CalJunket

Monday, October 10, 2005

Nowhere to go but up

Linked to from Andrew Sullivan today is this startling news: Adopting a flat tax (i.e. raising taxes on regular people and lowering them on the rich) leads to explosive growth!
I believe this is one of the biggest pieces of economic news ever. Milton Friedman's single-postcard flat-tax idea has finally started catching on (ten Eastern European countries, with four more in Europe close to adoption). 2004 GDP growth rates there averaged a staggering 8%, well over twice the industrialized nations' average of 3.4%. Of course these flat-tax rates vary widely, from 12-33%. Among the six lowest-taxed countries, growth rates are the highest: 8.6%. The lowest-taxed three have 9.5% growth.
Wow, that really is amazing! Clearly this person has not only discovered something about economics but he has also discovered that correlation equals causation. How else to explain the wild leaps of faith required to come to his conclusion. Poor countries, especially those joining the capitalist world for the first time, are due for high growth regardless of what silly tax policies they adopt. Just look at India and China.

Ah the flat tax. You know, the rich are always the eternal enemies of capitalism. They not only stand to gain personally from its disruption, but unlike stoned-out hippies, they have the means to affect it. The flat tax is the latest attack on the American capitalistic system. It’s yet another way to shift tax responsibilities from the rich onto regular folk while simultaneously eroding the funding for the governmental structures which keep capitalism alive. Sometimes I wish the flat tax would actually be implemented for a month. The public revulsion would be so strong and so immediate that whole elitist Libertarian structure would be overturned in a fortnight like shaking off a bad dream.

Now I’m just getting dark.

Update: Via Brad Plumber comes more information on the "Flat Earth Flat Tax". I think he's being unfair: Flat Earthers' beliefs are inconsequential. Flat Taxer's would pretty much ruin America.

Update: The orignal poster has retracted a bit of what he said here. Hat's off to him I say. If his tax preferences are a little eccentric, he is at least honest about the facts on the ground.



Comments:

Perhaps we should enable a flat tax. The rich, as it is, don't pay very much in taxes based upon their deductions. Besides Americans who are not paying taxes right now, we should adopt a 15% across the board tax with no way out of paying one's fair share except to charitable organizations.

From there, it's easy to raise or lower the tax rate. Instead of squabbling over which bracket should get an increase or decrease, taxes will be raised and lowered accordingly.
 
Conservatives often seem intent on convincing us that no matter how hard we try those sneaky rich people and their lawyers will always find ways to get out of paying their taxes. As it is, even with America’s current hobbled system, rich people *do* pay a larger percentage of their income. In Europe, they manage to set and collect very progressive taxes. They haven’t accomplished this by outlawing lawyers: They did it by setting taxation at an appropriate level and enforcing it appropriately.

That’s what Europe teaches us. Lawyers aren’t magical beings who manage to find loopholes in anything: the loopholes are put there. And they weren’t put there by just anyone. They were put there by Republicans. This isn’t to say that Democrats are lily white saints, but Republicans have set new standards for inserting loopholes into law. It got so bad that Newt Gingrich himself stopped Clinton from adequately funding the IRS so that they couldn’t prosecute rich Tax Cheats. (That fact that the IRS would have made the money back with some profit didn’t even phase him).

So the flat tax plan says basically: Politicians can’t be trusted with setting taxes and not messing with them so the solution is to have politicians set taxes this way and then not mess with them. Yeah, that’s an awesome plan, DTI. Hey, I have a plan for how to catch a badger:

1. Catch a badger.
2. Ask it how best to catch a badger.

That’s genius.
 
Another part of Friedman's idea was the notion of a negative income tax. In other words, if you make below a certain amount, you will instead receive money from the government. But not so much as to discourage one's initative. The reasoning behind this is that if society decides that we're going to have a welfare state, we might as well do it in the most cost effective way possible. Much better to give direct aid than prop up BS government agencies. Unfortunately, the proponents of the welfare state have a vested and ideological interest in maintaining a huge government.

We should also consider other libertarian proposals such as a national sales tax in lieu of the income tax. However, fans of the "progressive" income tax oppose such innovative reforms because then they would no longer have the ideological satisfaction of punishing success and prosperity. That's what is all basically boils down to. Considerations regarding the welfare state are secondary. It's all about whether we should unfairly punish the rich or not.
 
