Posts Tagged ‘Tax Reform’

Why does the tax code require more than 10,000,000 words and more than 75,000 pages?

There are several reasons and none of them are good. But if you had to pick one cause for all the mess, it would be the fact that politicians have worked with interest groups and lobbyists to create myriad deductions, credits, exclusions, preferences, exemptions, and other loopholes.

This is a great deal for the lobbyists, who get big fees. It’s a great scam for politicians, who get lots of contributions. And it’s a great outcome for interest groups, who benefit from back-door industrial policy that distorts the economy.

But it’s not great for the American people or the American economy.

Writing for Reason, Veronique de Rugy of the Mercatus Center explains that the net result is a Byzantine tax code that imposes very harsh compliance costs on the productive sector.

According to a 2012 study from the Internal Revenue Service (IRS) and the Treasury Department, …corporations alone spent $104 billion complying with the tax code in 2012. …The cost to individuals may be even higher. According to a 2013 study by Jason Fichtner and Jacob Feldman of the Mercatus Center, Americans face nearly $1 trillion annually in hidden tax-compliance costs. …Why does tax compliance cost so much? The answer is largely that the Internal Revenue Code…is riddled with exclusions, exemptions, deductions, preferential rates, and credits.

And she also points to a solution.

Genuine reform would cut out loopholes that tilt the playing field in favor of those with political connections. It would also aim to provide lower tax rates, fewer tax brackets, and less double taxation of income that is saved and invested. Such measures would be good for growth, but they would also mean taking on the interest groups that benefit from swapping tax preferences for campaign cash.

Since I want to rip up the tax code and replace it with a simple and fair flat tax, this is music to my ears.

Of course, achieving genuine tax reform won’t be easy.

There’s the obvious political obstacle since all the groups that benefit from the current system (politicians, lobbyists, bureaucrats, cronyists, interest groups, and other insiders) will fiercely resist reform.

There’s also a policy obstacle because many people oppose loopholes in theory but they haven’t paid sufficient attention to the nuts-and-bolts details.

With that in mind, let’s set out a set of guiding principles for the elimination of tax loopholes and the creation of a neutral tax system.

1. A loophole exists when income isn’t taxed – In libertarian Nirvana, the central government is so small that there’s no need for an income tax. Until we get to that point, though, we’re stuck with the internal revenue code and the goal should be to collect revenue (hopefully a modest amount) in a way that minimizes the economic damage per dollar collected. And that means a tax code that doesn’t have loopholes, which are best defined as provisions that enable people to avoid any tax based on how they earn income or how they spend income. In a neutral system, all income is taxed one time.

2. The economy performs better without a loophole-riddled tax code – Most people understand that high tax rates are bad for growth because they penalize people for earning income. They also generally understand that double taxation of saving and investment is bad for growth because it creates a bias against capital formation. But there’s not nearly enough appreciation of the fact that loopholes in the code are bad for growth since they are a back-door form of industrial policy that exist for the purpose of incentivizing people to make decisions on the basis of tax rather than on the basis of what makes economic sense. A neutral tax system means less economic damage.

3. It’s not a loophole to protect income from double taxation or to require income to be measured correctly – The bad news is that the current system forces taxpayers to overstate their income and it also imposes multiple layers of tax on income that is saved and invested. The good news is that there are provisions in the tax code – such as IRAs, 401(k)s, deferral, bonus depreciation – that seek to mitigate these biases. These parts of the system oftentimes are needlessly complex and they frequently will alleviate penalties in a discriminatory manner, but they are not loopholes. In a neutral system, all income is taxed only one time.

4. Loopholes should be eliminated as part of a plan to lower tax rates, not in order to give politicians more money – If loopholes are a corrupt and distorting dark cloud, the silver lining to that cloud is that all the special favors in the tax code deprive the government of tax revenue. Even the most egregious of loopholes, such as ethanol, have this redeeming feature. This is why loopholes should only be eliminated as part of an overall tax reform plan that also lowers tax rates and reduces double taxation. A neutral tax system shouldn’t enable bigger government.

There are some important implications that follow from these four guiding principles.

