Wednesday, February 11, 2004

Flat Tax breakdown

There is no reason for our tax system to be as complicated as it is. This causes loopholes that only rich people can exploit no matter what elected officials do.

If you haven’t figured it out yet, both previous sentences are wrong. What’s interesting about the above argument is how commonly this belief is held amongst conservatives. I’ve had to argue against it more than once. So, as a public service to moderates and liberals everywhere, let’s look at each claim individually.

Is there any reason to have a tax system so complicated? Short answer: Yes. Long Answer: Yes, sadly. Economics teaches us that taxes distort markets, almost always by making them less efficient. This can’t be helped since the government has to provide certain services for the economy to even work. The best the government can hope for is to levy taxes in such a way that the society benefits from the market distortions.

Case in point: Let’s say that there is no tax on catching tuna and they are close to dieing out. In a real sense, the fish left are infinitely more valuable as breeders than as sandwiches (even for the tuna fish sandwich eating population). The problem is that instead of valuing them correctly, the market asks of the fishermen only the amount they spend catching the fish. In effect, owner of the supply, US citizens, are not asking a good price for the fish they are selling. A tax on fish will fix this.

Although most tax issues aren’t as clear cut as this, most of the complexity of our tax system comes from trying to use taxes to properly value socialized ills. For example, the 401k tax program is designed to counter people’s natural difficulty with saving for their future. In fact, most of the complexity in our tax system comes from special breaks for people who deserve them. I’m not arguing that our current system is good. Far from it, it fails in the essential goal of financing the government. But it would be foolish to think that the best system would be any simpler.

The second point is even dumber: that the loopholes in our system are due to its complexity. Enron didn’t pay taxes for four years not because they hired particularly good accountants, but because they hired particularly powerful politicians. The loopholes are written specifically with tax evasion in mind. Why do European companies pay more taxes than US ones? It’s not because European companies are lead by altruistic philosopher kings. Republicans love corporate welfare and Democrats love agricultural subsidies (and ethanol, shamefully). But to think that they will suddenly sit up and be good because we passed some kind of flat tax is silly.

Not all conservatives believe in silly ideas about flat tax, but a lot of them do. Next time you run into one of these guys, have some with ‘em.


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