Tuesday, October 28, 2008

Taxation II

As stated in my previous post, I believe that the best approach to taxation is the adoption of a flat tax. The main virtues of such a tax are four-fold:
  • It's fair. The more money you earn the more you pay with the same percentage applied to everyone.
  • It's easy. Paperwork and the amount of time required to file taxes is greatly reduced. Taxpayers would also get to keep more of their money rather than spend it on accountants or TurboTax, who energies could be devoted to more productive endeavors.
  • It would be probably the most effective measure we could pass to reduce the influence of lobbyists in Washington.
  • It would eliminate distortions in the economy.
The points I would like to focus on most are the last two, which are closely related. Many thousands of lobbyists are drawn to Washington in a bid to influence the leviathan that is our government. Dispensing vast sums of money and favors, even a tiny sliver of the largess that emerges from the corridors of power can make an appreciable difference to a company or individual's bottom line. That's just human nature at work. Anytime there is money at stake people will try to get a share. The notion that the passage of "campaign finance reform" or any other similar piece of legislation will change that is laughable.

A flat tax, however, could make a difference. By eliminating all deductions and tax credits one of the prime means of pork and favor dispensing would meet its demise.

Unfortunately, ever since the 1986 tax reform act that closed loopholes in exchange for a lowering of rates the lobbyists have busied themselves trying to bore more holes in the tax code and gain special tax credits or favors for particular constituencies. This needs to be taken care of once and for all.

Beyond the corrupting influence this process has on government, the tax credits themselves have a further negative impact by distorting the economy. Remember, when lobbyists seek tax benefits it is usually because either they want support to engage in an activity that wouldn't otherwise make sense (such as ethanol) or for an activity they are doing anyways, in which case you are supporting an activity that doesn't need any help and are only encouraging excess supply (such as the mortgage interest deduction that promotes overconsumption of housing).

If an activity can't survive in the marketplace there is probably a very good reason for that, and an excellent sign that it shouldn't be undertaken. Many people, for example, point towards alternative energy as an initiative that should be supported through government tax policy, such as deductions for people that purchase a hybrid car or install solar panels on their house. I would disagree. The better policy here is not to grant tax breaks for solutions, but to increase taxes on the source of the problem.

Granting tax breaks presumes that we know what the proper solution to a problem is, when that is rarely the case. Perhaps solar panels and hybrid cars are a great way to shift away from fossil fuel consumption, but maybe there is a better method out there that is being ignored because of the tax incentives. Let's not pretend to know the answer. Instead, tax the problem, which is usually far easier to agree on.

For example, if each gallon of gas burned imposes $1 on society in the form of pollution, it should be taxed at that rate. If, after that tax is imposed, a hybrid car still doesn't make economic sense, then there is no point in buying one or subsidizing production of it. To do so just makes us poorer.

And, as the title of this blog points out, the point of public policy should be to make us all rich, not poor.

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