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.
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.”
In “We Need a Real Flat Tax,” Epstein 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 contends 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.”