Fellows with Friedman
In a Wall Street Journal op-ed, “America Needs an Alternative Maximum Tax,” John Cochrane proposes a new kind of tax that caps the amount that people would pay in taxes to prevent indefinite tax-rate hikes. He asks, “How much is the most anyone should have to pay? When do taxes indisputably start to harm the economy and produce less revenue—when government takes 50% of people's income? 60%? 70%?” If there is a maximum amount that an individual pays, then once past that cap they wouldn’t pay any further federal income tax for that year.
Cochrane breaks down the ideal tax structure in his article “Here’s What Genuine Tax Reform Looks Like.” He argues that the first goal of taxation is to raise the necessary amount of government revenue while causing the minimum of economic damage. The best way to achieve this is by simplifying the tax code. He explains that simplification is more important than rates, because “a simple code would allow people and businesses to spend more time and resources on productive activities and less on attorneys and accountants, or on lobbyists seeking special deals and subsidies.” A simpler tax code with therefore be inherently fairer than the complex system currently in place.
In this interview on the Area 45podcast, Cochrane analyzes President Trump’s economic policies discussed in the 2019 State of the Union address and Democrats’ wealth redistribution proposals, and whether they constitute sound economic policies. He breaks down why a wealth tax is not the “economic justice” solution that some politicians promise it to be. He explains how wealth redistribution does not incentivize or stimulate economic growth. He argues that the best form of economic justice is free-market capitalism.
Check out Michael Boskin’s Wall Street Journal op-ed “Get Ready for a 70% Marginal Tax Rate,” in which he states that two problems arise when marginal tax rates are increased. He contends that economics has proven, first, that higher marginal tax rates cause real economic harm, and, second, that as rates increase, the tax base shrinks to the point where it further reduces revenue. Ultimately, a marginal tax rate of 70% will cause more harm for the federal economy. He argues, “Nobody—rich, middle-income, or poor—can afford to have the economy so burdened.”
Read Boskin’s essay “How to Think about Taxes,” where he proposes a consumption-based tax instead of the current tax system, which punishes saving. He argues that the current system taxes savings anywhere between one to four times, depending on where an individual houses them. Instead, he proposes a flat tax on consumption to simplify the tax system and reduce the punishment for investing savings.
David Henderson analyzes why higher tax rates make for poor economic policy in his article “The Case against Higher Tax Rates.” He breaks down why economists tend to oppose high marginal tax rates, because of deadweight loss: deadweight loss is caused by people trying to avoid taxes by working and investing less, which leads to slower economic growth. This type of tax system “gives people an incentive to do something that they would not have chosen to do at a lower tax rate.”
Read Henderson’s essay “Income Inequality Isn’t the Problem,” in which he argues against the idea that alleviating poverty requires a substantial reduction in inequality. He says that “inequality of income and wealth can remain high or even increase while poverty is decreasing.” He analyzes economic inequality and if there are different kinds of inequality both bad and good and if it is a good idea to tax the top end more heavily. He argues that we need more innovators and inventors whose “success increases wealth inequality a little but also improves the well-being of tens of millions of people who are less wealthy.”
Watch this interview with Thomas Sowell discussing his essay “‘Trickle Down’ Theory and ‘Tax Cuts for the Rich.’” According to Sowell, US history shows that in its first 150 years, the government did not intervene during economic downturns and that the downturns all corrected themselves. The economy does not need government intervention, because it has recuperative powers. This means that high tax rates on the wealthy are unnecessary, as they will end up causing more harm by disincentivizing people to participate in the economy.
Read Sowell’s essay “‘Trickle Down’ Theory and ‘Tax Cuts for the Rich’,” in which he argues against the increase of tax rates on the wealthy and demonstrates that in the 1980s, when President Reagan reduced tax rates for the wealthy, higher-income taxpayers ended up paying more tax revenues into the federal treasury than under the higher tax rates, and that they continued to pay a higher percentage of tax revenues going forward. Therefore, raising tax rates for the wealthy does not mean that revenue will increase or that inequality will truly decrease.
In a two-part essay series, Richard Epstein discusses Senator Elizabeth Warren’s proposal for an annual wealth tax of two percent for ultra-rich families, and why it’s unconstitutional and not economically viable. In the first article, “Elizabeth Warren’s Unconstitutional Wealth Grab,” he breaks down the constitutionality of Warren’s wealth-tax proposal, explaining how her policy mandates greater income equality by leveling down the wealthy. The second article, “The Toxic Warren Wealth Tax,” breaks down the soundness of the economic policy behind her proposal. He argues that it’s not clear why we should worry about inequality of income or wealth, especially since the gap between the top and those further down is shrinking.
