Pethokoukis

Should pro-growth advocates keep pushing for a flat tax?

I have little doubt that if we were starting the U.S. tax code from scratch, a flat tax would be the way to go. And if you’re going to go that route, a flat consumption tax is the best version. Most flat tax proposals are flat consumption taxes based on the 1980s work of economists Robert Hall and Alvin Rabushka of the Hoover Institution. In Hoover’s Defining Ideas journal, Richard Epstein makes the case for the Hall-Rabushka flat tax on the usual grounds of greater economic efficiency and improved growth due to a) lower marginal rates on labor income, b) its simpler, broader tax base, and c) elimination of the current income tax’s bias against savings.

But Epstein adds a political rather than economic caveat:

[A flat consumption tax] enjoys virtually no visible political support today … virtually every key tax policy initiative today lurches in the opposite direction. The constant calls for higher levels of progressivity; the short-shelf life for key tax rates that must be renegotiated every year or two; and the constant playoff between interested parties jockeying to shift wealth among income, death, and excise taxes, which only magnifies the amount of political mischief.

But it’s not just the political difficulties. Given the current shape of the U.S. tax code — where decades of tax tinkering has resulted in nearly half of Americans paying no income tax — it would be difficult to implement a revenue-neutral, low-rate flat consumption tax. During the GOP presidential primary season, Texas Governor Rick Perry offered a 20% flat tax, which the Tax Policy Center estimated would lose about $500 billion a year in tax revenue versus extending current tax policy. Making it revenue neutral would mean raising middle-class taxes.

Now I would guess the TPC estimate overstates the revenue loss by understating the resulting economic growth from such a plan. Still, the number causes one to hesitate. Indeed, similar problems faced the Romney tax plan. Its combination of rate cuts and deduction limits on individual labor income made it unclear how pro-growth it would have been since effective marginal rates might have been more or less the same. (The Romney plan was much better on dealing with capital income.)

The question for both policymakers, both wonks and politicians, is that how much energy do they want to expend on pushing a politically and fiscally problematic version of tax reform? Not much, I would suggest. So what are the other options? That’s in my next blog post.

16 thoughts on “Should pro-growth advocates keep pushing for a flat tax?

  1. Flat taxers start from an economic goal — i.e. maximize growth and efficiency of revenue collection. That’s not the objective of Congress. The objective of Congressmen is to maximize the amount of benefit THEY receive from the tax code. The more favors they have to sell, the more benefits THEY receive. They are perfectly willing to trade off growth and efficiency against their objective. After all, it’s not their money they are wasting.
    If you start from the wrong objective, you will usually end up with the wrong plan.

  2. I do not disagree with the consideration of different tax reform ideas as long as they end up paying for the spending we have committed to and have debt for.

    It just seems to me that we have this endless merry-go-round talking about what we might/should/could do and ever arrive at an agreement about what to do that addresses the deficit.

    It strikes me that we doubled the DOD budget, signed on to two wars, and created Medicare Part D that overwhelmed the tax cuts increased revenue and now we say the problem and solution is to cut only entitlements.

    we can’t get there just by cutting entitlements and we are going to have to do what both Reagan and Clinton did – and that is to end up agreeing on a tax reform plan that does generate more revenues so we can pay for what we voted to spend money on – and/or we have to agree to not only roll back entitlements but also DOD.

    the discussion about which tax reform to adopt seems to be a de-facto stall tactic to arriving at a compromise agreement.

    The sequester deadline may well bring this to some kind of a resolution unless of course they do the sequester equivalent of a continuing resolution – i.e. kick the can down the road.

    to a certain extent – the discussions about “flat” tax are a Non sequitur if at the end of the process the flat tax fails to generate the revenues needed to balance the budget.

    It cannot be a separate discussion. we cannot continue to talk about tax reform as if it has no bearing on spending.

    the “starve the beast” strategy has failed. It did not result in reduced spending… but instead deficit spending and what “starve the beast” actually “delivered” was 16 trillion in debt.

    Time to stop pretending.

      • Policy Analysis by CATO? You’re kidding, right?

        that’s an Oxymoron when done by CATO.

        So we voted to DOUBLE the DOD budget and fight 2 wars without paying for either so now the “problem” with the deficit is entitlements?

        geeze Jandos… sounds lopsided

        • liberal larry whines: “Policy Analysis by CATO? You’re kidding, right?“…

          This is coming from a moron who quotes from the New York Times….

          LMAO!

          So we voted to DOUBLE the DOD budget and fight 2 wars without paying for either so now the “problem” with the deficit is entitlements?“….

          Well liberal larry do you think your repetition of a thoroughly debunked statement will make it somehow morph into a fact?

          geeze Jandos… sounds lopsided“…

          Geeze liberal larry, your tenuous grip on reality is showing again…

          • American Thinker? another oxymoron ?

            how come they don’t include the cumulative DOD spending and the Afghanistan spending?

            Juandos – have you ever heard of Confirmation Bias?

            you define it my boy.

