Beale debates Cato’s Edwards on the right’s "flat tax"–New Hampshire Public Radio
by Linda Beale
Beale debates Cato’s Edwards on the right’s “flat tax”–New Hampshire Public Radio
Last Wednesday (Oct. 26, 2011), I debated the Cato Institute’s tax policy guru Chris Edwards about the right’s various “flat tax” (FairTax, 9-9-9, USA Tax, consumption tax) proposals, on New Hampshire’s public radio station’s hour long program “The Exchange”, hosted by Laura Knoy. You can catch the program on the NHPR site, at “The Flat Tax is Back” (Oct. 26, 2011). (The live format is an initial discussion in response to the host’s directed questions, followed by call-ins from the public.)
I argued, as you might expect from my previous postings on this matter, that the various proposals for some form of VAT/consumption/wage-based/flat tax do not make sense at a time of inordinate income and wealth inequality in the United States. Consumption taxes are regressive, and most proposals from the right–including Herman Cain’s three step progress, with 9-9-9 as the midpoint, towards a national retail sales tax, and Rick Perry’s proposal for an ‘option’ of a 20% national sales tax–simply will make the rich richer and the poor poorer. They are terrible ideas at any time as a substitute for both the somewhat progressive income tax and the somewhat equalizing estate tax. They are especially terrible ideas in a period when inequality has returned roughly to the same level as it was in the Gilded Age and when plutarchy threatens to devour our democracy.
Edwards made some rather inconsistent statements–including acknowledging that all of these proposals call for elimination of tax on all income from capital and from all estates, and then a later statement that the flat tax would be fair because it would tax people alike on their total income! He also relied on straw man arguments–another favorite of the Cato Institute representatives that I have seen before, used to divert attention from the fact that they cannot really answer the real question at issues. Chris relied on the laughable Laffer-curve based argument of which Cato is inordinately fond and which has been adopted and repeated ad nauseum by the right, that tax cuts result in greater revenues to the rich that result in enhanced job growth. I reminded him and listeners that our greatest growth was from WWII to 1981 when we had very high tax rates, demonstrating clearly that high tax rates do not cause weak growth. (Of course, 1981 is the critical time, because the Reagan cuts ushered in the right’s reaganomics dominance with tax cuts, deregulation, militarization and privatization that led us to the current Great Recession–aided in part by the weak-kneed Democrats who went along rather than standing up for worker rights.) Chris’s response to the empirical evidence that tax cuts do not lead to broad-based growth or job creation was “we can’t ever go back to the high rates of the 1970s again.” Of course, that was a straw man argument. Nobody is arguing for 90% rates. I am arguing, however, that the flat tax–with its zero percent rate on most of the income of the uberrich and its very low rates on the rest of their income–will hurt the poor because it is distributionally unfair, and hurt the economy generally because it will lead to revenue shortfalls that will force spending cuts to programs that matter to the wellbeing of society.
Anyway, listen to the program. Your thoughts welcome in comments to the blog. (And sorry for miffing my chance at the “last word” at the end of the program. It was an instance of getting tangled up in what I wanted to say and ultimately failing to make the point with any power at all. What I was aiming for was something along the lines of the following:
Reagan passed the 1981 tax cuts, and then Congress realized what a problem the resulting deficits would be so was energized to pass increases in taxes. Problem was, most of the cuts favored the rich (were cuts in income taxes and in depreciation expenses providing cuts in income taxes, etc. ) and most of the increases disfavored the poor (i.e., were regressive payroll taxes). IN 1986, however, there was a broad process of Congressional review, resulting in the 1986 tax reform act that eliminated (for a very short time, as it turned out) the category distinction between capital gains and labor income. That was a major, good innovation that grew out of a sustained, measured, thoughtful though imperfect process. There is no indication that election of more hard right candidates will lead to any such similar reform process today. If elected, the hard right candidates are likely to push for, and may get, tax changes that continue to enrich the rich, like the flat tax or 9-9-9 tax plans being put forward by Perry and Cain.
originally published at ataxingmatter
I’d like to see a flat tax, of sorts. I think that the income tax rate for the top income bracket, the capital gains rate and the corporate tax rate should all be the same. A lot of wealthy people shift income around between these three types of income to minimize the amount of taxes that they pay. I think that most people who just get a W2 at the end of the year really don’t understand how this works. A lot of wealthy people run most of their income through a corporation, LLC or other entity and so they can take what might be wages for “normal people” as capital gains and pay the lower rate.
