Book Reviews

The Flat Tax

REQUIRED READING for an intelligent discussion of US tax code

The 60,000 page tax code itself is the issue, not another tweak or incentive in the way of tax rates, credits, deductions, or what not. The uber rich (including Warren B and Bill G) pay VERY LITTLE as it stands now because of how the code protects those who have concentrated, inherited, or sudden wealth. For just one example, just set up a qualified multigenerational family foundation, put a big chunk of appreciated stock in it, and you avoid the majority of capital gains, income, and even estate tax – forever! The world of trusts and foundations is murky to most people, and the truly rich (as opposed to very high income workers/business owners – VERY different people) depend on your ignorance of how the code really works to perpetuate class warfare that in the end will leave them right where they are. Yes, it’s the new American Aristocracy.

The only real answer to spur the economy and solve the deficit at the same time is a true flat tax with no or extremely limited deductions, with the first $40K (or whatever a living wage is) non-taxable for everyone.
Fair? Yes. Progressive versus what actually exists in practice today? Absolutely.

I laughed and cried when I read of Warren Buffett’s recent plea to raise income tax rates for the super rich. I’m not sure Warren would like a truly flat tax as it would actually touch him. Put another way, raising the top bracket to 50% or so still wouldn’t really affect him, since his ‘income’ is for the most part sheltered and never shows. Do the math with me – WB’s $6.7M tax bill last year divided by his liquid net worth works out to about .1%, not the ‘only 17%’ (?!) of his income that he claims in his op-ed. Most of his net worth has not been and will not ever be taxed under the current code. Buffett’s statements about the rich paying their fair share yesterday were intellectually dishonest in my opinion.

Read this classic if you actually want to be informed on this issue – they’ve covered all the objections you can think of, and more. Anything that Jerry Brown and Ronald Reagan agreed on might be worth a look.
Now, if only someone somewhere had the charisma and political will to actually pull such a thing off, given that legions of lobbyists, CPAs, bankers, investment advisors, etc. etc. etc. would do everything they could possibly do to kill any such reform since it would negatively affect their businesses.

A clear yet deep dive into one of the most prominent tax-reform ideas out there

The United States tax system is insane. At over 70000 pages and counting, it’s impossible for any person to fully understand it. It’s riddled with loopholes and special cases, inserted over the years by politicians larding their bills to attract votes. Its incentives distort individual choices by making evasion and avoidance more attractive, it stimulates rent-seeking, and it’s spawned entire industries devoted to addressing the deadweight loss from its complexity. It is almost thoroughly unlikable, and it’s a system no one would ever design.

This book presents an alternative tax system: the flat tax. The flat tax strips away nearly all the complexity of the current tax code, reducing the entire tax system (with a couple exceptions like the social security tax) to a handful of figures and simple calculations, stripping away nearly all special cases to eliminate loopholes and opportunities for unequal treatment. The authors reduce the entire code to a mere seven very short pages of text, understandable by any financially-savvy person. The tax forms themselves are the size of postcards.

Robert Hall and Alvin Rabushka here present the rationales for the flat tax, the logic behind it, the details of how it would work, and common questions and answers about it. They labor at some length to present the complete details of the system. It’s technical reading you can’t simply breeze through: you’ll have to work a little to understand it all, and it’s best digested slowly. But any intelligent person with a little mathematical skill and mind for finance will come away from this book with significant understanding of exactly how the flat tax would work. That definitely cann’t be said of any book that will ever discuss the current tax system.

Merits or demerits of the proposal aside, this presentation of the flat tax is excellent. If you want to understand the flat tax, whether to praise it, to bury it, or simply because you want to be better-informed, this is the book to read.

Very Informative Little Book

I purchased this book to help me understand the hoopla about alternative tax methods. The book not only explained why the flat tax proposal is good for the country, but compared it to the fair tax idea. Overall, I enjoyed the read, it had a lot of good information (especially since I didn’t have any to begin with), and I like the easy way the author explained the subject matter. I’d recommend it to anyone who, like me, is trying to get a better grasp of the political ideals being thrown around these days.

Non-Political Review

I’m not going to debate the merits or failings of the flat tax in this review. A book review is too short for that. The question is did this book clearly explain what the flat tax is, how it will work, what the authors believe the benefits are and the logic behind their arguments? Yes to all the above. Whether or not you think you’ll agree, or whether or not you end up agreeing is beside the point. The flat tax is a suggested tax reform and if your interested in tax reform this is a great book to understand the nuts and bolts of the flat tax that many of the flat-tax proponents are supporting. If you read this, you will understand what is being debated when the flat tax is being discussed.