As a practical matter, we can now identify provisions in the tax code that are clearly loopholes, such as the healthcare exclusion, the municipal bond exemption, and the state and local tax deduction (the mortgage interest deduction is misguided, but isn’t technically a loophole since one of the goals of tax reform is to give business investment the same tax-income-only-one-time treatment now reserved for residential real estate).

We also know that the capital gains tax rate isn’t a “preferential” loophole, but instead is the mitigation of a penalty that shouldn’t exist. Similarly, it’s not a loophole when companies deduct expenses when calculating income. And you’re not getting some sort of handout simply because Uncle Sam isn’t imposing double taxation on your retirement account. At the risk of repeating myself, all income should be taxed in a neutral system, but only one time.

Let’s close by looking at a few secondary – but still important – implications of a neutral tax code.

First, getting rid of loopholes won’t put a burden on poor and middle-income taxpayers for the simple reason that an overwhelming share of the benefits of these provisions go to high-income taxpayers.

I’ve already shown how the vast majority of charitable deductions are taken by those making more than $200,000 per year.

The same is true for the state and local tax deduction and the healthcare exclusion.

And the Washington Post just editorialized that the home mortgage interest deduction is a boon for rich taxpayers as well.

The mortgage interest deduction is also a significant cause of after-tax income inequality: The top 20 percent of earners get 75 percent of the benefits; the top 1 percent get 15 percent, according to the Congressional Budget Office. …Specifically, 10 metropolitan “hot spot” counties (among them Los Angeles in California and Fairfax in Virginia) with the greatest number of mortgages larger than $500,000 accounted for 45.1 percent of all such mortgages nationally. Just eight California urban and suburban counties accounted for 40 percent of the national total. Outside of such tony coastal precincts, the only big-mortgage hot spots were resort destinations such as Martha’s Vineyard, Mass., and Vail, Colo. — where many homes are vacation places, not primary residences.

To be sure, the Post is misguided in that it wants to restrict tax preferences in order to finance a larger burden of government spending.

So I’m not expecting the editors to join a coalition for pro-growth tax reform.

The second implication is that a neutral tax system means less corruption.

To cite one example, consider the oleaginous way that politicians deal with so-called tax extenders. Marc Short and Andy Koenig explain in a column they wrote for the New York Times.

Congress will soon take up the so-called tax extenders package, which has more than 50 tax breaks affecting a variety of industries and issues. …this bill mostly helps the wealthy and the well connected.

The fact that rich insiders benefit is no surprise, but what makes “tax extenders” so odious is that what began in 1988 as a supposedly one-time fix now has become a regular part of the process, a scam that gives lobbyists and politicians a way of generating fees and contributions.

The first tax-extender package…opened a door that lobbyists and lawmakers were all too willing to run through. …A 2014 analysis by Americans for Tax Fairness found that more than one out of every 10 lobbyists in Washington focused specifically on the extenders package. Given that this bill comes up about every year or two, special interests constantly have the opportunity to demand new handouts.

By the way, some of the extenders actually are good policy. They’re in the mitigation-of-penalties category I discussed above.

But those good provisions should be made permanent and the bad provisions should be jettisoned.

Unfortunately, that’s not in the interests of the politicians and lobbyists who benefit from an annual extender package, so the problem doubtlessly will fester.

Last but not least, let’s consider the moral component.

For those of us who believe in justice, it is ethically offensive that some rich and powerful taxpayer get better treatment simply because they know how to manipulate the political process.

This violates the important principle that the law should treat everyone alike. Yet another reason to have a simple and fair flat tax.

P.S. At the risk of being a nit-picker about my own writing, I should confess that a flat tax is not a purely neutral tax system. There will still be a penalty on earning income. But the penalty presumably will be modest if there is a low rate and that penalty won’t be exacerbated by penalties and loopholes that distort how people earn income and spend income.

P.P.S. Here, in one image, is all you really need to know about the economics of taxation.

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Sometimes the best way to help the cause of freedom is to stop a bad idea. And that’s why I’m vociferously opposed to a value-added tax.

Here’s what I wrote today for National Review. I start by explaining that it’s a bad idea to give Washington a big new tax to finance a larger burden of government spending.

