Matt on taxing the rich

Link here

...we actually have a well-established method of taking market distributions of income and trying to transmogrify it into a more just, useful, and welfare-enhancing deployment of social resources—taxes and public services. The world of finance has been the main driver behind the growth in inequality at the extreme high end, and establishing additional tax brackets with higher rates would help lean against that trend. So would something like the Obama administration’s proposal to curb the extent to which high-income individuals can shelter income from taxes through itemized deductions.


Francois' response: There's a few problems with taxing the rich, especially bankers, but first let me propose a really simple solution. Rather than adding new tax brackets and making the system even more complicated, thus causing even more billions to be put to unproductive use complying with tax law, how about we concentrate on the last part of Matt's paragraph there, limiting itemized deductions? Better yet, why not eliminate deductions entirely and just have one or two tax brackets with only a standard deduction? How much do the rich currently pay in real terms, 18%? What gets me about that is that that's just an average. Some rich folks pay a lot less than that. Some pay a lot more. There's nothing fair about that. Two people making $1 million/yr should pay the same amount. Above a certain income level, people don't need special deductions for kids, or whatever. Really, I don't think middle class people do either. Just build that into the standard deduction, rather than giving people breaks just because they chose to have a family while penalizing people who chose not to.

So if the rich pay an average of 18% and you feel that's too low, instead of creating 50% tax brackets that most rich people will avoid, why not just have a 25% bracket with no deductions once you get over $100,000 in income?

In an earlier post Matt talked about efficiency. Well, when it comes to flatter taxes we do have solid empirical results: Russia, Lithuania, and Slovakia. When they instituted flat taxes, their revenues skyrocketed despite much lower rates. Compliance rates increased dramatically. Part of that is because a complex system where people with the same income pay vastly different amounts creates a society where everyone is sure that everyone else is cheating. 33% of Americans cheat on their taxes in one way or another. In Russia prior to the implementation of the flat tax, tax avoidance was a national pastime. If everyone knows everyone is paying the same rate, people pay up.

I don't know that a flat tax is better for the economy. There's no evidence that it is. But it is certainly better if you want revenues. And since Matt has made the point that progressivism is better served on the spending side than the revenue side, this should be an idea he can get behind.

Besides, taxing rich people creates an unreliable revenue stream. Middle class taxes create a reliable, stable, revenue stream. That doesn't mean you should tax the hell out of the middle class while letting the rich skate. But it does mean that if you know your revenue model is highly dependent on how rich people do in the investment markets, you'd better not spend all that money in good times, because when a recession comes, you're screwed.