually, quite the opposite.
[…] On the Flat Tax, Is the IRS Boss proper and Ted Cruz unsuitable … […]
“Someone still needs to collect the taxes,” but how many individuals are behind bars for cheating on their Social Security payments? Mr. Cruz wins on points: pare the IRS back to a skeleton crew.
As for Messrs. Rubio and Lee, surely they jest!
35% marginal rate above 75K?
And THESE are ‘the good guys’ ???
Flat tax is the only way to go.
Eliminate all deductions: can’t trust politicians to decide what’s fair.
Phase in rates/ phase out deductions over ten years to ease the transition.
[…] On the Flat Tax, Is the IRS Boss Right and Ted Cruz Wrong?!? […]
20+% is not a low rate. 3% is a low rate. 5% is more than all the governments combined deserve (based on current and historical performance and value vs. cost).
“Taxes are theft.” That’s the only relevant point and where every discussion about reform must begin. Let those who overspend/t make up the difference …. personally; they designed and signed the bills.
If taxes are theft, that makes the IRS rather unsavory at every level. Henceforth, they should only be considered in discussions about elimination and prosecution.
“Just doing my job” is no excuse for abuse and racketeering. Luckily under Federal law there is guilt by association. Let the punishment begin. ©2015
Assume that every American spends about one day to file taxes. It does not matter whether you waste the day yourself or pay someone else to do it. The fruits of that day’s productivity get taken from your family.
What does this extra day get you? It is a day of work with no pay that you must give so that the government can provide you with services by confiscating another 50 days of your work (government collects ~20% of GDP). During those fifty days, you go to work, day in day without benefit to your family because the government services you get by surrendering those 50 days are services you would get anyway. As a matter of fact, it’s quite likely that the less you work the more you get from government.
The effort-reward curve flattens. Your motivation and that of your fellow citizens also falls. Other jurisdictions with more motivated workforces start outcompeting you. You sell less, you have less money for reinvestment, you enter the death spiral, a slower growth compounds your society into decline. You get what you deserve.
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The fact that the head of the IRS office has become politicized is simply a result of democracy. Politicization of ever more positions intensifies the more the country slides towards pitchfork democracy (aka. democratic totalitarianism, democratic tyranny).
Why shouldn’t the majority that wins at the polls get to choose who is head of the IRS? Yes we can! The majority decides everything. That IS democracy.
Actually that is not democracy, that is pitchfork democracy and it is exactly the type of demotivating, unproductive, low-growth society that the American forefathers sought to shield the New World from (perhaps their insight was serendipitous… but that is another story). However, few voters understand the great difference between democracy and Pitchfork Democracy. Besides, redistribution seems a much quicker shortcut to personal prosperity.
So when the constitution says “Congress shall make no law…” it really means “People shall make no law…” because it is people who elect congress based on their voting preferences.
But why shouldn’t people who have won the election make such law? Because we agreed long time ago to not screw each other every time one faction wins the election against the other. Or at least we thought we had agreed, but now we seem to be in the era of “Yes, we can!”. Yes we vote your labor efforts, your competence and exceptionality away if we want, and ultimately we get to decide who walks the planks to the guillotine.
The intention of the constitution is to introduce enough inertia into modifications to basic individual rights, so that you do not get the Greek type spectacle whereby every time there’s an election the winners get to screw the losers; round robin of course, until nearly everyone gets screwed in the end, except those who manage to float from majority to majority at the helm of government. But even for them, in a low growth demotivated society there is little to plunder in the end. They are simply the ones driving the Volga cars while everyone else drives the Zaporozhets’.
But all the constitution can offer is some inertia to individual right infringement and forcible conscription to the majoritarian communal causes. Under protracted and sustained attack by an electorate that is losing social capital, in the end, even the constitution has to give way. After all the constitution itself was made by… well… people. And people who have lost their social capital can change it, or perhaps more expediently and conveniently, push it aside and ignore it.
And once voters go down that path, lose social capital, and descend into pitchfork democracy, then nothing can save you. A vicious cycle of low growth compounds your country into decline. The more they decline, the more voter-lemmings will try to hang on to past glory through ever more redistribution. Lower growth compounds your country into decline. And given the irreversible high growth the planet has entered in recent times, this decline will compound quite rapidly. Unlike generations past, in today’s world voters will get to experience the effects of their choices themselves; not pass them over to the next generations. That may make them ultimately wiser, but the cycle of the big systemic decline must first clear the north American continent. So on we go with HopNChange…
In the end all that matters is motivation and the resulting growth. As the uncertainty of “who’s going to get elected next and who’s going to get screwed?”, “who gets to have the fruits of their labor retroactively confiscated?” sets in, people lose their motivation (or their “greed” to do better in life as some would name it), growth slows, and the country’s economic destiny compounds into decline.
With mediocre effort-reward curves you cannot achieve growth. The perpetual motion machine is long ways from being discovered. And without growth, nothing is sustainable, NOTHING. Decline eventually drags everything down with it, its morals, its change, its hope.
Reblogged this on Brian By Experience.
[…] I confess that I don’t have up-to-date estimates to confirm my assertion, but the Clinton Treasury Department back in 1996 estimated that the flat tax rate in a revenue-neutral world would WAIT, THERE’S MORE… […]
I went to the Tucson office of the IRS yesterday to get some forms for an extension. Between two receptionists at the counter, not one knew anything about the forms that I requested. They told me to go on the IRS website right in the office and look up the forms as they could not help me. Apparently there are thousands of forms to look up. The IRS is so complicated with thousands of forms, rulings, laws, cases etc, that this entire system needs to be scared and a Flat Tax that is truly simple to understand needs to take its place. This would eliminate tax cheats, tax accountants, and tax attorney’s. Everybody and every Corporation or business pays 15% of their income with no deductions. The way the system operates now, one has to cheat, connive, steal, and falsify their records just to pay less taxes. Some corporations who earn billions of dollars pay no income taxes. That in itself is criminal. We need a FLAT TAX NOW.