PTR wrote, "We should also consider other libertarian proposals such as a national sales tax in lieu of the income tax. However, fans of the "progressive" income tax oppose such innovative reforms because then they would no longer have the ideological satisfaction of punishing success and prosperity. That's what is all basically boils down to. Considerations regarding the welfare state are secondary. It's all about whether we should unfairly punish the rich or not."

If that is so why is it that two of the richest people in the country (Bill Gates and Warren Buffett) dismiss libertarian and republican tax proposals and call for higher taxes on the wealthy. I submit it is because they know we all do best when people at the lower ends of the economic spectrum have the means to participate in the economy. They also know that once you reach a certain income level, it doesn't make a difference how much more you get. Successful people draw a lot more from their employment than money.

Also, under your logic why should people who inherit their wealth be treated the same as those who earn it?

It is no accident that the economy took off in the 1990s AFTER the Clinton tax increase of 1993, and has only managed to remain anemic despite the Bush tax cuts of 2001 and the subsequent heaviest borrowing in American history. The difference is that the Clinton economic programs ensured that as many as possible could participate, while the Bush administration's cut huge segments out (or at least lessen their ability to buy and sell). Under Clinton the economy (taxes, employment, GDP) grew at record rates (even before the bubble years of 1999-2000). In the Bush credit card and tax cut economy, the Stock Markets are still below where they were when Bush took office(the NASDAQ is 700 points below its value on 1-22-01, the S&P 500 is about 200 points below its value then, and the DOW is 300 points below); income tax receipts have declined every year that Bush has been in office (except for perhaps a slight increase for FY2004 over 2003), and the % of the population employed today is lower than it was when Bill Clinton took office in 1993 (the point at which it began to climb steadily to its peak in 2000).

Anyway, it is clear that a progressive economic policy under Clinton not only fostered success and prosperity at all levels, but the rapid move to Republican economics put us almost immediately back to the point we were when their implementors were last in power in 1992. Libertarian policies would take us even farther back (think the late 19th and early 20th centuries) to when we last had experience with them.
 
Dude, didn't you read TS's post? Correlation is not causation.

Libertarian policies aren't going to take us back through time. The world is slightly different now, and I'd expect that even if we had the same policies as some hundred-year-old example, we couldn't reasonably expect the same results.
 
If Bill Gates wants the rich to pay higher taxes, then maybe he should set an example by voluntarily paying more. I don't see why he would support such a thing, however, as his billions are probably being better spent through his private foundations that they would be through the government. In fact, anyone who supports higher taxes should practice what they preach and pay more. Some states have options on their tax forms where people can put in additional money, but hardly anyone ever does.

I can't believe that you're attributing the prosperity of the 90's to Clinton's tax increases. There are so many factors that it's foolish to say one thing caused it all. Technology reached new heights which in turn opened up new possibilities that directly or indirectly affected many sectors of the market. The Cold War had ended, which brought hopes of a new era of peace and prosperity. Likewise, market liberalization and globalization became the new focus, with NAFTA being one major example. Likewise, we can't point at Bush's tax cuts as the cause of the "economic downturn" (albeit with lower unemployment than in the 90's). Man made disasters (9/11), natural disasters (Katrina), growing competition for employment and resources from the developing world (China, India), etc.

Honestly, I'm not optimistic about America's future. On one hand, you have Bush and the Republicans who have reached their goal of surpassing the LBJ welfare state under the guise of "compassionate conservatism." On the other, you have left-wing Democrats who want their chance to do the same thing, and even one-up the Reps with universal health care and all sorts of crazy socialistic schemes. We're lucky that there are actually some nations out there willing to give economic liberty a chance. It's mighty interesting that countries once behind the Iron Curtain are the ones most enthusiastic about laissez-faire capitalism. If this country ever becomes a lost cause, at least there will be some places around the world where people still value freedom.
 
patr wrote, "I can't believe that you're attributing the prosperity of the 90's to Clinton's tax increases. There are so many factors that it's foolish to say one thing caused it all."

I'm not attributing it solely to Clinton's tax increase. If you read my post carefully, you'll notice I wrote, "The difference is that the Clinton economic programs ensured that as many as possible could participate...." His economic programs were not only the tax increase, but labor policy, shifting investment of government dollars from the military into the civilian sector, etc., etc. etc. But it was not only his economic policies, it was the their implementation.

While its true that causation is very difficult to prove, especially in non-scientific domains, the fact that demonstrable results returned to their pre-1993 trends as soon as the 1992 team came back on the field in 2001, is about as strong as the evidence can get.