It’s especially good news that the United States has resisted the value-added tax (VAT), which is tempting because of its revenue-generating capacity. …Hostility to the VAT is justified by the European experience. Back in the mid 1960s, the burden of government spending in Europe was only slightly above the American level. But as VATs were implemented, the welfare state expanded, and now government consumes a much higher share of economic output on the other side of the Atlantic.

European politicians embraced the VAT because it’s the only way to finance leviathan-sized government.

…there’s a limit to how much revenue can be generated by an income tax. As honest leftists will admit (at least off the record), the Laffer Curve is real. …Indeed, income-tax revenues (personal and corporate) average less than 12 percent of GDP in OECD nations. …In other words, the only effective way to finance European-sized government is to have European-style taxation. Which is exactly why the Left desperately wants a VAT.

I then express dismay that a couple of very attractive candidates have inserted this pernicious tax in their otherwise good proposals.

…some conservatives think the VAT is an acceptable risk if it’s part of a bigger tax-reform plan. Senators Rand Paul and Ted Cruz, for instance, both have proposals that would lower personal-income-tax rates, reduce double taxation of income that is saved and invested, and eliminate corporate income taxes and payroll taxes. …Paul and Cruz would offset some of the revenue loss by imposing VATs.

The two Senators actually have good plans, at least on paper. My concern is about what happens once either one of them left the White House.

…something that looks pretty on a blackboard might not be so appealing once you add the sordid reality of politics to the equation. To be blunt, unless there’s a magic guarantee that principled conservatives such as Rand Paul and Ted Cruz (and their philosophical clones) would always hold the presidency, a VAT would be a very risky gamble. …What happens in the future when a statist wins the White House? …Raising the VAT rate would be a comparatively simple option for our hypothetical left-wing president. And because it has such a broad tax base (all “value added” in the economy, including wages paid to workers), even small rate increase would generate a lot of revenue to finance bigger government. …And I’m sure this future statist president also would boost tax rates on the “rich” and also impose higher levels of double taxation.

Incidentally, any good tax reform plan can be distorted by bad politicians in the future. But the downside risk of a VAT is monumentally greater because of its revenue-generating capacity.

…there’s a downside risk to other types of tax reform. But it’s a matter of magnitude. If we did something like Ben Carson’s flat tax or the more incremental tax-reform plans of Jeb Bush and Marco Rubio, it’s obviously possible for a future leftist to undo those reforms, in which case we could degenerate back to the current system. That’s obviously bad news, but it’s not nearly as bad as what might happen with the Cruz and Paul plans. When the wrong politicians got back in charge, they’d restore all the bad features of the income tax and also use the VAT as a money machine to expand the welfare state. And when the dust settles, we’d be France.

I realize that some people won’t believe what I just wrote. Maybe you lean left and you’re used to dismissing my arguments. Or maybe you’re a huge fan of Rand Paul or Ted Cruz and you think I’m somehow trying to knock them down because of some sinister agenda.

So maybe you’ll be more persuaded when a left-leaning columnist reaches the same conclusion. Here is some of what Catherine Rampell just wrote for the Washington Post.

Ted Cruz and Rand Paul have a really compelling tax proposal. …an interesting, serious and provocative idea: a value-added tax. …The VAT is also one of the first proposals out of the International Monetary Fund’s bag of tricks for countries that need to raise money. …it’s good these candidates have given voice to The Tax That Dare Not Speak Its Name. There’s only so much revenue a country can wring out of an income tax system, particularly one as Swiss-cheesed as ours. A well-designed VAT could help get our fiscal house in order.

This must be some sign of harmonic convergence. We both recognize that Paul and Cruz are proposing a VAT, and we both understand that there’s a limit to how much money can be raised from an income tax, and we both concur that a VAT will give politicians a way of dramatically boosting the tax burden.

But we don’t really agree. Because I’m horrified about the prospect of a new tax whereas Ms. Rampell thinks the VAT would be good because she favors bigger government.

By the way, Catherine confirms one of the fears I expressed in my article. The VAT would actually lead politicians to make the income tax even worse because of their fixation on distributional issues.

The main downside of a VAT is that it hurts the poor more than the rich, because the poor spend a larger share of their incomes on basic necessities. There’s an easy way to counteract that problem, though: Just make the income tax system more progressive.

