Customer Reviews

The Flat Tax: Updated Revised Edition (HOOVER INST PRESS PUBLICATION)

5 star:		(2)
4 star:		(2)
3 star:		(0)
2 star:		(1)
1 star:		(0)

 

 

I'm not going to debate the merits or failings of the flat tax in this review. A book review is too short for that. The question is did this book clearly explain what the flat tax is, how it will work, what the authors believe the benefits are and the logic behind their arguments? Yes to all the above. Whether or not you think you'll agree, or whether or not you end up agreeing is beside the point. The flat tax is a suggested tax reform and if your interested in tax reform this is a great book to understand the nuts and bolts of the flat tax that many of the flat-tax proponents are supporting. If you read this, you will understand what is being debated when the flat tax is being discussed.

The title of this book is not quite accurate. Hall and Rabushka want flat and simple taxes. They want to flatten out rates and simplify, well eliminate the maze of complex exemptions in the existing tax code. What we have here is a point by point explanation of a program for scrapping the tax code, followed by a useful Q+A section.

Some of their claims regarding their reforms are a bit exaggerated. For example, the claim that "every study we can find shows that lower tax rates on businesses and employees increases the supply of labor, capital, and entrepreneurship". As an economist I agree with their conclusions, but there are some studies, albeit faulty ones, that contradict the above argument. Professional opinion is not uniform.

The flat tax is an idea that is good economic policy, but bad politics. Our current tax system does detract from economic development. There is no economic justification for collecting taxes through such a complex code. Our tax code is maintained in part by certain special interest groups (tax accountants and tax attorneys) and the politicians who they pay off (Democrats). There is little we can do to reason with people who are feeding off of the tax compliance industry. They are on the take and will not listen to reason.

Our tax code is further maintained by rank and file Democrats who believe that we can achieve some sort of `social justice' through the tax code. These persons are not bought off, and some of them will listen to reason. This is how we can get rid of the tax code: by shifting public opinion. If enough people come to see the tax code for what it really is, then the political balance will shift against the tax compliance industry. There was a serious drive to scrap the tax code in the mid 1990's, which Clinton blocked.

Scraping the tax code would not lead to Nirvana, but it is good policy. Scrapping the tax code would also do justice upon those who have been leeching off the rest of us all our lives. The accountants and lawyers who make money off the tax code are parasites. Scrapping the tax code would ruin many of them, financially, and they deserve at least that. I should be clear that this last remark was a moral/political/personal statement, not a professional economic opinion. The Flat Tax is an important book because it can have an impact on public opinion. It can be a part of scrapping the tax code.

The 60,000 page tax code itself is the issue, not another tweak or incentive in the way of tax rates, credits, deductions, or what not. The uber rich (including Warren B and Bill G) pay VERY LITTLE as it stands now because of how the code protects those who have concentrated, inherited, or sudden wealth. For just one example, just set up a qualified multigenerational family foundation, put a big chunk of appreciated stock in it, and you avoid the majority of capital gains, income, and even estate tax - forever! The world of trusts and foundations is murky to most people, and the truly rich (as opposed to very high income workers/business owners - VERY different people) depend on your ignorance of how the code really works to perpetuate class warfare that in the end will leave them right where they are. Yes, it's the new American Aristocracy.

The only real answer to spur the economy and solve the deficit at the same time is a true flat tax with no or extremely limited deductions, with the first $40K (or whatever a living wage is) non-taxable for everyone.
Fair? Yes. Progressive versus what actually exists in practice today? Absolutely.

I laughed and cried when I read of Warren Buffett's recent plea to raise income tax rates for the super rich. I'm not sure Warren would like a truly flat tax as it would actually touch him. Put another way, raising the top bracket to 50% or so still wouldn't really affect him, since his 'income' is for the most part sheltered and never shows. Do the math with me - WB's $6.7M tax bill last year divided by his liquid net worth works out to about .1%, not the 'only 17%' (?!) of his income that he claims in his op-ed. Most of his net worth has not been and will not ever be taxed under the current code. Buffett's statements about the rich paying their fair share yesterday were intellectually dishonest in my opinion.

Read this classic if you actually want to be informed on this issue - they've covered all the objections you can think of, and more. Anything that Jerry Brown and Ronald Reagan agreed on might be worth a look.
Now, if only someone somewhere had the charisma and political will to actually pull such a thing off, given that legions of lobbyists, CPAs, bankers, investment advisors, etc. etc. etc. would do everything they could possibly do to kill any such reform since it would negatively affect their businesses.

I've assumed, perhaps arrogantly, that I understood what the advocates of a "flat tax" - Steve Forbes and others - were proposing, but I finally decided to skim over this classic starting-point of the discussion. And guess what? They're proposing just what I feared, a regressive $$% on all "income."
The discussion is not really so new, of course. Methods of taxation were discussed and experiments aplenty were conducted in the 19th C, especially during the Civil War. The same ardent plus and minuses were enumerated. Old Solomon was right: There's nothing new under the Sun.
But some of the more reasonable thinkers of that remote Civil War era, notably Conressman Justin Morrill of Vermont, had interesting ideas, including a "flat tax" on property. This was vehemently opposed by some as "confiscation" and by others as unfair to farmers. The former were indubitably correct; taxation is confiscation of wealth, but then isn't wealth is confiscation of well-being? The latter objection, that of land owners, was also correct, but only because the thinking of the era was limited to the recognition of property as land and perhaps improvements on the land. But how about a modern "flat tax" of $$% on all kinds of property except perishables - land, improvements, stocks and bonds, intangible business assets, art collections, appreciable goods, etc. Sure it might be hard to assess and collect, but it couldn't be any harder than the current income tax mess. And how could anyone call such a tax unfair?

It's hard to believe this idea has been around so long, and we still don't have it! It's simply the fairest, simplest, most efficient, and workable plan yet proposed! Read about it, legislate, and maybe we won't have to waste 2 weekends a year on that pesky 1040.