One final statistic I just looked up (in addition to those I cited in my last post), the number of non-farm jobs has declined in each year of the GW Bush Presidency, after rising in each year of the Clinton Presidency, and falling in the last two years of the GHW Bush Presidency (the farthest back I could readily find numbers).
 
patr wrote, "Likewise, we can't point at Bush's tax cuts as the cause of the "economic downturn" (albeit with lower unemployment than in the 90's)."

That is just wrong. We don't have lower unemployment than in the 90s, it is higher. We have fewer nonfarm jobs, a lower percentage of the civilian population employed, and a higher number of discouraged workers (those who are no longer counted in the unemployment number because they stopped looking for work after being unable to find it). Even the unemployment rate which fell steadily from 5.6% in 1995 to 4% in 2000, began a climb in 2001 that ended at 6% in 2003. It fell slightly in 2004, but a good chunk of that fall is probably discouraged workers tiring of pursuing a falling number of jobs.
 
A national sales tax instead of an income tax? Besides being a libertarian wet dream, that's a patently absurd proposition. Not only would such an arrangement be regressive, in practice, you couldn't realistically raise enough money to replace the income tax.

In most states, you currently pay 5-10% in sales tax. To fund the federal government, that would have to be increased to something like 30-40%. Politically infeasible? Definitely. Fiscally unrealistic? Probably, since 35% is a pretty big incentive to cheat on your sales taxes. Indeed, such a system shifts the incentive to cheat away from a few of the wealthiest - who will be paying less as a proportion of their income - to the great bulk of people lower on the economic ladder, who are paying more to compensate for all of the wealth that's been rendered tax-exempt.

In the real world, countries that do use national sales taxes or value added taxes also use other taxes just like the ones we use.
 
Beetle wrote, "Libertarian policies aren't going to take us back through time. The world is slightly different now, and I'd expect that even if we had the same policies as some hundred-year-old example, we couldn't reasonably expect the same results."

The world is hugely different now, but human nature seems to be about the same. The fact that we've seen the same economic trends under Bush II as we saw under Bush I, after they were all reversed under Clinton is about as close as you're likely to get to evidence of causation in a society as complicated as ours.
 
By the way, for those who are interested, the statistics I've quoted come from the Statistical Abstract of the United States, the Labor and Earnings sections.
 
Patr, you seem to be confusing liberals with Stalinist communists again. It’s understandable for someone who listens to Rush Limbaugh all day, but I expect more from you. Take this:

“The reasoning behind this is that if society decides that we're going to have a welfare state, we might as well do it in the most cost effective way possible.”

You understand that liberals (and most non-liberal Americans) support the social safety net because we understand that the well-off have a greater responsibility, but you miss the biggest reason liberals support it. We support Social Security and Universal Health Care because it’s more efficient. So arguing with a liberal that direct reimbursements would be more efficient is silly.

“proponents of the welfare state have a vested and ideological interest in maintaining a huge government.”

Proponents of social responsibility have no vested in huge government. All things being equal we prefer the smallest government possible. Any good liberal will rail against farm subsidies and government waste. (We are the only ones who do anything about it.) And of course liberals are much stronger defenders of limited government in the realm of civil liberties than conservatives ever were (am I forgetting the libertarians? No I am not. They seem to forget civil liberties on election day and vote for Republicans anyways.) No, it’s clear that conservatives want more government in some areas (the bedroom, in libraries) and liberals want it in others (de-red-taping healthcare). Pretending otherwise is just slander.

“…fans of the "progressive" income tax oppose [national sales tax] because then they would no longer have the ideological satisfaction of punishing success and prosperity…”

You call progressive taxation a plan to punish the rich, I call a national sales tax a plan to punish the poor and merely ask of the rich what is due from them.
 
I would like to add one thing to Tommaso's list:

The fact that when the lives of people at the bottom of the economic ladder improves, we all benefit - not just them. The better off they are, the more money they spend on goods and services produced by those higher up the chain.

IMHO this is one of the biggest reasons for the economic boom of the Clinton years. His policies fostered jobs and incomes for many of the poor among. They spent the money they earned, and the economy flourished.

When the Bush II administration took office in 2001, they began to reverse the Clinton policies. Money that went to programs to help the poor was given away in his trillion dollar tax cuts. Guess what, not as much of it was spent, or it was spent less widely in the economy; and the economy began to contract. It has yet to really begin to grow again. By most economic measures, we are still back somewhere in the 90s.
 
