Saturday, October 29, 2005

Flat income tax or consumption tax?

Maybe I'm overly cynical, but I suspect the increasing discontent with our government's profligate ways is going to continue to grow for some time. I don't see many possibilities for the emergence of political forces that can actually compel our country's leaders to cut spending. Plenty of people talk a good game about cutting government waste, but they always seem be able to point to waste that exists only in somebody else's district, or in somebody else's pet program. I call it ABBMism (anybody but mine-ism, NIMBYism's first cousin).

Heck, even those lawmakers who claim to be the most rock-ribbed of fiscal conservatives are not above feeding at the trough when it is spending in their home districts that is at stake. Ultimately, it is We The People who must demand fiscal conservatism. If the day arrives when some Congressman votes against pork barrel spending that would flow to his own district, because opinion in his own district demands that he vote that way, we'll finally have reason for hope. Until that day comes, taxpayer subsidies for the study of drunken fish are safe from the chopping block.

I believe if fiscal rectitude ever comes to characterize business in our nation's capital, it will be only after something fundamental and radical changes the dynamic. Fiddling with small details isn't going to get the job done. I'd say a constitutional TABOR amendment would be a huge step in the right direction. I'm open to other ideas, as well. And the one I suspect would have the greatest long term impact on prosperity is overhauling the tax code. Why do I deem this task so vital? Well, when you think about it, even if one could wave a magic wand and cut spending by several hundred billion dollars - thereby eliminating the deficit entirely - we would still be left with a system of taxation that costs the economy billions in compliance costs. Even more perniciously, the tax code directly makes America less prosperous by weakening the economy's capacity to create wealth as it causes economic resources to be allocated in a sub-optimal fashion. Politicians do a really lousy job when it comes to allocating capital, in other words, and you and I are poorer as a result.

So, count me among those who think radical overhaul of the nation's tax code is something every conservative - and indeed every liberal - should be fighting for. But a critical question to ask is, which is the better idea: moving to consumption taxation or shifting to a flat income tax? The scope of an in-depth analysis of the relative merits of these concepts is beyond this simple piece. So I'll simply state that personally, I'm more a fan of junking the income tax altogether in favor of some variety of a consumption tax. I believe there are significant advantages to following this course. But perhaps chief among these is greater political feasibility.

This last point might seem counter-intuitive. After all, junking the income tax completely is probably a more radical notion than moving to a flat income tax. Surely the special interests would be arrayed against such a clear break with current practice. But it is precisely the radical nature of this strategy that makes it more likely to some day be enacted into law. Think about it: it's going to be awfully difficult to say the following words to John Q. Taxpayer:
"We'd like to introduce you to the new, ultra-simple, flat tax. It'll put more money in your pocket in the long-term. And in the short term you can fire your accountant and spend his fees on anything you like. Oh, but there's just one little drawback. You have to kiss your mortgage interest deduction good-bye."
An income tax shorn of the wildly popular mortgage interest deduction just isn't in the cards. But preserving various special interest deductions detracts severely from the whole raison d'ĂȘtre of tax code overhaul, so I don't think the answer to the above dilemma is a milquetoast version of the flat tax that keeps in place this or that bit of politically sensitive tax sheltering. Sure, maybe this year we'd only be looking at tax loopholes for mortgage interest or charitable contributions. But someday soon they'd be calling for the tax code to once again subsidize the latest cause du jour.

No, I think a wiser course of action is to wean ourselves from the very concept of basing a person's tax bill on his contribution to the nation's output via switching to a radically simple, fair, transparent, easy to administer and politically possible consumption tax.

What about you?

Originally appeared in RedState, August 21, 2005

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