By the way, while she’s right that the VAT is a money machine for big government, I can’t resist pointing out a mistake in her column.

Unlike an income tax, it doesn’t discourage saving or working

No, that’s not true. One of the good features of a VAT (assuming all other taxes could be abolished) is that it would generate revenue in a way that minimizes the negative impact on incentives.

But it would still drive a wedge between pre-tax income and post-tax consumption.

This is also the case for the flat tax. A “good” tax system is only “pro growth” in the sense that it does less damage than the current system.

Just in case you haven’t reached the point of VAT exhaustion, here’s my video explaining why the VAT is such a bad idea.

But if you don’t want to spend a few minutes watching a video, just keep this image in mind anytime sometime tells you we should roll the dice and adopt a VAT.

P.S. None of this suggests that Rand Paul and Ted Cruz should be rejected by voters. All candidates have some warts. I like the Jeb Bush tax plan, but I’m worried by his failure to take the no-tax pledge. I like the Marco Rubio tax plan, but I’m not a big fan of his big tax credits for kids. And I could come up with similar complaints about other candidates.

All I’m saying is that Paul and Cruz have one part of their agenda that should be jettisoned.

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I was in Montreal last week for a conference on tax competition, where I participated in a debate about whether the corporate income tax should be abolished with my crazy left-wing friend Richard Murphy.

But I don’t want to write about that debate, both because I was asked to take a position I don’t really support (I actually think corporate income should be taxed, but in a far less destructive fashion than the current system) and because the audience voted in favor of Richard’s position (the attendees were so statist that I felt like a civil rights protester before an all-white Alabama jury in 1965).

Instead, I want to highlight some of material presented by Kansas Governor Sam Brownback, who also ventured into hostile territory to give a presentation on the reforms that have been implemented in his state.

Here are some slides from his presentation, starting with this summary of the main changes that have taken place. As you can see, personal income tax rates are being reduced and income taxes on small businesses have been abolished.

By the way, I don’t fully agree with these changes since I think all income should be taxed the same way. In other words, if there’s going to be a state income tax, then the guy who runs the local pet store should pay the same rate as the guy who works at the assembly plant.

But since the Governor said he ultimately wants Kansas to be part of the no-income-tax club, I think he agrees with that principle. When you’re enacting laws, though, you have to judge the results by whether policy is moving in the right direction, not by whether you’ve reached policy nirvana.

And there’ no doubt that the tax code in Kansas is becoming less onerous. Indeed, the only state in recent years that may have taken bigger positive steps is North Carolina.

In any event, what can we say about Brownback’s tax cuts? Have they worked? We’re still early in the process, but there are some very encouraging signs. Here’s a chart the Governor shared comparing job numbers in Kansas and neighboring states.

These are positive results, but not overwhelmingly persuasive since we don’t know why there are also improving numbers in Missouri and Colorado (though I suspect TABOR is one of the reasons Colorado is doing especially well).

But this next chart from Governor Brownback is quite compelling. It looks at migration patters between Kansas and Missouri. Traditionally, there wasn’t any discernible pattern, at least with regard to the income of migrants.

But once the Governor reduced tax rates and eliminated income taxes on small business, there’s been a spike in favor of Kansas. Which is particularly impressive considering that Kansas suffered a loss of taxable income to other states last decade.

But here’s the chart that is most illuminating. In addition to being home to the team that won the World Series, Kansas City is interesting because the metropolitan area encompasses both parts of Missouri and parts of Kansas.

So you can learn a lot by comparing not only migration patters between the two states, but also wage trends in the shared metropolitan area.

And if this chart is any indication, workers on the Kansas side are enjoying a growing wage differential.

So what’s the bottom line?

Like with all issues, it would be wrong to make sweeping claims. There are many issues beyond tax that impact competitiveness. Moreover, we’ll know more when there is 20 years of data rather than a few years of data.

That being said, Kansas clearly is moving in the right direction. All you have to do is compare economic performance in Texas and California to see that low-tax states out-perform high-tax states.

Indeed, if Kansas can augment good tax policies with a Colorado-style spending cap, the state will be in a very strong position.

P.S. This joke also helps explain the difference between California and Texas.

