November 19, 2012

We Already Have a Flat Tax

Pretty interesting summation from Professor Mankiw. He looks at a CBO study which "looks at the effects of income taxes, payroll taxes, and SNAP (the program formerly known as Food Stamps). The bottom line is that the average household now faces an effective marginal tax rate of 30 percent." Soon to be 35%, sadly, but the most interesting bit was his close:

What struck me is how close these marginal tax rates are to the marginal tax rates at the top of the income distribution. This means that we could repeal all these taxes and transfer programs, replace them with a flat tax along with a universal lump-sum grant, and achieve approximately the same overall degree of progressivity.

This is the same as tax rates vs. tax as a % of GDP. For all the government meddling, these things have a stubborn consistency.

We might as well face up to it, like Mankiw says and simplify the code and -- LOLZ!! I just crack myself up sometimez...

Economics and Markets Posted by John Kranz at November 19, 2012 11:13 AM

Marginal rates. MARGINAL. Even I, versed in such things and reading past three mentions of the term, interpreted the conclusion as a flat tax. (Well, maybe since that's what you and Greg called it, but it ain't. A flat tax is the same rate for every dollar taxed, no? Thus the name "flat?"

Here's the fudge factor: "...along with a universal lump-sum grant..."

There's why your simplified tax code is such a high hurdle. Imagine if a single dollar figure could be attached to the amount of tax dollars (other people's money) redistributed by government to "the average household." How many fewer votes would this earn? Better yet, how many fewer would accept the largesse?

No, far better for the political class to keep those figures in the shadows.

Posted by: johngalt at November 19, 2012 2:54 PM

Indeed, consider one of the contributors to the mythical low-income marginal tax rate from the CBO report:

Reduction of SNAP Benefits. For recipients, the reduction in benefits that occur as income rises adds an average of 25 percentage points to their marginal tax rates.

While true in the aggregate, calling the reduction in welfare payments as earnings increase a "tax" is a practice that further obliterates the meaning of the concept of "earned wealth."

Posted by: johngalt at November 19, 2012 3:08 PM

Marginal rates are the most interesting. If you believe that incentives count, the tax on the next dollar of income is what matters. (Dr. Yoram Bauman, the Stand Up Economist says "You might be an economist if you add 'at the margins' to the end of every fortune cookie.")

Mankiw suggests that a flat tax could replace the current system with a simple rebate/negative credit. Methinks you and he are arguing about the size or existence of the "universal lump-sum grant" but that we might all agree on the flat tax component.

Posted by: jk at November 19, 2012 5:01 PM

In general I am a proponent of lower marginal tax rates, even if that implies higher average tax rates. Nonetheless I feel obliged to urge caution in advocating a more efficient tax system. As Gary Becker, James Buchanan, Casey Mulligan, and others have emphasized, a more efficient tax system can lead to bigger government.

Posted by: EE at November 20, 2012 9:56 PM

I seek transparency. Even if I have to give them efficiency, I will trade it for the hidden social engineering they can currently do with the tax code.

Posted by: jk at November 21, 2012 11:12 AM | What do you think? [5]