31 October 2011

Scott Adams on the Flat Tax

There’s a lot to comment on here:
I think most people like the idea of a simpler tax code. No argument there. But I've never met a person who would volunteer to pay higher taxes in exchange for simplicity.
I don’t know if most would actually pay higher taxes.  Sure, direct taxes might increase for some, but a flat tax would really cut down on indirect taxes.  If everyone paid a flat 15% income tax, I don’t think most people would see their tax payments rise because everyone already pays a base level 9% income tax (in the form of Social Security and Medicare payroll taxes), not to mention plenty of indirect taxes.  So, while nominal net income might decrease, the purchasing power of that income would increase, assuming the money supply would remain stable (note: inflation is considered, for purposes of this post, an indirect tax).
The flat tax idea is a brilliant bit of psychological class warfare. At least I hope that's what it is. I'd hate to think the people in the highest tax brackets, i.e. my peeps, are as dumb as the people they hope to screw with promises of unicorns and flat taxes.
The flat tax seems brilliant, but most of the supporters of either a flat tax or FairTax are decidedly upper-middle class, and they know that they will be better off.  The lower-class people I know don’t seem at all sold on the idea of increased rates, so maybe the flat tax isn’t as brilliant as is supposed.
The flat tax diversion is a deliciously cynical way to maintain the status quo while appearing to be in favor of change.  The diversion works because the middle class has been duped by the media into thinking high income people pay a lower tax rate than the general public, so maybe a flat tax will set things right. That's the power of anecdotes. If you hear a few stories about Warren Buffett paying a lower tax rate than his secretary, you assume your dentist is beating the system too. He probably isn't.
I don’t personally know of any middle class people who think that high income people pay lower rates.  I’ll chalk Adams’ analysis up to self-selection bias.  Also, Chuck proved that Buffet wasn’t paying a lower rate than his secretary.
Another brilliant aspect of the flat tax argument is that it's simple to explain, and our brains are wired to perceive simple solutions as better than complicated ones. In reality, the simplest solution is usually the one that comes from someone who is either trying to screw you or who isn't capable of understanding the full situation.
Actually, the simplest solutions are the best.  However, that doesn’t mean that everyone will benefit from changing to a simpler solution.  For example, in the case of a Flat Tax, lots of lawyers and lobbyists would be out work.  And possibly several bureaucrats.

Furthermore, I don’t see how it’s “screwing over” people to make them pay for the benefits they receive from the government.
The flat tax diversion is weasel-clever because it shines a light on the absurd "fairness" argument coming from the folks who want to raise taxes on the rich. Fairness is an illusion our parents taught us as kids to make us stop fighting with our siblings over the appropriate division of candy. Fairness isn't an objective quality of the real world. The reality is that the rich willingly pay higher taxes for the same reason that the British monarchy willingly converted from a dictator model to a symbolic role: If you want to avoid being beheaded, sometimes you need to be flexible.
If I could ban one word from the common vernacular, it would be “fairness.”  It doesn’t exist, and never has.  Plus, no two people and ever agree on what it means, at least in terms of practical application.  Justice is a much better concept, and more objective in application, though not perfectly so.
Personally, I'm quite comfortable paying taxes at the highest rate. It's like paying protection money to the Mafia, and I mean that in the best possible way. High taxes reduce the odds that jealous mobs will kill me for succeeding in my chosen field. Oh, and my taxes are also helping fund national defense, education, social program, and other good stuff. That's a win-win. But please don't insult me with arguments of fairness. Save the fairy tales for your kids.
I’d rather get rid of the mafia, personally.  I suppose that buying protection is the next-best solution.  However, never underestimate mankind’s propensity for killing the goose that lays the golden eggs.
I know some of you will leave comments about your own fairy tales of Laffer Curve economics, in which lower tax rates stimulate the economy and fill the treasury with free money. And then someone will point out that economic growth in the Unites States has often coincided with higher tax rates. Can we agree that the Laffer Curve has been debunked everywhere but on Fox News?
While I’m not one who has studied the Laffer curve with any degree of depth, I always thought the it existed to show a) that tax revenue is $0 and rates of 0% and 100% and that b) the rate optimal for maximizing revenue was somewhere between 0% and 100%.  That’s all I use it for.

And I’m not sure how federal tax revenue equates to economic growth, except by definition per the widely used Samuelsonian macroeconomic metrics like GDP.  Also, lower tax rates don’t stimulate the economy per se; they simply don’t disincentivize certain market behaviors.

2 comments:

  1. "who would volunteer to pay higher taxes in exchange for simplicity."

    Yeah, Mr. Adams is missing the point. Under a flat tax, rates would likely decrease, because more taxation would be out in the open, and I presume that the additional visibility would cause the public to push back on the levels of taxation.

    He's right that it is upper middle class folks pushing it. Because it is the middle class that is getting looted the most, comparatively speaking.

    Mr. Adams also gets it right in questioning whether the bottom 47% will support this. Because they probably won't, for their free/cheaper ride will come to an end.

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  2. @EW- plus, a flat tax should kill the costs of indirect taxes (like a corporate tax, e.g.), which would cause a decrease in prices, which effectively works as tax cut. Hopefully a serious flat tax proposal will be offered before the bottom 47% become the bottom 51+%.

    Also, it's nice that your back in the blogosphere. I hope you can stay awhile.

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