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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)


Chapter 61
Flat Tax Or Flat Taxpayer?

Hosannas poured in from all parts of the academic spectrum--left, right, and center--hailing the Treasury's 1986 draft plan as an approach to the ideal of the "flat tax." (Since the plan calls for three classes of income tax rates, it has been called a "flat tax with bumps.")

This near-unanimity should not be surprising, because a flat tax appeals to the sort of academic who, regardless of ideology, likes to push people around like pawns on a chessboard. The great 19th-century Swiss historian Jacob Burckhardt called such intellectual social engineers "terrible simplifiers." The label applies beautifully to the legion of flat-taxers because one of their prime arguments is that they would replace our bewildering mosaic of tax laws by one of limpid simplicity, one that "you could make out on a postcard."

Unfortunately, this proposed simplicity is more child-like and naive than a great burst of clarifying intelligence. For our Terrible Simplifiers fail to stop and ask themselves why the tax laws are so complicated. No one likes complexity for its own sake. There is a good reason for the current complexity: it is the result of a myriad of individuals, groups, and businesses trying their darndest to get out from under the crippling income tax.

And, in contrast to the flat-tax academic who sneers at all other groups than his own as slaves of sinister special interests, there is nothing wrong with this often messy process. For these are people who, quite simply and even admirably, are trying to keep some of their hard-earned money from being snatched up in the maw of the tax-collector.

And these people have already found out what our flat-tax academics seem not to have cottoned to: there are things in this life worse than complexity, and one of them is paying more taxes. Complexity is good if it allows you to keep more of your own money.

In the name of sacred simplicity, in fact, our flat-taxers are cheerfully willing to impose enormous losses on a very large number of individuals and businesses, in the following ways:

RAISE the tax on capital gains to treat it like income, thereby crippling saving and investment, particularly in new and growing firms. One of the things that has kept the English economy from going totally down the tubes is that England, despite its cripplingly high income taxation, has no tax at all on capital gains.

ELIMINATE accelerated depreciation, thereby destroying an excellent 1981 tax reform that allowed businesses to depreciate rapidly and re-invest. This change will particularly hurt heavily capitalized "smokestack" industries, already in economic trouble.

ELIMINATE OR RESTRICT income-tax deductions for mortgage payments, plus treat homeowners as having a taxable income from "imputed" rent, i.e. from the rent they would otherwise have paid if they had been tenants instead of homeowners. This double blow to homeowners is so politically explosive that it will probably not go through--but such is the full intention of the flat-taxers. Unfortunately, those who are taxed on "imputed" income will not be able to pay their taxes in "imputed" form. They will have to pay Uncle Sam in money.

ELIMINATE oil depletion allowances, a neat way to send the oil industry into a depression. Flat-tax academics persist in regarding depreciation payments and depletion allowances as "subsidies" to capitalists and oil or mining companies. They are not subsidies, however, they are ways of permitting these firms to keep more of their own money, something which at least pro-free enterprise academics are supposed to believe in. Furthermore, only income is supposed to be taxed, and not accumulated wealth; taxing "income" which is merely the loss of capital value (either by depreciation or depletion) is really a tax on capital or wealth.

ELIMINATE tax deductions for uninsured medical payments or losses due to accident or fire. Does one get a glimmer of why economists are sometimes called "heartless"?

Note that, unlike some welfare economists, I am in no sense a slave to the ideal of "Pareto-optimality" (the notion that no government action must impose a loss on anyone). I am willing to advocate radical measures that impose losses on some people, but only to achieve a substantial increase in freedom. But severe losses merely for the sake of symmetry?!

We are left with the final Argument From Simplicity: that the flat tax will enable all of us to dispense with tax lawyers and accountants. A powerful lure, perhaps, but fallacious and untrue on many levels. In the first place, those taxpayers who want simplicity can achieve it now: they can fill out the simplified tax forms. Two-thirds of American taxpayers do so now.

The rest of us who struggle with complex forms are doing so for a good reason: to pay less taxes. Second, those of us who have our own businesses, including the business of writing and lecturing, will enjoy no reduction in the complexity of our tasks; we will still be struggling at great length to see what our net business gain (or loss) might be. None of this will change under the reign of the Simplifiers.

And finally, there is, once again, a good reason for our paying money to tax lawyers and accountants. Spending money on them is no more a social waste that our purchase of locks, safes, or fences. If there were no crime, expenditure on such safety measures would be a waste, but there is crime. Similarly, we pay money to the lawyers and accountants because, like fences or locks, they are our defense, our shield and buckler, against the tax man.

Many years ago, my friend and mentor Frank Chodorov, during the midst of the McCarthy era, wrote that "the way to get rid of  Communists in government jobs is to get rid of the jobs." Similarly, the way to get rid of tax lawyers and accountants is to abolish the income tax. That would be Sweet Simplicity indeed!

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