          • Oh dear! liberal larry is in a snit: “American Thinker? another oxymoron ?“…

            LMAO again! This coming from the moron who quotes wikipedia…

            Juandos – have you ever heard of Confirmation Bias?“…

            Yes, everytime you try but fail miserably with your attempts derationalize reality…

  3. Well I’m all for taxing liberals, progressives, and Democrats only in all wage/salary levels…

    Let’s see how many of those fools decide to jump ship if that impossibility ever came to pass…

  4. The TPC “estimated would lose about $500 billion a year in tax revenue versus extending current tax policy”

    virtually everytime someone talks about reducing tax rates, some organization does static analysis that shows a drop in tax receipts (I absolutely refuse to call it tax revenues, since the government isn’t selling a product), and yet tax receipts increase when the rates are dropped. conversely these same groups assume that tax receipts will increase if the rates are raise, but they don’t. they drop.

    • re: tax cuts and revenues

      the key is how do you balance the budget.

      if you cut taxes and the increased revenues are not enough to balance the budget, what is plan B?

      worth reading:

      ” Despite the aggressive tax cutting, Reagan couldn’t ignore the budget deficit, which was burgeoning.

      After Reagan’s first year in office, the annual deficit was 2.6% of gross domestic product. But it hit a high of 6% in 1983, stayed in the 5% range for the next three years, and fell to 3.1% by 1988. (By comparison, this year it’s projected to be 9% but is expected to drop considerably thereafter.)

      So, despite his public opposition to higher taxes, Reagan ended up signing off on several measures intended to raise more revenue.

      “Reagan was certainly a tax cutter legislatively, emotionally and ideologically. But for a variety of political reasons, it was hard for him to ignore the cost of his tax cuts,” said tax historian Joseph Thorndike.

      Two bills passed in 1982 and 1984 together “constituted the biggest tax increase ever enacted during peacetime,” Thorndike said.”

      http://money.cnn.com/2010/09/08/news/economy/reagan_years_taxes/index.htm

      the point is that Reagan recognized that tax cuts alone was not sufficient – he also knew he had a responsibility to balance the budget – and he did what was necessary to accomplish that goal.

      this is what we have to do now.

      our fixation with what kind of tax cuts to do or not do while ignoring the deficit and our 16 trillion debt is not the kind of leadership that Reagan demonstrated.

      The man would be turning over in his grave if he saw what was passing now days as “fiscal conservatism”.

  5. I would be OK with a flat consumption tax, only if the constitution is amended to forbid an income tax. If both are allowed we be sucked dry.

    • ” The president faces a weak economy and a split Congress, with some Republicans furious over the president’s endorsement of a plan to cut budget deficits with a combination of a tax increase and budget cuts.

      “He is adamant that we are wrong on the tax increase,” wrote the president after meeting with one leading House Republican. “He is in fact unreasonable.”

      The year was 1982, the president was Ronald Reagan and the congressman was Jack Kemp.”

      http://economix.blogs.nytimes.com/2012/11/23/the-unreasonable-tax-opponent/

      Reagan said in his diary: It was the price we had to pay for budget cuts…

      http://goo.gl/nyZhn

  6. “I have little doubt that if we were starting the U.S. tax code from scratch, a flat tax would be the way to go. ”

    That’s your chief problem, Jim. You have “little doubt.”

    Maybe you should have SOME.

  7. I continue to be amused at all the comments about balancing the budget and generating tax revenue to pay for spending. I’m amused because the entire system is set up backwards.

    When you plan a budget for your home/business, do you start by spending money or assessing your income?

    Obviously, a fiscally responsible person/business/government would start by assessing revenue first. Once revenue is determined (whatever tax system you want to use), only then should you start spending money.

    I understand that we are saddled with debt, entitlements, and excessive spending on military and other things. These all need to be addressed as well. However, it starts with how to approach a budget. The government does it backwards, it’s that simple.

    I’m a proponent of a flat tax. I think it should be set at 10%, and I would encourage states to follow at roughly 4-5%, with localities adding on 1-2%. Eliminate all other taxes, fees, etc. at all levels. The maximum any American will pay is 17% (at all levels, and remember, that also eliminates all other taxes such as sales, etc.).

    This concept provides tremendous stability in the economy and would allow businesses and investors to plan ahead. The economy would grow, which would increase tax revenues at all levels.

    I would be o.k. putting in a “poverty threshold”, though I’m not fold of it. In other words, do not tax the first $20,000 earned by all people.

    Yes, this would mean that governments at all levels would have to cut back. They should, they are bloated and providing services that are not necessary…and often not wanted. Cutting back military spending would be easy, especially since we currently spend nearly as much as the rest of the world combined. Any entitlement program should be independent and self-sustaining. If it isn’t self-sustaining, then it should be dismantled. People should have an option whether to be involved or not…and they should be told that if the program can’t sustain itself, it will go away.

    These are the general guidelines, but over the next 2 years I will be completing my PhD dissertation on this topic, and hope it will be made available for review, critique, and acceptance.

    Additional note: Social Security can easily be fixed. It should be tied to life expectancy. When the age to receive benefits was set at 65, life expectancy was less than 60. This allowed the program to work. However, now, life expectancy is in the 70′s, and more money is going out. Based on the original framework, the age to receive benefits should be in the 70′s now. I also hate the term “retirement” when discussing Social Security. It was not designed as a “retirement” program, but rather a social program to help those who lived beyond their ability to work. If you are 75 years old today, and can still work, you should…unless you have planned on your own for a true retirement! (this eliminates a major entitlement issue in the budget)

    • re: “backwards”

      totally agree.

      right now we take in about 1.5T in tax revenues.

      how should it be allocated on a percentage basis to entitlements, National Defense and the rest of govt?

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