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I’m a big fan of the flat tax because a low tax rate and no double taxation will result in faster growth and more upward mobility.

I also like the flat tax because it gets rid of all deductions, credits, exemptions, preferences, exclusions, and other distortions. And a loophole-free tax code would be a great way of reducing Washington corruption and promoting simplicity.

Moreover, keep in mind that eliminating all favors from the internal revenue code also would be good for growth because people then will make decisions on the basis of what makes economic sense rather than because of peculiar quirks of the tax system.

Sounds great, right?

Well, it’s not quite as simple as it sounds because there’s a debate about how to measure loopholes. Sensible people want a tax code that’s neutral, which means the government doesn’t tilt the playing field. And one of the main implications of this benchmark is that the tax code shouldn’t create a bias against income that is saved and invested. In the world of public finance, this means they favor a neutral “consumption-base” tax system, but that’s simply another way of saying they want income taxed only one time.

Folks on the left, however, are advocates of a “Haig-Simons” tax system, which means they believe that there should be double taxation of all income that is saved and invested. You see this approach from the Joint Committee on Taxation. You see it from the Government Accountability Office. You see it from the Congressional Budget Office. Heck, you even sometimes see Republicans mistakenly use this benchmark.

Let’s look at three examples to see what this means in practice.

Example #1: Because they don’t want a bias that encourages people to spend their income today rather than in the future, advocates of a neutral tax code want to get rid of all double taxation of savings (Canada is moving in that direction). So that means they like IRAs and 401(k)s since those vehicles at least allow some savings to be protected from double taxation.

Proponents of Haig-Simons taxation, by contrast, think that IRAs and 401(k)s are loopholes.

Example #2: Another controversy revolves around the tax treatment of business investment. Advocates of neutral taxation believe in expensing, which is simply the common-sense view that investment expenditures should be recognized when they actually occur.

Proponents of Haig-Simons, however, think that investment expenditures should be “depreciated,” which means companies are forced to pretend that most of their investment costs which are incurred today actually take place in future years.

Example #3: Supporters of neutral taxation think capital gains taxes should be abolished because there already is tax on the income generated by assets such as stocks and bonds. So the “preferential rates” in the current system aren’t a loophole, but instead should be viewed as the partial mitigation of a penalty.

Proponents of Haig-Simons, not surprisingly, have the opposite view. Not only do they want to double tax capital gains, they also want them fully taxed, which would mean an economically jarring jump in the tax rate of more than 15 percentage points.

Now, having provided all this background information, let’s finally get to today’s topic.

If you’ve been following the presidential campaign, you’ll be aware that there’s a controversy over something called “carried interest.” It’s a wonky tax issue that seems very complicated, so I’m very happy that the Center for Freedom and Prosperity has produced a video that cuts through all the jargon and explains in a very clear and concise fashion that it’s really just an effort by some people to increase the capital gains tax.

There are four points from the video that deserve special emphasis.

  1. Partnerships are voluntary agreements between consenting adults, and both parties concur that carried interest helps create a good incentive structure for productive investment.
  2. Capital formation is very important for growth, which is one of the reasons why there shouldn’t be any capital gains tax.
  3. A capital gain doesn’t magically become labor income just because an investor decides to share a portion of the gain with a fund manager.
  4. An increase in the tax on carried interest would be the camel’s nose under the tent for more broad-based increases in the tax burden on capital gains.

By the way, I liked that the video also took a gentle swipe at some of the ignorant politicians who want to boost the tax burden on carried interest. They claim they’re going after hedge funds, when the tax actually is much more targeted at private equity partnerships.

But what really matters is not the ignorance of politicians. Instead, we should be focused on whether tax policy is being needlessly destructive because of high – and duplicative – taxes on saving and investment.

Such levies would reduce investment. And that means lower levels of productivity and concomitantly lower wages.

In other words, ordinary people will suffer a lot of collateral damage if this tax-the-rich scheme for carried interest is implemented.

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Some honest statists understand and acknowledge that you can’t have bigger government unless you target middle-income taxpayers.

And why do all these statists want higher taxes on ordinary people?

The answer is that they understand you can’t finance a giant welfare state unless there’s a huge increase in the tax burden on lower-income and middle-income taxpayers.

