Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
A Flat Tax Truth We Need to Tell
Kevin Williamson makes the case for killing the corporate income tax. I have argued the same thing. Now as an additional part of KW’s radical tax reform, he would “institute a flat tax on all income, salary, bonuses, capital gains, inheritance, gifts, dividends, whatever.” Then he tells a truth that many flat tax advocates and supply-siders shy away from:
If you’re a deficit-hawk like me, you’ll want to see that one flat rate set high enough to cover what government actually spends every year. And there’s the poison pill: A real flat tax would necessarily mean a very large tax increase on the American middle class. The middle income quintile currently pays around 13 percent per year in real federal income taxes (here I’m combining the income tax and the payroll tax). Figure on doubling that, more or less, if you want a truly flat tax that funds what government actually spends.
But that’s not really so bad in the long run, either: There’s no way that the United States will keep up its currently level of welfare-state spending (Social Security, Medicare, Medicaid, welfare per se, etc.) without either a large tax increase on the American middle class or crushing debt and eventual fiscal chaos.
And here’s me with a similar take on some hard budget realities.
Published in Economics
Might just finally get people to start voting for the amount of government they can afford.
The obvious problem with this is what Milton Friedman pointed many years ago. When you increase revenues to the point where you have no deficit, politicians will respond by spending more, creating a deficit of similar size to the old one. Except now, the size of government has increased.
American resistance to tax increases is our only saving grace. The massive tax rates of Europe haven’t ended their problem of deficits. We still have some headroom before we hit the peak of the Laffer curve, but places like Greece are already beyond it and yet still are only willing to talk about tax increases as a fix for their spending habits.
No, gorge the beast doesn’t work anymore than starving the beast.
How about just end the statement right there?
This is about letting the American people know that TANSTAAFL. I’m not saying gorge the beast. I’m saying make the people know what the beast cost. Don’t hide it by deducting the taxes from their paychecks either. Make them pay monthly or quarterly. Don’t even accept online payments. Make people stick that check in an envelop and fill out the address and put a stamp on it. Make government equally painful to all.
All good thoughts for our next attempt at governance after the second American Revolution.
Eh – I’ve been saying for a while now, what we need to do just can’t be done. We need to do at minimum two things to get the government’s fiscal house in order. First, we need to revise the tax code and revenue stream so that it is simple to understand and fair to all. This is why I favor a flat tax, either income or consumption, I’m not picky. Second, we need to restrain spending so that it roughly matches the revenue generated each year. This is why I want some sort of balanced budget amendment. I have my own scheme for how this works, but we just have to have a hard limit on how much we can spend.
I don’t see how either of these things are politically feasible. What we need, we can’t get.
This is true and I’ve been saying it for years, but add that since we don’t want our taxes to go up we will raise the flat tax rate but then raise the income level where it kicks in. The solution is very simple. Stop spending so much. We do not need socialized medicine, we can privatize SS if we move ongoing obligations to general revenues, we do not need welfare, indeed it is the single most damaging program we have every imposed. As a minimum welfare should be sent to the states where citizens who have to pay for it will start paying attention. Now one more thing. The deficit is important because with our low savings rate it shows up as external debt. With robust savings I’m indifferent between whether we pay for necessary spending with non market conforming tax revenues or market conforming borrowing. Repeat necessary spending.
There’s another, dynamic effect here too. In a highly progressive tax structure like ours, a disproportionately large fraction of revenues comes from the highest earners. During boom times, these highest earners see their income increase rapidly, providing more tax dollars to the government (1990s). The politicians have a field day and make sure to increase spending as fast or faster than tax revenues are growing. But during a recession, the highest end of the income scale can deflate rapidly, disproportionately crushing tax revenue and causing huge deficits, made all the worse by the irresponsible increases in government spending during boom times. And it’s a ratchet.
Mr. Pethokoukis is conflating two different issues: a flat tax and a balanced budget.
