Monday, February 18, 2013

Overwarmed policy

James Pethokoukis puts forward some much-needed heresies (to the right) on economic policy: "No to the Flat Tax and Other Stale Ideas." It's a good sign this is getting published at National Review Online. Less encouraging (though not unexpected) are the comments, the overall gist of which is that these orthodoxies must never be reconsidered and who is this "kid" to do so anyway? (I don't know how old Pethokoukis is, but if he was at US News in 1997, he's not all that young, and it's a dumb "counterargument" anyway.)

UPDATE: Also see Ramesh Ponnuru's "Reaganism After Reagan," found via Justin Green, who points out that it's "obvious but needs to be said."


Ray Haupt said...

I found that article interesting but I do not see how the notion of a flat tax can be brushed aside as a "stale" old idea. We have plenty of flat taxes such as the city wage tax in Philadelphia that extracts nearly 4% of every dime of salary or wages for Philadelphia residents and about 3.5% of salary and wages earned in the city by non-residents.

I am not a huge enthusiast for the flat tax or the consumption tax as alternatives to the federal income tax. On the other hand the system we have has been a quagmire for decades and any simplified alternative has high appeal.

The migration to a more plausible taxation will be hard fought if we even manage to seriously address the question in the Congress or in the White House. No doubt the Democrats will demand higher tax rates, the Republicans lower, and nothing will get done.

I am baffled as to why simple solutions cannot easily be found. In the days before the election Mitt Romney suggested that the matter of tax deductions be handled in such a way that all things deductible may remain deductible but a cap on the aggregate sum of deductions be capped. He threw out some arbitrary numbers .... $50,000 as I recall. I thought that would be a splendid idea that would only affect people with very high incomes as a starter. Perhaps that amount should be even higher as a starting point with a gradual tightening over a decade to minimize tax "shock". A program like that could give people time to adjust to an environment where tax deduction becomes a trivial point in economic decision making and finally a moot point as legislators hopefully eliminate all deductions for all people. All deductions.

I would like to see a deduction free progressive income tax with 100% participation beginning with the first dollar earned. The rate would be very low for the bottom tier of workers but there would be universal participation which in my opinion is a healthy thing.

Kenneth Silber said...

There are pros and cons to all these tax ideas. A downside to an any income tax is that it penalizes people for saving (since you pay tax when you earn the money and when it accumulates interest or dividends).

A downside of a flat (income or consumption) tax is that it won't raise the revenues a progressive (income or consumption) tax, leaving aside debatable questions about fairness and giving everyone a stake in cost-effective government.

I've leaned toward some kind of progressive consumption tax, and in any case I think (as you suggest) phasing changes in to avoid shocks is a wise approach. But there will be always be big tradeoffs involved, and what comes out of the legislative sausage grinder is unlikely to be simple.

Ray Haupt said...

Like you say, the legislative sausage grinder will make things more difficult and what should be a simple sausage will likely transform to an unpalatable fat laden scrapple.

I can see advantages to consumption, flat, and progressive income taxes; and downsides to each as well.

I find I strongly dislike tax agencies and the congress acting as social agencies as they devise taxes in such a way as to reward or punish certain behaviors such as home purchase, gambling, and smoking. Even rewarding and punishing economic classes via the progressive income tax is irritating but likely unavoidable as a practical matter.