Which is exactly what’s happened in Europe.

Of course, you don’t need to favor that outcome to predict (of fear) that it will happen. My opposition to tax hikes, for instance, is precisely because I don’t want America to have a Greek-style fiscal future.

It’s a simple matter of math. The income tax simply isn’t capable of generating enough revenue to fulfill the fantasies of folks like Hillary Clinton and Bernie Sanders.

Robert Samuelson, writing in the Washington Post, explains that the middle class will need to be targeted if politicians actually want to finance an ever-expanding welfare state.

Democrats retort that raising taxes on the rich will provide needed revenues to expand progressive government. …They obviate the need for middle-class tax increases to pay for government. …of Democrats’ faith in soaking the rich. …The trouble is that the math doesn’t match the rhetoric, as a new Brookings Institution study shows. In it, economists William Gale, Melissa Kearney and Peter Orszag asked this question: What would happen if the top income tax rate were increased from 39.6 percent to 50 percent? The answer — less than you think. …it would raise about $100 billion in tax revenues…, but it’s actually slightly less than a quarter of the $439 billion budget deficit for fiscal 2015. …Even if the $100 billion were directly distributed to the poorest fifth of Americans (an average $2,650 per household), the effect on overall inequality would be “exceedingly modest,” the authors say. …tax policies don’t come close to covering the real costs of government.

In other words, there aren’t enough rich people to finance big government, even if you somehow assume that huge tax hikes don’t have negative effects on taxable income (and the evidence from the 1980s shows that upper-income taxpayers have very strong responses to changes in tax rates).

So, given all this evidence, what’s Samuelson’s bottom line?

If middle-class Americans need or want bigger government, they will have to pay for it. Sooner or later, a tax increase is coming their way.

And he’s right.

Which makes it all the more puzzling that some good lawmakers want to give the other side a value-added tax.

One of my colleagues at the Cato Institute, Chris Edwards, wrote a column on this topic for National Review. Here are some key excerpts.

Senators Ted Cruz and Rand Paul are strong advocates of limited government. …That is why their embrace of the value-added tax (VAT) in their presidential campaigns is so baffling. VATs are the revenue engine of big-government welfare states, not a proper funding source for the small federal government that both senators favor for America. …the candidates hide behind innocuous names — “business flat tax” for Cruz and “business transfer tax” for Paul.

But calling something a “business tax” doesn’t mean the burden is borne by businesses.

The tab for taxes collected from businesses is ultimately passed through to individuals in the form of lower wages, reduced dividends, or higher prices. …VATs have huge bases. That’s because — unlike income taxes — they do not allow businesses to deduct employee compensation when calculating the taxable amount. …The result would be that tax revenues from businesses under the Cruz and Paul VATs would be enormous.

In other words, the VAT is – among other things – a withholding tax on labor income. And that’s why this levy generates a huge amount of revenue.

To make matters worse, this giant tax is hidden from voters.

Because Cruz and Paul shift much of the collection to businesses, more of the tax burden gets hidden from citizens and voters. …If the government is going to take our money, it should mug us on the street in broad daylight, rather than sneak into our homes at night and burglarize us unnoticed. The VAT would encourage more burglary.

And this hidden tax also will give statists an easy method of financing an ever-expanding burden of government spending

Cruz and Paul want smaller government, but down the road, other politicians looking to shore up entitlement programs will say, “They could be financed with just a small tax increase on businesses.” But each “small” increase in the VAT rate would transfer huge amounts of additional cash from the private economy to the government.


When I wrote about Sen. Cruz’s plan and Sen. Paul’s plan, I specifically pointed out that the VATs needed to be jettisoned.

But Chris makes an even stronger case. And he’s correct. Adopting a VAT would be a cataclysmic error for advocates of limited government.

It would be a truly perverse tragedy if the other side eventually gets a VAT because well-meaning (but misguided) conservatives paved the way.

P.S. The left also is salivating for a broad-based energy tax.

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Last year, I wrote a column for the Wall Street Journal making the case that families would benefit more from lower tax rates rather than targeted tax credits.

My argument was simple and straightforward.