If we decided to balance our budget for next year, the middle class would have to take a huge hit regardless of whether we had a flat tax or a progressive tax – because even with our current progressive system, there is simply no way to raise enough revenue without tapping into middle class income.
Obviously the effect would be stronger with a flat tax, but let’s not pretend there’s any tax system which can balance the budget without hitting the middle class. Even if we decided to simply cut spending to balance the budget, a huge chunk of that cut would have to be to middle-class benefits.
While your point has quite a bit of merit, I’m not convinced that prior experience is applicable to the theoretical situation of a flat tax.
As Mark Wilson points out, the majority of revenue comes from a minority of the population. It’s easier for an average taxpayer/voter to support higher spending and higher deficits when someone else is picking up the bill anyhow.
It is very likely that many middle class voters would suddenly find a renewed interest in our budget if their tax rates were coupled to overall spending. The question is then: would they put pressure on lawmakers to decrease spending, or to go back to the old progressive tax/budget deficit status quo? Probably the latter, unfortunately.
I’ve been saying this for years. My entire income is royalties and has been for more than 25 years. They don’t take taxes out of royalties, and I don’t get a W2. Four times a year, I have to sit down and write a check to the IRS. Let me tell you if everyone had to do this and be smacked in the face with just how much they are taking out of our wallets, there would be rioting in the streets.
Which is why voters will never let it happen. Nice hypothetical, but now we need ideas that are actually feasible in today’s political climate.
I like Steven Hayward’s formulation: “Serve the Check.”
As other people have said this is unrelated to the flat tax it is really a balanced budget amendment issue. If I had to pick only one, I would pick a strong balanced budget amendment over a flat tax.
Bummed at some of the despair in this thread, but respect the reality thereof.
I am starting to think that even after 7+ years of Obama, we still don’t get it. We haven’t fallen far enough.
My simple formulation of a Balanced Budget Amendment:
Congress shall not appropriate funds in the current year for more than that total funds collected in the prior year without a 2/3 majority vote in both the House and the Senate and assent of the President.
Sorry, but I’ve given up on things like a small government, a flat tax, etc. They’re never going to happen, and not because of some shadowy conspiracy, but because average voters don’t want them. Smaller government means losing things like the home mortgage interest deduction, PELL grants, the so-called “Earned Income Tax Credit”, etc. Everyone likes the idea of smaller government in abstract. But if it takes away money or benefits to people, then suddenly they’re hysterical. Americans are all “Fine, cut that guy’s bennies, but don’t touch mine“. This is why Democrats will always have an advantage: we’ll never outbid them for Stuff. And what have conservatives said ? “Sooner or later, we’ll run out of money. Be fiscally responsible!”. And yet…. it seems we never run out of money. We print and print with no ill consequences. We’ve got Ben Bernanke’s helicopter working 24/7, with rock bottom interest rates. And no consequences for doing so. I think that’s a huge influence on people going “OK, why NOT spend more in government, then? The money is endless. Prove it isn’t”.
I don’t think it’s just a matter of falling far enough – or to use a different analogy, of people feeling enough pain. It’s also necessary for people to understand the causal relationships between their personal hardships and public policy.
One problem with having a steeply progressive tax rate combined with high debt is that it disconnects the natural cause-effect relationship of voting and policy choices.
Imagine if our debt started to cause interest rates to rise and made car loans and mortgages much more expensive – a clear example of national policy hitting individual middle class families. Will those families realize that their difficulties are caused by policies they support? Or will decades of being cushioned from fiscal decisions lead them to believe that the higher interest rates are being caused by rich bankers and foreign currency manipulators?
Feeling the financial squeeze isn’t sufficient if voters don’t know why they’re really being squeezed in the first place. Having a less progressive tax rate might be a first step in re-establishing the natural cause-and-effect relationship.
“crushing debt and eventual fiscal chaos.” We’ve already got the crushing debt and the fiscal chaos is about to begin.
