An Axiomatic Case for the Flat Tax

by André Casajus[*] and Andreas Hoffmann

Estonia was the first European country to introduce a flat tax on income in 1994. Many others followed. For example, Hungary successfully introduced a flat tax in 2012. In the U.S., some of the States (e.g. Pennsylvania) have introduced a flat tax on income. As in Germany, however, the federal income tax in the U.S. is still progressive. We believe the case for the flat tax is strong. Presenting an axiomatic justification for the flat tax as a redistribution rule, this post suggests that you need to accept only a few basic properties to favor a flat tax for income redistribution.

Continue reading

Raise Middle Class Taxes Now!

by Mario Rizzo

I now favor expiration of the Bush era tax rates for everyone.  Why? Because the only way to curb spending in the long run is to make as large a number of Americans as possible truly feel the consequences of the expenditures they appear to desire.

If Americans saw the cost of the gigantic welfare state in their paychecks, they would, I am confident, radically re-evaluate the expenditure side of the situation we are in. Then when someone comes up with a genius idea for spending, the people would think: Is it worth higher taxes? Might I not spend it better on my family, my church – or even – on… champagne? Continue reading

A Cap for Deductions?

by Mario Rizzo

The New York Times reports today that the Democrats are searching for a way to get additional tax revenue from “the rich” in a way that might garner Republican support. So they are bringing up an idea suggested by Mitt Romney in the presidential campaign to limit deductions to a specified aggregate amount.

How such a proposal would work out in practice depends on the details. The first point is the status of the charitable contribution deduction. Is that included in the limit or not? If it is, then one should expect charitable contributions, especially the large gifts, to fall. Beyond the political reprecussions, there are substantive issues. In a world so dominated by the “compulsory charity” of the state do we want to reduce private-based alternatives? This is a tough issue.

On the other hand, if we exclude charitable deductions (as some “Democratic centrists” — New York Times‘s label —  want), then we have opened the door to exception-making and special interest pleading. What about the home-mortgage deduction? I can see it now,”At a time when the housing sector is just starting to get on its feet…” And “the state of the housing sector has important macro-economic effects.” And so forth…

Of course, this would be an increase in effective marginal rates since as income rises you must pay the old rate (let us say) on a greater amount of your income.

So this is what the election was all about? I am afraid so.

Fiscal Cliff: Sense and Nonsense

by Mario Rizzo

The above table is from the November 8th issue of the Wall Street Journal. The figures for the fiscal cliff consequences are usefully stated for next year and not for the next nine years as those who want to suggest that the numbers are truly impressive (or want to scare children) typically use.

Consider the following facts or likely scenarios: Continue reading

Mitt Romney is Not a Tax Idiot

by Mario Rizzo

Let us begin with a famous quotation from Judge Learned Hand in a decision affirmed by the Supreme Court:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)

Quite simply, I am really tired of hearing about Mitt Romney’s tax returns. Does Team Obama really want us to believe that if Mitt Romney took advantage of every legal option to lower his tax bill that he is somehow bad, out of touch with the majority of Americans, or unpatriotic (whatever that is supposed to mean)? Continue reading

Taxpayers’ Future in Wisconsin Vote

by Chidem Kurdas

Wisconsin governor Scott Walker is in the extremely unusual position of facing a recall vote less than two years after he was elected in 2010. The recall is orchestrated by unions that have gone all out to reverse his valiant effort to contain the growth in state and local spending. This vote has wide implications beyond the state of Wisconsin, implications for all government budget making and the question of  whether taxpayers can be protected at all against predatory interests.

Mr. Walker’s supposed crime is to be on the taxpayers’ side. Continue reading

How’s Your Compulsory Holiday Giving Coming Along?

by Mario Rizzo

I wish people would perform the following intellectual experiment. Find out how much in federal taxes you have paid in the past year. Don’t worry about making any distinctions between the various payroll taxes and the income tax. It all goes into the same pot in the final analysis.

Now assume that this amount is in an account and that you are not allowed to spend any of it on yourself or your immediate family. Nevertheless, you are given a choice about how to spend it. What would you spend it on? Now compare that with what the federal government spends on. How do they match up? Continue reading

Energy Policy vs. Market

by Chidem Kurdas

No matter how thoroughly public policy fails, there is no end to efforts in the same area.  Energy is a case in point. Reviewing the history of US energy policy in his new book, Columbia University legal scholar Michael Graetz writes: “The book  is, then, in one sense a story of failure…”  Continue reading

Tax Baseline Key to Debt Fight

by Chidem Kurdas

Neither House Republican Speaker John Boehner  nor Senate Democratic Majority Leader Harry Reid propose tax increases in their competing deficit and debt-ceiling plans. Indeed, the Reid plan’s omission of tax hikes is described by Democrats as a major concession to Republicans.

But even if there are no new obligations, taxes are primed to go up. That baseline, biased in favor of a growing tax burden, is key to proposed deals and will no doubt remain the pivotal point in budget negotiations long after the current debt ceiling is broached.

