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John Cochrane on Why a Complicated Tax Code Leads to Negative Outcomes

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Published: July 24, 2019

In order to raise the necessary revenue for the government with minimal damage to the economy, we should lower marginal rates, broaden the base, and simplify the tax code. With a simple, clear system, we not only can raise revenue but also increase productivity and work.

Additional Resources

  • Listen as John Cochrane weighs in on the economy. Available here
  • Watch “Why Tax Rates Matter More Than Taxes,” available here.
  • Watch “Office Hours: John Cochrane On Economic Growth,” available here.
  • Read John Cochrane’s blog post, “Economists and Taxes,” available here.
  • Listen as John Cochrane discusses his blog post "Economists and Taxes," available here.
View Transcript

How do we raise the most revenue for the government with minimal damage to the economy? 

Economics has an answer – we want the lowest possible marginal rates, and the broadest base, and the tax code should be very simple. 

Now, “Marginal rates” matter – the extra tax you pay on each extra dollar you earn. 

The greater that marginal rate, the lower the incentive to work, save, invest, go to school, start a business, and so on. 

A bad tax system pretends to have high marginal rates, but then there’s lots of deductions and exclusions and special cases, so people don’t really end up paying high taxes. 

You have a haven for tax lawyers, lobbyists, accountants and politicians who can dole out favors to friends while pretending to “tax the rich”. 

To raise revenue then we want a simple, clear system, so people spend their time productively, not gaming the tax code. 

The economics answer is simple. 

The political question is how can we get to such a massively simplified system, oriented towards economic growth?