KDW’s piece compares the different candidates corporate tax plans and says he favors eliminating the corporate tax. One problem with eliminating the corporate tax is that without a potential for IRS audit it is easy for companies to hide personal consumption as corporate expenditures. For publicly traded companies you have stockholders that want to protect their dividends and capital gains, which will help prevent fraud of this type. However, for one-man or few-man operations you would see a lot more tax fraud of the personal consumption as corporate expense type.
Maybe the answer is to lower the flat tax rate sufficiently that nobody pays more and a bunch of people get tax cuts.
They do it anyway as expenses, bonuses etc. all deductible. What would hinder it would be a VAT as all expenditures would add to the tax bill so management would pay close attention. With a low flat tax and a VAT they will watch management much more carefully as it’s their money. Under corporate taxes it’s only theirs after deductions. Stockholder stopped following management when their personal rate was over 90 and the profits tax over 50 meaning they got less than 5 cents on the dollar for dividends from profits, so they encouraged growth, cash flow, sales, capital investment that eventually led to capital gains which was taxed at a much lower rate. That changed boardroom culture and it will take a good tax system a while to change the culture back to concern for stockholders.
It is easier to toss it and start from scratch than try to reform it from within. Gore all the oxen so that professional lobbyists don’t suffer relative losses, which is what they care about. They don’t want their competition to get anything they don’t It’s also easier to sell a simple idea. “Reform” isn’t a simple idea as the tax code is not knowable so “reform” means nothing. Cruz has it right and I wish more people understood his tax proposal.
Every time this issue comes up, I find myself wishing only taxpayers could vote. That is, only those whose net tax paid is greater than their net government benefits.
I don’t know how you’d measure such a thing given the vast tangle of both taxes and benefits, but since this is just wishful thinking that’d never come to pass, I won’t spend much time trying to untangle them.
I think the best aspect of Cruz’s don’t-call-it-a-VAT plan is that it greatly simplifies the application and proper enforcement of business taxes because you don’t have to calculate profit, you just have to calculate revenues. It also in a single sweep eliminates the Federal subsidization of all employer provided benefits like healthcare, retirement plans, the company truck that you drive like it is your own, etc.
In my mind the Cruz tax plan is almost impossible to game and taxes income of all types and from all sources. It doesn’t matter if your income comes as profits, salary, or non-cash benefits you will be hit by taxes. In that sense it is very fair.
It is a rather high rate however. On the business side it is a 16% flat tax on labor (similar to SS) or profits and on the personal side it is another 15% on personal income over a threshold. Which means for low income individuals you have a 16% tax rate and high income individuals you have a 29% tax rate.
Good to see KW back on the commonsense economics beat, though the news here is hardly more promising than the Kentucky opiate beat he’s been reporting from.
Total spending — federal, state and local — will total $6.6 Trillion this year.
That’s over $20,000 for each citizen of our country.
Over $82,000 for each family of four (a quaint divisor).
That doesn’t include much special district, POA spending ad nauseam.
I’m with Brent here. Have to wait until the rabid golden eagles come home to roost.
KW’s The End Is Near And It’s Going To Be Awesome is the reference, not polite, erudite arguments about tinkering with the IRC.
I think we are on the same page, however I think you are missing the aspect that if you pay out bonuses to employee’s at least it is taxed as personal income. I am not worried about cash compensation of employees and management, I am more concerned with hiding compensation through non-cash benefits, which while allowed as deductions on the corporate level are considered taxable on the personal level (except for a few specific exemptions like healthcare, retirement, etc.). If you get rid of corporate taxes it is easier to hide non-cash compensation so it isn’t taxed at the personal income level.
True; true; true. And I’ll meet you in the Ricochet phone booth with everyone who brings their personal sacrifice for the common good of our country. [And I don’t plan on changing from street togs to red tights and cape. Though I’m sure they’ll be room to spare.]
Excellent! I don’t know how anybody can look at those numbers and think the enterprise we call the US of A is sustainable.
As a Canadian I can say you pass a Fair Tax at your peril. The GST, the Canadian VAT, is still probably one of the most controversial political decisions made in our history. More so than Fair Trade. Even 25 years later.