In a recent report on the long-term fiscal outlook, the Congressional Budget Office  estimated that the wide range of tax increases built into current law would generate substantial additional tax revenue and boost the share of taxes to levels not seen in recent decades. That’s the baseline scenario. Continue reading

Taxes Are Already Scheduled To Rise

by Mario Rizzo

President Obama and his various spokespeople are saying incessantly that deficit reduction as a requirement (thanks to the Republicans) to raise the debt limit must be done in a “balanced” manner. There must be some kind of revenue increases to go along with the spending-growth reductions. There are many ways to talk about “balance.” In this case, however, they are all normative. If you think that taxes are already too high, then higher taxes add to the existing imbalance.

Nevertheless, in all of the discussion, few seem to be reminding us that there are already tax increases built into the current system largely to support the so-called entitlement programs. Continue reading

The Current Debt and Budgetary Impasse

by Mario Rizzo

One of the most important, but frequently ignored, aspects of the current negotiations about raising the debt ceiling is the lack of credible commitment on each side.

The problem has two aspects. One is clearly analyzed by Michael McConnell in today’s Wall Street Journal.  (Perhaps also here.) What exactly is “on the table”? The president or the GOP says “I propose X in budget cuts.” Are specific reductions being proposed or just general goals to be worked out later? Is the base-line current spending or is it current budgetary authority (that is, the current planned rate of increase)? If the president suggests revenue “enhancements,” how specific are these? Are they increases in marginal rates or elimination of specific “loopholes”? We just don’t know for sure.  

The second aspect is how enforceable would be such agreements under the current gun? Continue reading

Debt Deal as Salami Strategy

by Chidem Kurdas

Yes, a federal debt deadline is looming and, yes, it has become conventional wisdom that something needs to be done about the deficit and resulting debt. Having watched the  political jockeying, I am now persuaded that the notion of a bi-partisan deal to tackle the deficit is likely a trap.

To raise the debt ceiling, President Obama urges Republicans to accept a bargain that includes higher taxes and spending cuts. Note the reasoning: “The money’s been spent,” he reportedly said. “So this is urgent, and it needs to get settled.”  

Suppose Republicans agree to ending some tax breaks as Mr. Obama proposes. Next time around, he comes back with another oh dear, we already spent the money, you’ll have to raise some other taxes and, of course, the debt ceiling again. And so on and so forth, with Leviathan in the main protecting its ample bulk. Continue reading

Confusion Masquerading as Science? Taxes and Spending

by Mario Rizzo

I am always amazed that when many economists give policy advice the sophistication and logical rigor that the discipline so values gets completely lost.

There are many ways to interpret this. One is that the level of precision appropriate to theory and to applied economics is not appropriate to the “art” of economic policy. Of course, I would suggest that maybe this teaches us something about the ultimate value of sophistication in the theoretical product. Do the precise concepts of theory and applied economics have referents in the “real world”? Or is most of the precision lost when we try to understand the world and recommend policies? This is an important question.

However, here I am interested in the sloppiness of the policy-relevant discussions that even very good and respectable economists produce. One interesting example is a recent “Economix” piece in The New York Times by the Princeton economist Uwe Reinhardt.

I have two points: first, the confusing mix of science and value judgments; and second, the naïve analysis of the political process. Continue reading

Public Unions vs. the Real Underdog

by Chidem Kurdas

Wisconsin governor Scott Walker successfully made the financial case to limit collective bargaining by public unions. Not only have the unions imposed an immense burden on taxpayers, present and future, but they create bureaucratic rigidities that cause dysfunction and, in financial crunches, layoffs of promising employees.

Yet in recent weeks it has become noticeable that these points fail to persuade many Americans.  The Wisconsin bill that just passed and similar reforms in other states face furious opposition, including appeals to the public.  Perhaps it’s not a bad idea to highlight another aspect of government unions, in addition to the purely economic issues.

We need to understand why part of the public supports unions. The best explanation that I’ve seen is from Richard Epstein in Free Markets Under Siege, a 2005 book that analyzes unions and agricultural price supports as examples of cartels in different markets.  These cartels impose social costs and require special dispensation from antitrust law. Why did the rest of the population accept the costs?  “Never underestimate the enhanced political sympathy when the underdog seeks to gain state power,” Professor Epstein points out. Continue reading

Texas Triumphant

by Jerry O’Driscoll  

Actually what is triumphant is the economic model of low taxes, light regulation and economic liberty. As Michael Barone clarifies in today’s (Weekend) Wall Street Journal (p. A13) no state has implemented these policies better than Texas. In “The Great Lone Star Migration,” Barone details the winners and losers by population since 1930. He breaks the period into two sub-periods: 1930-70 and 1970-2010.

He presents much data, and one statistic stands out: “Today one out of 12 Americans live in Texas – the same proportion that lived in New York City in 1930.” Continue reading

Voters’ Best Interest

by Chidem Kurdas

Ronald Dworkin, a well-known legal scholar, describes last month’s election results as depressing and puzzling. In a commentary in the New York Review of Books, he asks, “Why do so many Americans insist on voting against their own best interests?”  Continue reading

Friedman on Social Security Reform

by Chidem Kurdas

This may be a good time to revisit Milton Friedman’s proposal for reforming all entitlement programs and social security, in one fell swoop. His idea goes back several decades but is no less powerful in its simplicity. A serious discussion on reform may now start with the Roadmap put forth by Wisconsin Congressman Paul Ryan, the next chairman of the House Budget Committee.   Continue reading

Two Takes on Political Donations

by Chidem Kurdas

The Wall Street Journal reports that the biggest campaign spender of 2010 is a public sector union, the American Federation of State, County and Municipal Employees, which lavished $87.5 million on helping Democrats. This single union outspent the US Chamber of Commerce, which came second with $75 million.

