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Sunday, August 19, 2007
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Voodoo Economics

Charlie Sykes had to go and write a book.  Then the liberals responded with 50+ Things You Won't Learn From Talk Radio, and then Tom McMahon and Jessica McBride responded, and now finally we have this from Jay.  For me by the way, that list would actually be the infinite number of things I don't learn on talk radio, since I don't actually listen to any talk radio.  I'm not going to attempt to go down their entire list, because frankly, it's just not my style.  But I will attack one particular point... Tax cuts don't increase revenue.

There has been a lot of contention around this point.  In fact, it's almost akin to a religion for both sides.  Liberals believe whole heartedly that you can tax and tax and tax ,and that the money will always be there to tax some more like a cornucopia.  Conservatives believe that if you lower the percentage and remove the loopholes, you will both spur the economy and make more actual dollars taxable thereby increasing overall revenue, while also being more fair and leaving more dollars for the average person.  By my description of the two sides, I'm sure you can see where I fall.

But before I get to the actual facts of the matter, I would like to discuss one point that nobody seems to have covered yet.  Why is the goal of taxes to increase revenue at all?  Excuse me while I discuss basic libertarian tenants here, but government is not a business.  If we decrease taxes, and revenue decreases as a result, thereby decreasing the overall size and influence of government... Why is this is a bad thing?  Actually, I think it would be a damn good thing.  I bring up this point, because although nobody is talking about it, this is the real point of contention that will always remain unsettled between the two sides.  Liberals think increasing government revenue is a good thing, while libertarians and fiscal conservatives don't see that as a goal to be strived for.  But I digress.  Back to the original "revenue" argument.

One of the things about liberal thinking that always amazes me is how they can both believe that increasing taxes can increase revenue, and also believe that increasing taxes will decrease demand for things until nobody does it.  I'm of course talking about smoking.  The whole goal of constantly increasing cigarette taxes is to decrease the demand for cigarettes, and then use that money to supposedly pay for the societal ills that cigarettes cause.  Yet somehow, when they increase the taxes on work, they don't seem to think that less work will then occur.  I'm still trying to figure that out.  According to liberals, increasing taxes on unwanted things leads to less of the unwanted thing, while increasing it on things we like somehow also increases that thing we like.  It's a miracle I tell you... praise Jesus!

But onto more solid evidence.  One of the cooler phenomena that has happened in the former Soviet states since the 1990's is their incredible economic growth compared to that of the Western European states that are slowly turning socialist with their large government social programs.  One of the keys behind this incredible growth has been that many of these former Soviet states in Eastern Europe have adopted the flat taxHere is one example of what the flat tax has done (emphasis mine):

Karl Marx might be shocked to see who’s doing what with tax systems in Central and Eastern Europe these days. After all, it’s the capitalist West that won’t abandon progressive tax systems, which Marx championed in The Communist Manifesto, while the former Soviet bloc countries are lining up to buck their old ideological fountainhead by moving to a … single tax rate for nearly all earners, regardless of income. Nowhere has this flat tax caught on more swiftly than in Central and Eastern Europe, where nine of world’s 13 countries to have adopted the system are located. It’s a reform movement that started in 1994 with Estonia, gained momentum when Russia saw a 25-percent increase in state revenue from personal income tax after implementing a 13-percent flat tax in 2001, and culminated with Slovakia’s much-lauded adoption of a single 19-percent rate on income, corporate, and valued added tax three years later.
...
Few, if any, of the reforms in Central and Eastern Europe meet the definition of a true flat tax because they include deductions, exemptions, and other exceptions. … Several Western European leaders complain that the lower tax rates … give the newer European Union states an unfair advantage in attracting business.

What's amazing about this is that we're not talking about small increase here.  That's a 25% increase one year over another simply by enacting a flat tax.  What amazes me more is that liberals wouldn't be jumping all over this like white on rice.  That's 25% more money that they can waste on jobs programs that don't actually create jobs, and health care initiatives that don't actually increase our health.  That's 25% more dollars they can spend on giving away condoms to aborted babies.

Now why wouldn't they want to do that?  Now that I think about it though, maybe its a good thing that we don't do this.  After all, if it increases revenue and therefore increases the size of government, that can only lead to bad things.  I guess for some people, it will always be Voodoo Economics.

# Posted at 8:30 PM by Nick  |  Comment Feed Link 3 Comments  |  No Trackbacks

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Monday, August 20, 2007 5:09:32 AM (Central Daylight Time, UTC-05:00)
I don't have a lot of time to really get into it (and following your links leads to a subscription-only source), but how much of Russia's and Slovenia's increased tax collections was simply a function of a better-organized tax structure that collected from *everyone*?

Okay, never mind, I did a quick google, and found this:
One senior government tax official estimates that before the flat tax took effect at the beginning of 2001, Russians on average declared as little as 25% of their income. Since it was introduced, there has been a marked increase in both payment rates and revenue. Official statistics show that income tax revenue rose 28% between 2000 and 2001, and a further 21% by last year, after adjustment for inflation. Total government revenue from personal income taxes shot up from an unadjusted $6.2 billion in 2000 to almost $12 billion last year.

The Kremlin is pleased. "We don't think it's possible to force people to pay taxes through repressive sanctions," says Mikhail Orlov, head of tax policy at the Ministry of Economy. "The tax system may be primitive, but it's simple." And, he added, so far it works.

Part of the credit for the turnaround goes to a clever advertising campaign designed to convince taxpayers that the tax is a bargain. One TV ad during the recent tax season showed two apples, one with a 13% slice cut out of it representing the flat tax and the other missing a 30% chunk, a reference to Russia's former top income tax. The message: Taxes are so low that any reasonable person would pay up. "It's a small amount, so of course it's worth paying," says Natasha Diniliouk, an accountant who lives in Moscow.


In other words, more people paid taxes instead of skipping out on them, and that's as much as anything what caused revenues to increase. Taxing 30% of only 25% of the country's income certainly leads to a lower total than taxing 13% of 100% of income.

In the US, since we have near-100% compliance, switching to a flat tax would certainly make it easier to file, but I doubt it would create much new revenue.
Monday, August 20, 2007 8:23:50 AM (Central Daylight Time, UTC-05:00)
100% compliance? Here is a list of the top 100 delinquent tax payers, just in the State of Wisconsin. And that's declared taxes. There are many people who pay taxes, but hide plenty of their money. The tax code is so complicated, and there are so many tax shelters, that even among "compliant" individuals, there are people who don't pay all their taxes. What's even more significant was this story from the AP:
<P>
Think of the uses of $300 billion, the annual gap between what taxpayers owe and what they pay.
..
An IRS study last year concluded that the tax gap in 2001 was $345 billion. Of that, $197 billion came from underreporting on individual income tax returns and $88 billion from underreporting by corporations and the self-employed. The rest came from those not filing or not paying the proper amount.
</P>

So what were you saying about 100 compliance again?
Monday, August 20, 2007 10:10:51 PM (Central Daylight Time, UTC-05:00)
Sometime ago on Clark Howard a guy was talking about selling a house and how to minimize the tax burden (is that redundant?) on the capital gains. Clark went through the standard play – that is, you have a clock in which to pour that money back into another residence.

I do not recall the exact circumstances, but Clark's advice was to cash out and pay the capital gains tax. Why? Capital gains are at near record lows and to do anything else would likely expose the cash to greater tax losses.

Do not make the mistake that people's behavior is static.

Its not a matter of cheating, after all the various tax shelter schemes are setup either to channel behavior or are the result of law's unintended consequences.
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