Child-based tax cuts are an effective way of giving targeted relief to families with children… The more effective policy—at least in the long run—is to boost economic growth so that families have more income in the first place. Even very modest changes in annual growth, if sustained over time, can yield big increases in household income.

I then had a follow-up piece that expanded the discussion, responding to critics but also noting that advocates of lower rates and supporters of targeted credits at least agree on the importance of reducing double taxation and also want to address non-fiscal impediments to growth.

Now it’s time for a third installment in the series.

The Wall Street Journal opined today against tax credits, citing the challenges that have arisen on the other side of the ocean.

Parliament blocked David Cameron’s plan to reform family tax credits. There’s a warning here for conservatives…about the dangers of social engineering through taxation. At issue is a convoluted tax benefit developed by Tony Blair in 2003 that was supposed to reward low-income work and childbearing. …This policy hasn’t worked.

The editorial points out that welfare reforms deserve credit for a somewhat improved job market.

Moreover, there’s scant evidence of desirable effects on birthrates (an important issue because of the collapsing welfare state, as discussed yesterday).

To the degree there are more births, it is because of the U.K.’s large immigrant population. Tax policy has no significant impact.

A 2013 Office for National Statistics study noted that the combination of economic climate and tax policy “does not have a clear impact in a particular direction.”

But there definitely is a measurable impact in other ways. People now expect to get checks from the government based on the size of their families.

…the tax credits have become a new entitlement for the child-rearing middle class. …eliminating the credits has proved to be politically difficult. The tax-credit system is so entrenched that it’s as hard to reform as any other entitlement… That’s a lesson for Americans as a debate about tax reform gathers momentum.

And the WSJ expands the lesson.

…the most pro-family tax policies are those that do the most to boost broad-based growth and raise incomes, which means a flatter tax code with lower rates and fewer distorting credits and exemptions. As Britain shows, the danger of using the tax code for pro-natalist social planning is that you end up with an expensive new entitlement that is merely another mechanism for income redistribution and can’t be reformed.

And if you want evidence, just look at how the so-called earned income tax credit has become the federal government’s fastest-growing entitlement program.

So why expand the problems of the EITC by creating new and bigger credits?

Especially since the tax code already is a convoluted and corrupt mess.

Writing for Investor’s Business Daily, Amity Shlaes and Gregory Thornbury make the case for a low-rate flat tax instead of expanded credits.

The fixation on family tax benefits abides, even though the tax code already features dozens of credits and deductions installed in the name of children. …The assumption that such credits are the best gift for the religious family dates back 100 child credits ago… But that doesn’t mean that the policy truly benefits families.

They explain that growth is more important.

And you’re more likely to get a better-performing economy when marginal tax rates are reasonable.

…a better policy for families, then and today, is a tax code that does more to realize their aspirations than any political lobby. Such a plan has no child credits but would be simpler and flatter, with a top rate of, say, 20%, 18%, 15% or even, as Carson would have it, 10%. The reasons why this is so have to do with standard tax parameters such as marginal rates and standard tax concepts such as the incentive.

Keep in mind, by the way, that there are tradeoffs. If politicians want big credits, they will want to make up for the foregone revenue by raising tax burdens elsewhere.

Costly tax breaks like the child credit are one reason why top rates are so high in the first place. To compensate for the revenue that such a break forgoes, lawmakers raise rates at the top of the tax schedule or lower the point at which the top rate kicks in.

Last but not least, there’s a moral component to this debate.

There are taxes in the Bible. But nowhere does the Bible say that a great share of the rich man’s money has to go to a secular government. And it never crosses the minds of today’s politicians that they encourage their constituents to violate the 10th Commandment when they stoke resentment and envy. …Our code does feel like a maze because progressivity represents behavioral engineering par excellence. It treats humans like rats who struggle through, avoiding trap doors and hunting for chunks of cheddar cheese without ever gaining much idea of where they are. It’s time for a tax code that treats humans with dignity.

And that tax code, needless to say, is a simple and fair flat tax.

Which, for what it’s worth, includes a generous exemption based on family size. So the goal is to provide some tax relief to families, but to keep it reasonable so that other objectives (such as growth) can be realized.

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The tax-reform landscape is getting crowded.