A Proposal to Radically Revise the Income Tax Code

Authors Robert Hall and Alvin Rabushka wrote in the Preface to this 1995 book, “the adoption of the flat tax would give an enormous boost to the U.S. economy by dramatically improving incentives to work, save, invest, and take entrepreneurial risks. The flat tax would save taxpayers hundreds of billions of dollars in direct and indirect compliance costs. It would also shift billions of dollars from investments that reduce taxes to those that produce goods and services.”

They state that “Loss of interest deductions and eliminating interest taxation are two of the most conspicuous features of our tax reform plan.” (Pg. 79) They note that disallowing of interest for companies “is a problem only during the transition to the flat tax. Corporations and homeowners with large amounts of debt will suffer, just as those with large holdings of bonds or mortgages will gain.” (Pg. 118)

They admit, however, that “We can’t tell if there are any interest groups who would pay significantly higher taxes… If we are right that improved incentives will actually raise real incomes by 6 percent after seven years, then it won’t take long for the taxpayers who lose at the outset to come out ahead.” (Pg. 93) They also concede that “The immediate effect of tax reform (regarding charitable contributions) may be a small decline in giving. Later, as the economy surges forward under the impetus of improved incentives for productive activity, giving will recover and likely exceed its current levels.” (Pg. 99)

They argue, “The inheritance tax should be eliminated… An inheritance tax constitutes double taxation, which violates a sacred principle of sound tax policy.” (Pg. 126)

The “Fair Tax” (e.g., The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS) is a more “current” proposal for serious tax reform, but the arguments of this book are nevertheless well worth studying, for anyone interested in revising tax law.

Flat and simple

The title of this book is not quite accurate. Hall and Rabushka want flat and simple taxes. They want to flatten out rates and simplify, well eliminate the maze of complex exemptions in the existing tax code. What we have here is a point by point explanation of a program for scrapping the tax code, followed by a useful Q+A section.

Some of their claims regarding their reforms are a bit exaggerated. For example, the claim that “every study we can find shows that lower tax rates on businesses and employees increases the supply of labor, capital, and entrepreneurship”. As an economist I agree with their conclusions, but there are some studies, albeit faulty ones, that contradict the above argument. Professional opinion is not uniform.

The flat tax is an idea that is good economic policy, but bad politics. Our current tax system does detract from economic development. There is no economic justification for collecting taxes through such a complex code. Our tax code is maintained in part by certain special interest groups (tax accountants and tax attorneys) and the politicians who they pay off (Democrats). There is little we can do to reason with people who are feeding off of the tax compliance industry. They are on the take and will not listen to reason.

Our tax code is further maintained by rank and file Democrats who believe that we can achieve some sort of `social justice’ through the tax code. These persons are not bought off, and some of them will listen to reason. This is how we can get rid of the tax code: by shifting public opinion. If enough people come to see the tax code for what it really is, then the political balance will shift against the tax compliance industry. There was a serious drive to scrap the tax code in the mid 1990’s, which Clinton blocked.

Scraping the tax code would not lead to Nirvana, but it is good policy. Scrapping the tax code would also do justice upon those who have been leeching off the rest of us all our lives. The accountants and lawyers who make money off the tax code are parasites. Scrapping the tax code would ruin many of them, financially, and they deserve at least that. I should be clear that this last remark was a moral/political/personal statement, not a professional economic opinion. The Flat Tax is an important book because it can have an impact on public opinion. It can be a part of scrapping the tax code.

Fairness and Efficiency in the Flat Tax

Although this little book, which is a quick read and gets right to the point, was written in the mid 1990’s, it is actually very relevent for today (early 2011). America’s Income Tax system has become way too complex and consums way too much of America’s bandwidth each year. About 1.5 Billion Man-Hours in fact.

I much appreciated that the book actually presents several essays with different takes on the pro’s and con’s of a flat tax. This was very helpful by being able to hear multiple side of the discussion rather than just one author’s perspective.

For any citizen who is tired of all the effort and time that goes into doing his or her taxes each year, the simple post-card approach of the Flat Tax will be greatly appreciated. What is also amazing is that this simpler approach can still be revenue neutral at the same time, but offer lower tax rates as well.

Get this book, read it and then pass it along to a friend. The more people that come to understand this very viable alternative to what we have now, the more it may actually become possible that we can bring about change to the tax code.