Archive for the ‘Flat Tax’ Category

Since it is tax-filing season and we all want to honor our wonderful tax system, let’s go into the archives and show this video from last year about the onerous compliance costs of the internal revenue code.

Narrated by Hiwa Alaghebandian of the American Enterprise Institute, the mini-documentary explains how needless complexity creates an added burden – sort of like a hidden tax that we pay for the supposed privilege of paying taxes.

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If you go to the IRS website, there are about one thousand forms (and accompanying material such as instruction documents) that you can download.

Fortunately, most of us only have to worry about a small fraction of what’s on that list, but it’s still a nightmare – and one that gets worse every year because politicians have an endless appetite for manipulating our lives and auctioning off new loopholes for campaign cash.

So let’s take a few minutes to review the features of a tax system that is simple and fair (and pro-growth). I’m talking about the flat tax, which now is successfully working in about 30 nations.

Just a quick caveat for my friends who prefer the national sales tax. Yes, that system also would be a vast improvement. But since the Fair Tax or something like that would require a constitutional amendment to ensure that politicians couldn’t impose both a sales tax and income tax, that’s more of a long-term project.

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General Electric has received a lot of unwelcome attention for paying zero federal income tax in 2010, even though it reported $5.1 billion in U.S. profits. This is a good news-bad news situation.

The good news is that GE’s clever tax planning deprived the government of revenue. And I’m in favor of just about anything that reduces the amount of money that winds up in the hands of the most corrupt and least competent people in America (a.k.a., the political class in Washington).

The bad news, though, is that politicians can engage in borrow-and-spend vote-buying behavior, so depriving them of revenue doesn’t seem to have much impact on the overall burden of government spending.

Moreover, there are good ways to cut taxes and not-so-good ways to cut taxes. Special loopholes for politically powerful companies and well-connected insiders are unfair, corrupt, and inefficient.And I’ve already written about GE’s distasteful track record of getting in bed with politicians in exchange for grubby favors.

Ideally, we should junk the corrupt internal revenue code (and the corporate side of the tax code makes the personal tax code seem simple by comparison) and replace it with a simple and transparent system such as the flat tax.

That way, all income would be taxed since loopholes would be abolished, but there would be a very low tax rate and no double taxation.

Tim Carney of the Washington Examiner is one of the best economic and policy journalists on the scene today, and this excerpt from his column explains what is right and wrong about GE’s tax bill.

GE allocates hundreds of talented minds to attempts at lowering taxes. I don’t blame GE for that. It’s probably worth it — which is exactly the problem. In a world with a simpler tax code — or better yet, with no corporate income tax — GE would spend those resources creating something of value. Again, this is a case where government creates a chasm between what’s profitable (gaming tax law) and what’s valuable for society. Also, this story demonstrates once again how Big Government hurts small business much more than it affects Big Business, which can afford to figure out a way around taxes.

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One of my many frustrations of working in Washington is dealing with perpetual-motion-machine assertions. The classic example is Keynesian economics, which is based on the notion that you magically create additional economic activity by having the government spend money instead of allowing the private sector to decide how it gets spent (in an especially bizarre display of this thinking, Nancy Pelosi actually said that subsidizing unemployment was the best way to create jobs).

Another example of this backwards analysis can be found in the debate over the IRS budget. The President is resisting a GOP proposal to modestly trim the IRS’s gargantuan $12.5 billion budget and his argument is that we should actually boost funding for the tax collection bureaucracy since that will mean more IRS agents squeezing more money out of more taxpayers.

Here are some excerpts from an Associated Press report about the controversy.

Every dollar the Internal Revenue Service spends for audits, liens and seizing property from tax cheats brings in more than $10, a rate of return so good the Obama administration wants to boost the agency’s budget.House Republicans, seeing the heavy hand of a too-big government, beg to differ. They’ve already voted to cut the IRS budget by $600 million this year and want bigger cuts in 2012. …IRS Commissioner Doug Shulman told the committee Tuesday that the $600 million cut in this year’s budget would result in the IRS collecting $4 billion less through tax enforcement programs. The Democrat-controlled Senate is unlikely to pass a budget cut that big. But given the political climate on Capitol Hill, Obama’s plan to increase IRS spending is unlikely to pass, either. Obama has already increased the IRS budget by 10 percent since he took office, to nearly $12.5 billion. The president’s budget proposal for 2012 would increase IRS spending by an additional 9 percent — adding 5,100 employees. …Obama’s 2012 budget proposal for the IRS includes $473 million and 1,269 new positions to start implementing the health care law.