Adding to the proposals put forth by other candidates (I’ve previously reviewed the plans offered by Rand Paul, Marco Rubio, Jeb Bush, Bobby Jindal, and Donald Trump), we now have a reform blueprint from Ted Cruz.

Writing for the Wall Street Journal, the Texas Senator unveiled his rewrite of the tax code.

…tax reform is a powerful lever for spurring economic expansion. Along with reducing red tape on business and restoring sound money, it can make the U.S. economy boom again. That’s why I’m proposing the Simple Flat Tax as the cornerstone of my economic agenda.

Here are the core features of his proposal.

…my Simple Flat Tax plan features the following: • For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income. • Above that level, a 10% flat tax on all individual income from wages and investment. • No death tax, alternative minimum tax or ObamaCare taxes. • Elimination of the payroll tax and the corporate income tax… • A Universal Savings Account, which would allow every American to save up to $25,000 annually on a tax-deferred basis for any purpose.

From an economic perspective, there’s a lot to like. Thanks to the low tax rate, the government no longer would be imposing harsh penalties on productive behavior. Major forms of double taxation such as the death tax would be abolished, creating a much better environment for wage-boosting capital formation.

And I’m glad to see that the notion of a universal savings account, popularized by my colleague Chris Edwards, is catching on.

Moreover, the reforms Cruz is pushing would clean up some of the most complex and burdensome sections of the tax code.

But Cruz’s plan is not a pure flat tax. There would be a small amount of double taxation of income that is saved and invested, though the adverse economic impact would be trivial because of the low tax rate.

And the Senator would retain some preferences in the tax code, which is somewhat unfortunate, and expand the earned income credit, which is more unfortunate.

It maintains the current child tax credit and expands and modernizes the earned-income tax credit… The Simple Flat Tax also keeps the current deduction for all charitable giving, and includes a deduction for home-mortgage interest on the first $500,000 in principal.

But here’s the part of Cruz’s plan that raises a red flag. He says he wants a “business flat tax,” but what he’s really proposing is a value-added tax.

…a 16% Business Flat Tax. This would tax companies’ gross receipts from sales of goods and services, less purchases from other businesses, including capital investment. …My business tax is border-adjusted, so exports are free of tax and imports pay the same business-flat-tax rate as U.S.-produced goods.

His proposal is a VAT because wages are nondeductible. And that basically means a 16 percent withholding tax on the wages and salaries of all American workers (for tax geeks, this part of Cruz’s plan is technically a subtraction-method VAT).

Normally, I start foaming at the mouth when politicians talking about value-added taxes. But Senator Cruz obviously isn’t proposing a VAT for the purpose of financing a bigger welfare state.

Instead, he’s doing a swap, imposing a VAT while also getting rid of the corporate income tax and the payroll tax.

And that’s theoretically a good deal because the corporate income tax is so senselessly destructive (swapping the payroll tax for the VAT, as I explained a few days ago in another context, is basically a wash).

But it’s still a red flag because I worry about what might happen in the future. If the Cruz plan is adopted, we’ll still have the structure of an income tax (albeit a far-less-destructive income tax). And we’ll also have a VAT.

So what happens 10 years from now or 25 years from now if statists control both ends of Pennsylvania Avenue and they decide to reinstate the bad features of the income tax while retaining the VAT? They now have a relatively simple way of getting more revenue to finance European-style big government.

And also don’t forget that it would be relatively simple to reinstate the bad features of the corporate income tax by tweaking Cruz’s business flat tax/VAT.

By the way, I have the same specific concern about Senator Rand Paul’s tax reform plan.

My advice to both of them is to ditch the VAT and keep the payroll tax. Not only would that address my concern about enabling the spending proclivities of statists in the future, but I also think Social Security reform is more feasible when the system is financed by the payroll tax.

Notwithstanding my concern about the VAT, Senator Cruz has put forth a plan that would be enormously beneficial to the American economy.

Instead of being a vehicle for punitive class warfare and corrupt cronyism, the tax code would simply be the method by which revenue was collected to fund government.

Which gives me an opportunity to raise an issue that applies to every candidate. Simply stated, no good tax reform plan will be feasible unless it’s accompanied by a serious plan to restrain government spending.

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