Reasoning about Taxes

A flatter tax system is one of those perennial Republican quests. But it's a solution that doesn't match up terribly well with the problems Rubio, Lee, and their co-travelers say they're concerned with.

The basic idea behind the progressivity of the current system is it protects the least well-off. If you're a single individual making $9,000 a year, every cent you earn is going to food, shelter, clothing, etc. If you make $38,000, that first $9,000 is still really crucial, but the next $29,000 slightly less so, and so on. Which is why each one of those batches of money is taxed at a progressively higher rate: the money you need the most gets taxed the least.

And while Rubio and Lee's plan [two income tax brackets instead of the current seven brackets] benefits the richest the most, it basically amounts to a tax cut for everyone. So if all you're concerned with is the tax burden of middle-to-low earners, it's not a bad deal. The problems are elsewhere.

One, Rubio pitches the plan as a blow in favor of simplicity, which makes no sense. The current setup of seven brackets may seem complex. But once you know what your taxable income is, it takes a page or two of forms and a few minutes of simple arithmetic to figure out your tax liability.

The complexity, rather, comes in figuring out your taxable income. There are a host of deductions and exemptions in the tax code, all of which remove some of your income from the "taxable" bucket. And afterwards, when you've determined how much you owe, there are various credits that reduce that number, too.

A flat tax (just one tax bracket with one rate for everybody) would still be an income tax, and thus defining "taxable income" would still be necessary. Politicians could add just as many deductions and exemptions and credits as we have now.

A consumption tax (i.e. a national sales tax of some sort) presents a similar problem, in that you can still introduce all sorts of carve-outs. Its big advantage over a flat tax is there's no tax paperwork for individuals; they just pay the sales tax whenever they buy a good or service, while the business handles the paperwork.

How simple the U.S. tax code is depends on what loopholes you introduce. Every so often, Congress goes through the code and clears out a bunch of loopholes that have built up. But then the natural grind of politics and lobbying and interest groups inevitably reasserts itself, new loopholes are created, and eventually Congress has to go back and clear it out again. It's like scraping the barnacles off a ship's hull. It's never actually done, and whether you have one tax bracket or 50 doesn't change the process.

... people can earn large amounts only when they live under favorable social circumstances, and they don't create those circumstances by themselves. Warren Buffett acknowledges that society is responsible for much of his wealth. "If you stick me down in the middle of Bangladesh or Peru," he said, "you'll find out how much this talent is going to produce in the wrong kind of soil." The Nobel Prize-winning economist and social scientist Herbert Simon estimated that "social capital" is responsible for at least 90 percent of what people earn in wealthy societies like those of the United States or northwestern Europe. By social capital Simon meant not only natural resources but, more important, the technology and organizational skills in the community and the presence of good government. These are the foundation on which the rich can begin their work. ... his estimate undermines the argument that the rich are entitled to keep their wealth because it is all a result of their hard work. If Simon is right, that is true of at most 10 percent of it.

...

Thomas Pogge ... argues that at least some of our affluence comes at the expense of the poor. He bases this claim not only on the usual critique of [trade barriers], but also on less familiar aspects of our trade with developing countries. For example, he points out that international corporations are willing to buy natural resources from any government, no matter how it has come to power. This provides a huge financial incentive for groups to try to overthrow the existing government. Successful rebels are rewarded by being able to sell off the nation's oil, minerals or timber.

In their dealings with corrupt dictators in developing countries, Pogge asserts, international corporations are morally no better than someone who knowingly buys stolen goods. ... The situation is, of course, beneficial for the industrial nations, because it enables us to obtain the raw materials we need to maintain our prosperity, but it is a disaster for resource-rich developing countries, turning the wealth that should benefit them into a curse that leads to a cycle of coups, civil wars and corruption and is of little benefit to the people as a whole.