I thought you were very good, Linda. Thanks for doing it!
for what it’s worth, i agree. but people have got used to their games and it gives them a thrill to think they are beating the tax man. which means you won’t see your kind of a flat tax anytime soon.
Anyone favoring a flat tax is clueless about the importance of discretionary income — and, accordingly, the economic implications. That’s what’s left after housing cost, food, basic clothing, transportation (um, gasoline), and, in the case of a family, saving for a college education. Saving extra for retirement really cannot be sacrificed, either, although it probably is in these times by the majority. At $50 or $60 K, there’s barely anything left over, whereas, even right now with our somewhat progressive income tax structure, high income people will barely notice the slight dent that somewhat higher rates will cause.
Right now, 90% of the population has little or no discretionary income. It is no surprise that demand is depressed. That makes for high unemployment, a deep, deep recewssion. Face it, Cato types, you have lost the argument: you got your tax cuts for the wealthy in 2001 and 2003, and they did not — repeat did not — result in more job creation by the main beneficiaries whose incomes exploded. But denial in these people knows no bounds. The contortions that follow will be priceless, something for the archeologists of the future to be dumbfounded by.
Nicely done Linda. My main thought while listening is that the argument is for simplisity and people just do not want to hear that life is not simple in the way they would like it to be. As with Einstein, we are still looking for the fountain of youth with the simplistic unifying theory of everything.
If we can’t get people to think beyond a plate of cookies to be evenly divided up by all those around the table, then we have to come at the arugment in such a manor. How to take people who think in terms of themself as in “I’ll get a cookie too” and make them think about how the one odd cookie will get handled after the plate has gone around the table is the issue when any of us who understand the falicies of a flat tax get into a debate. I resort to the prime constitutional objective of equality of power. I think Elizabeth Warren talking about how no one earns a penny without someone else coming before them is the way to segway into the practicals of progressive taxation.
“Face it, Cato types, you have lost the argument:….” Urban
A good point and undoubtedly true to any objective observer, but the Cato types (as you call them) don’t make the argument for the sake of winning. They are paid to make the argument regardless of the lack of validity to that argument, and that is true of all similar arguments having to do with any aspect of the economy or the government. They are paid to make the argument over and over again. The truth of the matter is not the point. Only making the argument and keeping it on the front burner so to speak is what the Cato types are meant for. It’s not a debate. It isn’t a form of science. It isn’t even a professional seminar. It is propaganda. It is produced only for the purpose of making what come to seem to be plausible reasons for bad legislative agendas.
Never be satisfied with besting a Cato type in a debate. They aren’t there to win. They are only there making their implausible points for the purpose of keeping the tune on the air. For many of our fellow citizens the truth is anything that is repeated often enough. It must be true. I heard it on CNN and then I heard it on Fox News. And I even heard it criticized by those left wing looneys on MSNBC. It must be true if there’s so much debate about it.
While I don’t favor a flat tax, it does seem that there is opportunity for a significant revision of the current structure with some progressivity built in.
The current FICA tax (13.5%, half paid by the individual and half by the employer) currently brings in over 80% of the revenue raised by the current income tax system. That seems surprising given the cap and the exclusion of unearned income. If the current income tax system only raises 20% more than FICA, then some substantial revision should be possible.
While I don’t have the actual income data, it does seem that a 15% tax rate on all income (whether earned, ass dough and without any cap) similar to the FICA tax (no deductions, exemptions, etc.) should raise at least as much revenue as the current tax code, and maybe a 20% rate would be enough to eliminate the deficit and build up the SS and Medicare trust funds. That would mean a flat rate of 28% (income tax rate, 50% of FICA and 1.5% Medicare) on all federal taxes for individuals.
Some “fairness” adjustments could be made (give a credit to low income individuals for FICA payments, Unearned Income Credit, basic exemptions, etc.) but still result in a maximum federal tax rate of around 30%.
If a “flat rate” is desirable, then try to reframe the term “flat rate” to mean the rate covering all federal taxes (FICA, Medicare, estate taxes and income taxes), which will benefit lower income.
Elimination of the various deductions and exemptions might be unpopular but it would be better to say “eliminating the mortgage deduction means the flat rate goes up to 32%” would be the way to fend off inserting deductions.
How about a flat tax on wealth? After all, a person’s tax burden is proportional to their wealth. That’s fair, isn’t it? 🙂