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Monday, August 15, 2005

A Flat Tax Recipe for Disaster

The push for tax reform is beginning to escalate in anticipation of the tax reform panel’s release of its recommendations in September and this piece by Steve Forbes has my snark meter rising a bit.  Apologies.  When you hear arguments for a flat tax such as those made below, remember that the arguments are coming from people who cannot handle mathematical operations beyond multiplying a single percentage times income.  Having, say, four different percentages apply to four ranges of income is just too hard.  That sort of mathematical ability leads to misguided reform proposals such as:

One Simple Rate, by Steve Forbes, WSJ Editorial: A major domestic battle looms this fall, when tax reform -- a centerpiece of the president's bold domestic agenda -- will finally be on the table. ... After the political shellacking the White House took on Social Security, the administration will be strongly tempted to take a conciliatory path that supports only superficial reforms … Such a course would have perilous consequences. … My flat tax plan has one simple rate, on the federal level: 17% on personal income; and 17% on corporate profits. There would be generous exemptions … The economic boom the flat tax would unleash would be stupendous, ushering in a long-term, non-inflationary expansion of historic proportions. The current expansion would pale in comparison. Once again, we would be the clear global leader … between 2005 and 2015, the Forbes Flat Tax Plan would generate $56 billion more in new government revenue than the current income tax. More important, an estimated $6 trillion in additional assets would be created, an immense boost to our nation's balance sheet. This study also predicts that that flat tax would lead to nearly 3.5 million new jobs by 2011 -- jobs that otherwise would not exist. …

Gosh Steve, why that’s just magical.  It would create over 500,000 additional jobs a year?  Magical.  And you cut taxes on every single person and increase revenues by $56 billion?  Recent tax cuts have made the deficit worse so that will be even more amazing.  And we could sure use another $6 trillion in assets.  By the way, who will own those assets?

For anyone wearing magic spell protection, it is obvious that this is a recipe for fiscal disaster.  Haven’t the deficits of Reagan and Bush, and Bush taught us anything?  Here’s the trick for shaking off the spell.  As you look at the graph below, say to yourself again and again: Look at the red part of the line... Look at the red part of the line... Look at the red part of the line... Look at the red part of the line... Look at the red part of the line...

Source: National Debt History by President
[The source states: "The data plotted here were taken
directly from the White House web site and plotted without
modification." I checked to be sure and the graph is a plot of the
OMB Gross National Debt numbers in Historical Table 7-1.]

Here's an editorial from today's Washington Post noting the GOP's high propensity to deficit spend:

Big-Government Conservatives, Editorial, WP: Three times in the past quarter-century, conservative leaders have promised to restrain wasteful government spending. President Ronald Reagan tried it … And President Bush has tried it ... None of these efforts proved politically sustainable. ... Mr. Bush's attempt at spending discipline has been especially limp. … The nation is at war. It faces large expenses for homeland security. It is about to go through a demographic transition that will strain important entitlement programs. … Remember, Republicans control the Senate and the House as well as the White House. So somebody remind us: Which is the party of big government?

    Posted by on Monday, August 15, 2005 at 01:26 AM in Economics, Taxes | Permalink  TrackBack (0)  Comments (30)


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