Reading the WSJ article by Brody Mullins and John D. McKinnon, I thought that AFSCME is giving taxpayer money to politicians who will help it further pick my pocket.  Whereas had I confined myself to reading the New York Times’ front-page piece on the same topic, I would have had no such concern, because there is no mention of AFSCME.  The NYT campaign finance story focuses entirely on the US Chamber of Commerce and says not a word about the public union. Continue reading

Greenspan Paradox on Recovery

by Chidem Kurdas

Alan Greenspan exemplifies an inconsistency that appears to be widespread. He reportedly said that the stimulus has fallen far short of expectations and the government should get out of the way and allow businesses to power the recovery. At the same time, he’s so worried about budget deficits that he supports higher taxes.   

Threatening more taxes is not exactly the way to encourage economic activity. Continue reading

Anniversary of Social Security

by Mario Rizzo  

Today is the seventy-fifth anniversary of Social Security.  

Only an unreconstructed reactionary (that is, a classical liberal) would, at this late date, be opposed to Social Security Act of 1935.  

My purpose here is not to go over that issue, however. It is to comment on a recent Washington Post article on Social Security.   Continue reading

Why No Jobs?

by Jerry O’Driscoll  

In today’s (Monday, August 9th) Wall Street Journal, a small business owner provides the calculations on why he is not hiring. He takes his median employee, changes her name, and explains why he must spend $74,000 to provide her with an after-tax salary of $44,000 plus $12,000 in benefits. The risks of higher taxes and mandates are on the upside. And, yes, Obamacare is already adding to his healthcare costs.

Sometimes commonsense economics trumps high theory.  Firms aren’t hiring because it isn’t cost effective.   The owner could hire more people and expand his business, but it isn’t cost effective.

What would you do to alter the calculation in favor of more employment?

What Oil Leak Politics Says

By Chidem Kurdas

In the Obama administration’s script for passing around oil-spill blame, the drilling regulator Minerals Management Service shares the stage with chief villain BP. The disaster is said to have exposed the weakness of MMS, a problem the president has now tackled by appointing a new head for the agency.

One can understand why Mr. Obama wants to confine government failure to this little bureaucracy – long reported to be corrupt – inside the Interior Department. It is a slick move, but the hypocrisy is breathtaking and corrosive of what confidence there is in the government.

Just weeks before the Deepwater Horizon rig imploded, the entire administration and Congressional Democrats demonstrated casual disregard for the environment. In effect, they provided evidence that wheeling and dealing for the proposed climate change law creates risk of additional damage to the planet.  Continue reading

Two Takes on Class Conflict

by Chidem Kurdas

A presentation at this week’s NYU Colloquium by Ralph Raico, professor of history at the State University of New York Buffalo, generated a thought-provoking discussion.  His paper traces the early-to-mid 19th century development  of the classical liberal theory of class conflict—which long predated Marx and is different from class conflict in the Marxian sense.

Marx and his followers identified class conflict as something that happens in the market economy, where the owners of capital appropriate value produced by workers. This market-based notion of class still dominates public discussion, with the state regarded either as a capitalist tool or possibly a mediator between capital and labor.

By contrast, from the classical liberal perspective the state and the groups that control it are the central players. Using the power to tax and regulate, the governing class appropriates society’s wealth, spends it ways to benefit itself and doles it out to political supporters. It is this old concept that makes sense of today’s economic conflicts, from riots in Greece to the rise of Tea Partiers in America. Continue reading

How ObamaCare Might Be Repealed

by Mario Rizzo  

As long as Obama is president, it is unlikely that the recently-passed healthcare law will be explicitly repealed. However, it is quite possible that if certain constituent parts of the law begin to fail a radical transformation could take place.  

The longer-term Achilles’ heel of the law is the health insurance mandate. Following closely in terms of vulnerability, but a more short-run concern,  is the projected Medicare savings.  

Each of these can and will likely be picked apart.   Continue reading

Blair House Summit: Focus on Tax Cut

by Chidem Kurdas

Political theater as it is, President’s Obama’s call for a health reform summit to be held on February 25th at Blair House presents an opportunity to publicly air the need for one critical ingredient.

Health insurance exchanges would give consumers information about and a choice among health insurance policies—if they work, a very big if.  Democrats want to require states to set up exchanges, while many  Republicans would encourage them without making it compulsory.

Insurance marketplaces face an uphill battle of adverse selection. People who expect to have expensive health problems buy policies, while the young and healthy don’t—high costs and a small customer base guarantee that the insurance will be very expensive, a problem further exacerbated by government mandates that the policy cover every medical service under the sun. All this just about dooms the exchanges. Continue reading