I tested your argument and it proved compelling so I retract my original claim because it is based on inconclusive data. I ran the numbers on the non-flat tax countries of the former Soviet Union and there is only a slight ( 0.3%) advantage to the flat tax group. The entire post is here:

http://iris.org.il/blog/archives/422-IRIS-Exclusive-All-Flat-Tax-Countries-Experiencing-Explosive-Growth-Rates.html
 
No problem. It takes a big man to admit he was mistaken. Especially on a blog. Thanks for running the hard data and sticking to the science.

It is important for liberals and conservatives both to keep an open mind about better ways to stimulate broad economic growth. It's the main thing we all strive for, even if we often have seperate views on the subject.
 
One reason why the economy was good during the Clinton era was the elimination of the deficit through tax increases but, most importantly, spending cuts. As long as spending is higher than our tax revenues (thank you, Mr. Bush), we can never have a stable economy. A budget deficit as well as a budget surplus are never good for the economy. In this respect, Bill Clinton was very responsible in his decisions to cut spending.

However, there are a lot of different reasons why our economy has been sinking. Overseas jobs are detsroying American jobs. Both liberals and conservatives who champion free trade and open borders don't see the effect on American jobs. Only real supporters of American labor like Pat Buchanan and Ralph Nader are proposing policies to help keep American jobs.

It's no suprise that liberals like Bill Gates and Warren Buffet are proposing liberal taxing policies. For the upper classes, the progressive tax is offset by loopholes and deductions. For people in the middle class who pay 30+% of their income in taxes and can't afford to make initial deductions, a flat tax would benefit them the most. If the rich actually ended uppaying their fair share with a flat tax, they would be the first people supporting a return to the progressive income tax.
 
You've been watching too much Lou Dobbs, DTI. There was more outsourcing under clinton than there was under Bish. And if you took even one econ class you'd know that outsourcing *helps* the overall economy even though it creates winners and losers. For example, when we outsource T-shirt making, T-shirt buyers benifit and domestic T-shirt makers don't. On the whole though, the nation has spent less money on T-shirts and has more moeny for other things.

As a liberal, resolving this dilema is easy. Have those who benifit "share the wealth" so to speak through retraining programs and the like. For a conservative, the only option seems to be "tell the losers to deal with it" or as Lou Dobbs seems to choose "fail to understand basic economics".

Also, did I just step into a time warp or something? There's nothing particularly simple about a flat tax and there is no reason to think it's easier to enforce. I mean look, you know how much you own, you look up the percentage you owe and then multiply. It hardly matters if everyone has the same percentage or not. What makes current tax codes difficult is the deductions, but that has nothing to do with progressivity at all.

No one, not you, not the Angry Clam, not the esteemed Mr. Davis, not anybody has been able to explain to me why the flat tax is supposed to substantially easier to impliment than a standard progressive income tax without deductions. I'm starting to believe than none of you guys have every really thought about it throughouly.
 
Wait a second. Have you just started arguing the opposite of what you were previously arguing? Or is this a proof by contradiction thing?

The thing that makes it beneficial to society is the *creation of value*. Regardless of how many people work at the casino, no value is being created (unless you want to consider the "entertainment value" thought that would hardly justify the vast sums involved). Investment on the other hand, is creating value by putting existing resources to work more efficiently than they would otherwise.

Really what we're getting into is a two-fold requirement for earning: 1) value must be created, 2) effort must be expended.

When I sit down at my job and (putting aside my blogs) program java code for an hour, I am creating value even though I'm doing so only be helping to put resources to more efficient use. That's all computers do.

A gambler may spread his money around, or other people's money around, but the value created is minimal. I'm not saying we should levy a 100% tax, but that we should recognize gambeling winnings as unearned.
 
I assume that your above response was to my last post in the newer thread, but I'll respond here anyway.

So I guess the real creators in gambling establishments (movie theatres, restaurants, etc.) are the employees, but without gamblers (viewers, diners, etc.) they would have no jobs.

I'm not arguing with your distinction between earned and unearned income, just with your statement that unearned income creates nothing of social value. It creates a great deal of employment. Now perhaps all of those people (and society) would be better off if they were employed as programmers, masons, teachers, farmers, etc. But the marketplace clearly shows that their services are highly valued. Even when such services were illegal, people sought them out and paid well for them. Are such people deluded, or do they find value there?
 
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