Flat Tax Fallacies

Some time back, I watched a remarkable two hour PBS overview of the first two hundred years of the US Supreme Court:

http://www.pbs.org/wnet/supremecourt/

The entire two hours was engrossing. Among other things, it reinforced my view that the greatest achievement of the George W Bush Presidency is his appointment of John Roberts as Chief Justice. What a remarkably worthy and wise appointment. I was impressed by the testimony and remarks of Roberts during his confirmation hearings. His remarks regarding the history of the Court on the PBS special are even more impressive.

I was particularly struck by two topics during the telecast. The first was the paradox that the ceaseless debate about the Constitution being a "living" vs "set in stone" document had its origins in the most important decision the Court ever made, the Marbury vs Madison case which established the authority of the Court to review and overturn the laws of Congress out of vapors as thin as those used to establish the so-called Right to Privacy which led directly to Roe vs Wade. The delicious paradox is that the (only implied) authority for Judicial Review was first used to strike down a law of Congress which conflicted with a strict constructionist view of the Constitution. And we've been stuck (or blessed) with the fallout from this paradox ever since.

The second thought provoking topic was presented only as background for a description of some interesting Court history, but the topic itself has great contemporary importance.

It had to do with the origin of the Federal Income Tax and its birth as a reaction to the perceived excesses of the so-called "Robber Barons" (Rockefellers, Carneghies, etc.).

Basically, the tax was imposed as an effort to redistribute wealth.

For two opposite views on the merits of government-engineered wealth redistribution, I recommend the following executive summaries (the first by a "progressive" labor movement journalist and the second by Milton Friedman):

http://www.unlockyourlife.com/pizzigati.html

(Note in the above that FDR proposed a 100% tax on incomes above a certain level!).

http://www.freetochoose.net/article_2a.html

I come down somewhere in the middle. The problem with the absence of a progressive tax is that it leads to enormous disparities in wealth distribution, which are at first tolerated but which inevitably lead to class warfare of the type which we are beginning to see here in California, where Exhibit A is the (horrible) "millionaire's tax," the Proposition 63 voters' decision to fund mental health treatment with tax revenues exclusively collected from said millionaires.

Here's the California state web site that reports on the status of the program established by Prop 63:

http://www.dmh.cahwnet.gov/mhsa/default.asp

The "millionaire's tax" for the mental health program is the sort of micromanagement populism which will become more and more prevalent as the rich vs middle class gap persists and widens.

I'm not a fan of government management, but I am approving of government regulation. As a sports fan, I know that players adapt to all manner of rules and regulations and still play their hearts out, as long as the competition is judged to be fair and to give all players an equal sporting chance at success. The most destructive type of regulation is not excessive regulation but unequal regulation or inconsistently enforced regulation.

Even Friedman (above) argues that the Depression occurred more because of incompetent regulation than from the regulation itself.

In sport, an important goal of regulation is to maintain a competitive (if not completely level) playing field. Thus, there are weight divisions in boxing, three points for long baskets made by short players, prohibitions against doping in general, and many other highly restrictive rules.

If restrictions and rules themselves were an impediment to vigorous competition, we'd have no one trying to win the game. The idea that lots of regulations in and of themselves stifle the economy is as silly as saying that rigid and "oppressive" rules in sport stifle competition. Quite the contrary, good rules make for good competition, which is the essence of sport and the essence of a market economy.

The progressive tax is just one other rule of the game. You are "allowed" to make your first 10,000 dollars with little "impediment." As you make more and more, it becomes more challenging. Sort of like a computer game where it becomes progressively more challenging at the higher levels.

With a flat tax, the more wealth (and, with it, power) one accumulates, the easier it becomes to compete and, thus, the disparity between the ultra-rich and middle class begins to grow exponentially. The data described by the labor movement journalist (linked above) make this clear.

For a number of compelling reasons, a progressive tax makes for a better game. Which means a better economy.