Unlike Keynesian economics, there actually is some truth to Obama’s position. The fantasy estimate of $10 of new revenue for every $1 spent on additional bureaucrats is clearly ludicrous, but it is equally obvious that many Americans would send less money to Washington if they didn’t have to worry about a coercive and powerful tax-collection bureaucracy that had the power to throw them in jail.

This is an empirical question, at least with regards to the narrow issue of whether more IRS agents “pay for themselves” by shaking down sufficient numbers of taxpayers. Reducing the number of IRS bureaucrats by 90 percent, from about 100,000 to 10,000, for instance, surely would be a net loss to the government since the money saved on IRS compensation would be trivial compared to the loss of tax revenue.

But that doesn’t mean that a reduction of 10,000 or 20,000 also would lead to a net loss. And it certainly does not mean that adding 10,000 or 20,000 more IRS agents will result in enough new revenue to compensate for the salaries and benefits of a bigger bureaucracy. Even left-wing economists presumably understand the concept of diminishing returns.

But let’s assume that the White House is correct and that more IRS agents would be a net plus from the government’s perspective. The Administration would like us to reflexively endorse a bigger and more aggressive IRS, but public policy should not be based on what is a “net plus” for the government.

There are two ways to promote better tax compliance. The Obama approach, as we’ve read above, is to expand the size and power of the IRS. Up to a point, this policy can be “successful” in extracting additional money from the productive sector of the economy.

The alternative approach, by contrast, seeks better compliance by lowering tax rates and reforming/simplifying tax systems. This course of action boosts compliance by making evasion and avoidance less attractive. People are much less likely to cheat if the government isn’t being too greedy, and they’re also more likely to comply if they think there is less waste, fraud, corruption, and favoritism in the tax code.

Let’s now put this discussion in context. Obama wants more IRS agents in large part to enforce his new scheme for government-run healthcare. Yet that’s a perfect example of what I modestly call Mitchell’s Law – politicians doing one bad thing (expanding the IRS) only because they did another bad thing (enacting a health care bill that made the tax code even more convoluted and punitive).

So instead of making the IRS bigger in response to a bad healthcare law, why not repeal that bad law and shrink the size of the IRS? Even better, why not junk the entire tax code so we can replace the IRS with a system that is honest and fair?

And if these big steps are not immediately feasible, at least cut the IRS budget so that awful laws are enforced in a less destructive manner.

This Center for Freedom and Prosperity video has additional details about the national nightmare we call the IRS.

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I spoke at the Tea Party Patriots convention earlier today. Great people, great crowd.

My job was to debate on the side of the flat tax over the fair tax. Several people asked for more information, and I promised to put this video on the blog. Long-time readers probably will have seen it before, but it’s always good to be reminded why we need tax reform – and also reminded why we can’t trust politicians with a new source of revenue.

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In an interview with the Wall Street Journal, Clint Eastwood is asked about the new governor of California and uses the opportunity to advocate a simple and fair flat tax.

“But I’ll tell you when I liked him—and I wasn’t a registered Democrat—but I liked him when he was running for president [in 1992] on the flat tax. . . . A ton of economists, both liberal and conservative, have argued for a flat tax, but nobody’s ever had the nerve to do it. . . . It would simplify things, but simplification doesn’t seem to be in the human psyche.”

It’s always good to get endorsements from the right kind of celebrities. Years ago, the nation’s most infamous shock jock, Howard Stern, praised the flat tax. I used to listen to Stern every day, so that was a win-win situation from my perspective, but I realized that he wasn’t universally admired.

Clint Eastwood isn’t nearly as controversial, so perhaps he can be the public face of tax reform. Actually, maybe he’s the actor who should have been governor of California. Unlike Schwarzenegger, he would have known how to deal with greedy special interest groups.

