Flat Tax would lower the incentive to avoid paying taxes

The Flat Tax would lower the incentive to avoid paying taxes to the government. Then it seems that those who complain about all the  Washington influence-peddling and lobbying  should support the Flat Tax. Max Brantley of the Arkansas Times complains probably the most but there is no way he would favor trying to lesson the problem with a Flat Tax.

I’ve been very critical of Obama’s class-warfare ideology because it leads to bad fiscal policy. But perhaps it is time to give some attention to other arguments against high tax rates.

Robert Samuelson, a columnist for the Washington Post, has a very important insight about tax rates and sleaze in Washington.

His column is mostly about Obama’s anti-tax reform agenda, but it includes this very important passage.

…many politicians support tax breaks for favored groups (the elderly, the poor, small business) and causes (homeownership, attending college, “green” industries). This enhances their power. The man who really pronounced the death sentence for the Tax Reform Act of 1986 was Bill Clinton, who increased the top rate to 39.6 percent rather than broadening the base. As the top rate rose, so did the value of generating new tax breaks. Ironically, many of the people who complain the loudest about Washington influence-peddling and lobbying are the same people who support higher tax rates, which stimulate more influence-peddling and lobbying.

The last sentence is key. Higher tax rates are good news for the politicians, interest groups, bureaucrats, and lobbyists that dominate Washington.

Here’s a simple example. Let’s pretend we have a modest tax rate of 20 percent. Now imagine you are part of an industry with $200 million in profits and you want a special tax break. How much are you willing to pay to get that loophole?

Well, with a 20 percent tax, the most you can save (assuming the loophole is huge and you wipe out all your tax liability) is $40 million.

So how much would you spend on lobbyists, campaign contributions, etc, in order to get that loophole? That’s hard to answer, because it would require some estimate of the probability of success. But one thing we can safely assume is that the industry would never spend more than $40 million.

But let’s now assume you live in a world with 50 percent tax rates. Does that change the incentive for influence peddling in Washington? Of course it does. The industry’s tax bill is now $100 million, so it now has an incentive to spend up to that amount to get special treatment.

So now let’s consider a couple of additional hypothetical questions.

  • First, imagine you’re a lobbyist. Do you think you will get more business if tax rates are high, or if tax rates are low?
  • Second, imagine you are a politician. Do you think you will get more campaign contributions if tax rates are high, or if tax rates are low?

The answers are obvious, and so are the implications. Yes, higher tax rates are bad for growth and competitiveness. And, yes, they are unfair and discriminatory.

But they also foment and encourage sleaze in D.C., and that’s something that honest leftists should hate as much as the rest of us.

For more information, here’s my video on the link between big government and corruption, including a section on how a loophole-ridden tax system benefits Washington insiders.

The Flat Tax: How it Works and Why it is Good for America

Both videos have good information (at least I like to think), but kudos to Samuelson for drawing an important link between high tax rates and corruption.

P.S. Robert Samuelson is hard to pin down on the philosophical spectrum. He’s written very good columns denouncing Obama’s manipulation of welfare statistics and criticizing the President’s flirtation with the value-added tax. But he’s also had a couple of columns where he identifies a very real problem, but fails to reach the right conclusion, including this piece that should have been an argument for Austrian economics and this piece on health care inefficiency that should have pinned the blame on third-party payer.

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