Check out Epstein’s article “We Need a Real Flat Tax,” in which he argues, “The challenge for the defender of limited government is to find that set of taxes that minimizes the distortions of a market economy while generating revenue to accomplish government’s necessary and proper goals.” He proposes a two-pronged approach, where the government imposes user fees to defray the costs of public services (like highway tolls) and a flat tax proportionate to either income or consumption. He argues that the flat tax “allows the government to set the overall levels of revenue as high or as low as seems necessary, without inviting various factions to game the system for partisan advantage.”
Read “Death by Wealth Tax” by Epstein, where he writes, “The country’s preoccupation with income inequality has become the fount of many bad ideas.” He contends that any attacks on the inequality of wealth fail to see that the hard work that improves the wealth of one individual, without reducing the wealth of anyone else, should be considered good for society. The wealth redistribution proposals are too comfortable with leveling down everyone at the top of the curve, rather than trying to increase the wealth of everyone from the bottom up.
In Epstein’s article “We Need Flatter Taxes, Cleaner Rules,” he argues that “the sole source of general revenues should come from a flat tax, preferably on consumption and not income.” He contends that low flat taxes stimulate economic activity and work to eliminate the strategies used by taxpayers to avoid paying taxes by dividing their income among various entities like trusts, foundations, and family partnerships. He also argues that flatter taxes would reduce administrative costs for the Internal Revenue Service.
Alvin Rabushka and Robert E. Hall
Read the definitive work by Robert E. Hall and Alvin Rabushka, The Flat Tax, where they set forth their flat-tax plan, first proposed in 1981. The flat tax is intended to simplify the federal tax system by replacing the progressive income tax with a low and simple flat tax. Hall and Rabuskha argue that the flat tax is the most fair, efficient, simple, and workable tax plan. Eliminating progressive income taxes and implementing a flat tax would simplify taxes so much that individuals and businesses could file using a single postcard.
Check out Alvin Rabushka’s blog, Flat Tax, where he writes yearly updates of the adoption rates of the flat-tax plan around the world. He shows how some countries have maintained the flat tax after implementing it and breaks down the new rates adopted by other countries that are replacing flat taxes with two or more rate tiers. He also discusses meeting with various political leaders around the world to advise on their flat-tax plan proposals.
In the interview “An Economist’s Economist” with Robert E. Hall he discusses their flat-tax plan and why it’s gained relatively little traction in the United States, compared to other countries. He argues that very few countries have implemented a true flat tax, as most of its supposed adopters also feature a high value-added tax. This combination of taxes doesn’t produce the low rates that Hall and Rabushka claimed in their proposal would drive economic growth. Hall argues that there is an poorly conceived idea that taxing high incomes will generate all the revenue a country needs without examining the problems those high tax rates create.
Read Rabushka’s article “Could a Degressive Tax Be Better Than a Flat Tax?,” in which he argues that the current US income-tax system disincentivizes citizens to work, save, and invest. He proposes a degressive tax system where the higher one’s income, the lower one’s marginal rate. He argues that a degressive tax rate is a true incentive-based tax system, as it encourages people to work harder to earn more and therefore pay a lower tax rate. This could boost a faltering economy by incentivizing the growth of wealth.
Rabushka’s silver-anniversary follow-up to The Flat Tax dives in to the first 25 years of the flat tax and how it’s been most successfully applied in US state capitals and in countries outside of North America. He analyzes the various flat-tax proposals around the world and how successful they have been in each of those places. He argues for more states to adopt optional flat taxes in order to breathe new life into a movement to establish a federal flat tax at a rate of 19%, or even lower.
Read “Prospects for Tax Reform,” in which Rabushka argues for a federal tax overhaul to lower taxes. He argues that rising tax burdens “have historically fueled tax revolts,” that they foster growing resentment of the Internal Revenue Service, and that the public believes the tax system is too complicated and unfair. Rabushka proposes these three arguments as the best reasons for reducing the federal tax rates. It is difficult, he argues, for Americans to get riled up about the tax system during great prosperity, and instead a major overhaul of the federal income tax will need to come at a time when the public support is at its greatest.