I’m no Dirty Harry, so I can only push for a flat tax with words.

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Republicans did a terrible job last time they were in power. The created a new entitlement program for prescription drugs. They further centralized education with the no-bureaucrat-left-behind legislation. They undid the positive reforms of the 1990s with central-planning subsidies and controls for agriculture. And they became earmark junkies as part of their votes to massively increase the burden of government spending.

Republicans say they’ve learned their lessons, and I’m sure many of the new Tea Party-oriented members genuinely want to expand freedom and prosperity for the American people, but it’s always wise to be skeptical when dealing with politicians.

If the GOPers really want to do the right thing and demonstrate their new-found commitment to liberty and sound governance, they should make – and keep – the following New Year’s resolutions. To keep it simple, realistic, and achievable, we have only six resolutions. Three resolutions deal with public policy and three resolutions are about resisting the seductive corruption that is so ubiquitous on Capitol Hill.

The three policy resolutions list things that House Republicans could adopt. That doesn’t mean they will make it through the Senate or get approved by the President. These are ideas that Republicans can pursue to show they are serious about doing what’s right for the country.

1. Limit the overall growth of government spending. America is in a fiscal mess because federal government spending has more than doubled since Bill Clinton left office. Bush was a big spender. Obama is a big spender. And Republicans and Democrats on Capitol Hill have been big spenders. Now that we’re in a deep hole, the first imperative is to stop digging. It would be nice to actually cut spending, but simply limiting the annual growth of federal spending so that it grows no faster than inflation would yield very good results. The key to fiscal responsibility is making sure the productive sector of the economy grows faster than the burden of government spending.

2. Repeal Obamacare, but understand that much more needs to happen to fix the health care system. It is a certainty that the House GOP will vote to repeal Obamacare as one of their first acts, but that will be a symbolic step since Harry Reid’s Senate obviously won’t consider such a step. Republicans, however, can use the discussion as an opportunity to educate themselves and the American people about how government intervention crippled the healthcare system even before Obamacare was enacted.

3. Push for real tax reform by lowering tax rates and curtailing tax distortions. One of the pleasant surprises of 2010 was the decision, by both Obama’s Fiscal Commission and the Domenici-Rivlin Task Force, to endorse lower tax rates and fewer tax loopholes. Both groups also wanted a higher tax burden, so the overall packages were not acceptable, but it nonetheless is remarkable that they rejected Obama’s approach of class-warfare taxation based on higher tax rates. Surely the House GOP can take the good parts of those plans and push even farther and take a big step toward a flat tax.

Most of us understandably pay attention to the big policy issues, such as the ones covered by the three previous resolutions. But if we want better policy, it’s also important to change the culture on Capitol Hill. If Republicans abide by these three resolutions, they would be comparatively immune to the routine corruption that is so common in Washington.

1. Don’t succumb to bribery by accepting campaign cash to push policies that hurt America. It’s not against the law to get contributions in exchange for earmarks and other special-interest favors, but it would be criminal behavior anyplace other than Washington. An overwhelming percentage of lawmakers presumably know that things such as ethanol subsidies are terrible public policy, but they get enacted because the agribusiness industry doles out contributions to politicians from both parties. The same is true of earmarks. If the GOP swore off this corrupt process, the result would be better policy.

2. Don’t put the interests of your committee above the interests of the nation. It is very common for lawmakers to strongly identify with the committees on which they sit. This is why Republican appropriators often side with Democrats to defend earmarks and other types of wasteful spending. Similarly, Republicans on the committee dealing with education are more likely to be bad on that issue than other members of the GOP caucus. And Republicans on the transportation committee are worse on those issues than their colleagues. Committee term limits would help, but the only permanent solution is for attitudes to change.

3. Take the Constitution seriously. Members of Congress take an oath of office to uphold the Constitution, and the GOP specifically has announced that they want all legislation to include an explanation of why it is consistent with the Constitution. That’s great news, but only if Republicans are serious. But does anyone think that the GOP is ready to bar any legislation funding the Departments of Education, Energy, Agriculture, and Housing and Urban Development? None of these bureaucracies should exist according to the Constitution. So if the GOP is going to do its job, they need to treat the Constitution as more than a political talking point

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