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Wednesday, November 17, 2004

Flat Tax 

Andrew Sullivan descibes why a flat tax works, both from a fiscal policy and political point of view. This is related to what Arnold Kling wrote recently about taking into account both economic and political incentives into drafts of fiscal policy.
From a political perspective, however, having four broad-based taxes with low rates would help to discourage lobbying. The incentive to lobby for an exemption is much higher when marginal rates are 35 percent than when rates are 8 percent.

For example, consider the corporate income tax. As it stands now, the social cost of the corporate income tax (including compliance costs, the costs of rent-seeking as K Street lawyers lobby for exemptions, and the costs of economic distortions) exceed the revenue that it brings in, which is why it is reasonable for economists to support abolishing the corporate income tax altogether. My hypothesis is that with a tax rate of 8 percent, the K street rent-seeking would diminish sharply, compliance costs would decline because of reduced complexity as well as reduced incentives to dodge the tax, and the economic distortions would be reduced as well.

Reducing the marginal tax rates on personal and corporate income from 35 percent to 8 percent would reduce the value of tax exemptions by 80 percent. I think that this would shut down the K Street tax lobbying industry, or at least curtail it sharply. Even the real estate lobby might decide that the mortgage interest deduction is not worth fighting for when the marginal personal income tax rate is only 8 percent to begin with.

Comments:
I think we have a de facto flat tax, and the (correct) argument is for simplifying it and calling it that.

Problem is, calling for a flat tax is actually calling on local tax authorities to stop their revenue streams. Hard work, so to speak.
 
"Local tax authorities"? Like municipal and state taxes? I would think they would continue to be independent of federal taxes.

Also, there is a very real difference between having a tax that is low enough to not be avoided, and having a large tax with plenty of money spent avoiding it, even through legal loopholes.

This is why many people think that a drastically lower rate will actually increase revenue, because you can find a local optimum as far as government is concerned. This is coincide with the maximum ammount people are willing to pay before spending more money trying to pay less. With few loopholes, this can be higher.

Give the government more money, in a more flat manner, and save the American taxpayer the headache of taxes. I've read stories about the national sport in places like Belgium being tax avoidance, because rates are so high and there are so many loopholes. We should certainly move in the opposite direction.
 
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