Professor Mark J. Perry's Blog for Economics and Finance
24 countries now have a flat tax, with great success.
Can the U.S. learn something about taxes from the emerging market countries of Eastern Europe? Dan Mitchell of the Cato Institute breaks it down in the video above, click on the arrow.
Thanks to Cafe Hayek for the pointer.
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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Adam Smith, who could be considered the quintessential lassie-faire capitalist, argued for the graduated tax on the basis of a social contract - a social obligation that the rich pay not only their proportionate tax, but in fact something more.
"A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."
Progressive taxes, VAT taxes and tax deductions all create imbalances which lead to bubbles. A great example of this is the housing bubble in US, which has been propped up by the tax deduction on mortgage interest.
Now, it might have seemed like a great "social contract" to give people a deduction on mortgage interest, but all it did was prop up a housing bubble.
By giving a tax deduction for housing, the US government made the decision that its better for people to own a house rather than rent an apartment.
On what basis? By what right?
Machiavelli999 the most recent housing bubble could not have existed and grown to the size it did except for wide spread institutionalized mortgage fraud.
"Adam Smith, who could be considered the quintessential lassie-faire capitalist..."
No, he can't; not if he made a statement like the one richdude quoted.
Matt: "No, he can't; not if he made a statement like the one richdude quoted."
Indeed he did make such a statement in his seminal work (I even linked directly to the page the quote is on).
The idea of the flat tax is based on the idea that taxing the wealthy at higher rates is inequitable (unless you want to use another argument like 'trickle-down'). Simplification of the tax code is another issue all together, and one that can be handled with or without a flat tax.
It absolutely astounds me that people who want to argue for policies have little respect or knowledge of the very principles upon which this country is based. The man (Smith) was (and still is considered) an intellectual giant. Maybe you should consider reading him.
BTW, Greenspan considers Smith to have developed the underlying concepts behind the term 'lassiez-faire'. Of course other people have said that we'd now consider Smith to be a 'liberal democrat'. Anyway, all this said, the US was founded on some rather revolutionary principles that borrowed heavily from these Enlightenment figures. Central themes were of course capitalism, democracy, and the social contract.
Contrary to what some would like to call the social contract, it is not collectivism. The fact of the matter is that you live in a society, and as a functioning member of that society, you indeed have obligations. As a capitalist society, we accept that there will be income disparities, but we are not so Machiavellian as to say commercialize such services as police and fire departments. Think of what would happen if we did.
Therefore we pay taxes to support these organizations, while some others pay no taxes for these services, but ultimately the society as a whole functions better. This is not collectivism, and there is a balance that must always be struck between this personal sacrifice as an obligation to the society you live in.
I understand that many people (probably most of the readers here) will reject this notion, and would probably prefer some form of anarcho-capitalism in which everyone fends for themselves to their own abilities, and to which those who are inhabitants of the lower classes are there solely because of their own incompetencies and inabilities and laziness. While that's not an entirely inaccurate characterization of how some would view the world, its certainly not a society I would want to participate in.
Look again closely at that map and think about how well things are going in those countries. Last I checked, Eastern Europe was not exactly the bar by which we measured societies, nor the effectiveness of tax policies, particularly considering the political corruption and relative recent transition of many state-owned enterprises to private hands through less-than-free-market transactions.
Oh yeah, and if you say something bad about the government, they shoot you or worse, put something radioactive in your drink. But at least your taxes are cheap.
The fact that Adam Smith is in favor of a graduated tax system doesn't mean it is a position we should adopt. He was a brilliant man but that doesn't mean that his every utterance is beyond reproach.
As for the countries that have adopted the flat tax, this doesn't mean that we intend to follow in the footsteps of Eastern Europe anymore than we do Iceland, another flat tax adopter. That said, I do find much about Estonia's public policies worth emulating.
The appeal of flat tax is that it doesn't try to shape society, not that it is more equitable or whatever. It creates a higher degree of certainty, which helps business. If you are going to have a individual income flat tax, then you should also get rid of payroll tax, FICA, FUTA, FUKU, Gas tax, etc. They all go down the same pipe anyway, why kid ourselves! Get rid of corporate tax too while you are at it. That's it. Everyone pays their share. How is that for "we are all in this together" (code words for communalism and dictatorship).
Federal income taxes should be abolished alltogether in favor of a consumption, pollution, real estate and municipal/city progressive tax based on land ownership.
The Eastern Europe model is driven by a huge black economy and inability to collect taxes at any level.
Richdude:
"It absolutely astounds me that people who want to argue for policies have little respect or knowledge of the very principles upon which this country is based. ... Maybe you should consider reading him."
Maybe you should consider not making assumptions about what I have or haven't read, my knowledge of, or respect for, the principles upon which America was founded, or that I'm arguing for any particular policy.
"The man (Smith) was (and still is considered) an intellectual giant."
And some people still believe the earth is flat.
Smith was certainly very influential and in many ways beneficial, but to call a man who advocated the second plank of the Communist Manifesto "the quintessential lassie-faire [sic] capitalist" is almost delusional.
You've got some premises to check.
That is all.
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