The Flat Tax Increases Growth | Hacker News Reader

The Flat Tax Increases Growth

marginalrevolution.com

21 pointselsewhen28 comments

Current US tax rates increase taxes on the wealthy (in theory, anyway). A flat tax would burden the relatively poor with increased taxes. Since the wealthy don't greatly contribute to growth and the relatively poor do, I don't see how an increased tax on the growth producers actually helps to crete growth.

every proposal is going to change the tax burden, thats the nature of changing the tax burden

I'm curious why you think "the wealthy don't greatly contribute to growth and the relatively poor do." We'd also probably need to define at what point one becomes "wealthy" and what the range is for "relatively poor."

Most flat tax proposals I've seen exempt the first $x. So it ends up that the people hurt the most by common flat tax proposals are the middle and lower-middle class. Upper-middle is basically the same effective tax rate and beyond that pays substantially less. The only time I've seen the upper brackets pay a higher ETR under a flat tax is if it includes all unearned income which is almost never the case.

Why not just make tax rates low for everyone? A flat tax does not necessarily have to be high.

Because somebody has to pay for the things that enable growth: roads, schools, libraries, airports, hospitals, etc...

If you simultaneously got rid of all the deductions, loopholes, etc and made it a true flat tax on all income, then it might work out that the effective rate of a flat tax policy could be more progressive than the results of our "progressive" tax policy.

I would be interested in seeing what values of ax+b (a being the rate and b being the standard [+ perhaps only] deduction) would work out to be income neutral to our current convoluted algorithm.

I don’t buy this for a second. Even my rich lobbyist family member who abuses the hell out of the tax code to right off ridiculous things is paying a much higher effective rate than somebody making 40k and taking the standard deduction.

> If you simultaneously got rid of all the deductions, loopholes, etc and made it a true flat tax on all income, then it might work out that the effective rate of a flat tax policy could be more progressive than the results of our "progressive" tax policy.

Define "income"

Yeah and increases inequality, that creates poverty, instability, and we go full cycle. It is actually long been known, that progressive taxation indeed slows down short-term development and increases long-term.

I see this inequality increases poverty line every day.

If people are specifically getting poorer, fine, you’re right. But inequality can happen and make everyone richer, it’s just the differences get wider.

Please explain your trail of thought.

The problem with inequality can be summed up in three words:

Money equals power

https://en.wikipedia.org/wiki/Effects_of_economic_inequality

What you said is actually half true, indeed if inequality grows, but incomes of the bottom grows faster it will be tolerated, but never welcomed. But once growth slows (and it always does), there is no way for the upper class to acquire the wealth without making lower class poorer. And with money comes power, and with power - ability to rig the system.

The notion that inequality is ok as long as everyone is getting wealthier is based on the fallacious assumption that people reason about wealth in absolute terms. Wealth is purely relative.

It's probably more useful to think about the problem in terms of social cohesion. As wealth inequality increases, social cohesion decreases---the wealthy dehumanize those less wealthy, and the less wealthy lose faith in the fairness of the system. Eventually you get to a point where the "poor" (who may in fact be quite rich, historically speaking) don't feel any investment in social order, and find it more efficient to take from the wealthy than to create new wealth, since the greater proportion of any marginal wealth they do create goes to the wealthy anyway.

See for example the Ultimatum game for a similar micro-economic effect, where individuals reject unfair outcomes even if it means losing money (https://en.wikipedia.org/wiki/Ultimatum_game#:~:text=It%20wa....).

GDP is great. What about changes in standard of living, income inequality, life expectancy, etc.

Seems like reduced tax evasion may be the key issue based on this bit from the paper:

> I still find no evidence of an effect on inequality, as seen in column (2). One potential reason for this puzzling result is the fact that tax compliance was known to be very low in Eastern European and Central Asian countries prior to the flat tax reforms.

I tried to look at the effects of tax changes in the US, but the issue I ran into was that other things change at the same time. Changes to the tax code tend to be paired with either spending changes, or some other economic event that drove the change.

So the GDP goes up, but do the people inhabiting the country live better lives?

A case study in picking good metrics.

Maybe we need to think about whether modern capitalist economies are higher-order lifeforms that have produced many systems, including systems of economic rationalization and "consent manufacture", that directly optimize their... ecomass. It's no longer really about class and the means of production -- we're seeing how an organism that is larger than us has learned how to reprogram us to better serve its need. The paper clip optimizer is already here, folks!

Even then, it still is about capital, it's just that the power and interests of capital work inside this organism the same way individual cells further their own life in a multicellular organism. The whole coheres as a result of a confluence of interests and interactions, most of which are so minuscule they have no substantial individual impact on the whole and merely serve as reinforcement of the general pattern, growth. Some cells are more powerful than others, nerve cells have some ability to direct the organism as a group, as do billionaires in this economic organism, but in both cases are bound by the system and ultimately have the same interests as the organism itself.

The important note here is that these sub-units of the organism are not people in general. They are capital and its controllers. It is their individual interests which trend towards their own growth that result in the organism itself seeking growth as a whole.

Reduce your personal GDP while working the same hours, same life arrangement - does your life get better?

From the article:

Using quarterly GDP data on this panel of flat-tax adopters and a difference-in-differences identification strategy, I find that the adoption of a flat tax structure has a strongly significant positive effect of 1.36 percentage points on GDP growth…[lasting about a decade].

So. . . 1.36% growth over 10 years? Is that better than the countries that didn't implement a flat tax?

1.36% is the size of the measured effect (the difference in GDP growth)

A flat tax is predictable; that also has value and reduces economic friction.

Progressive taxes are predictable too. Tax tables are published long in advance of tax day.

Now I have not read the paper, but what the articles quotes seems to make some flawed assumptions, that you can measure the difference of effect of the flat tax era versus post flat tax era in these countries, is that even possible without speculation?

After communism these countries where left in very dire situation, their economies where not adopted for a market based economy, everything from diversified private companies, regulatory institutions, monetary policies, relevant tax codes, functional banking system, trade policies etc.

In that kind of environment it probably makes sense to introduce a flat tax, there is just too many unknowns. Initially you will probably experience a good growth because of high demand rebuilding when leaving the old system behind and of course high positivism of national sovereignty.

However as time goes by and your economy progresses and your economical infrastructure gets into place, why would you expect the same, high or low, growth as the early years? Your economy is not organized the same a decade ago, classic apples to oranges comparison.

Also, your national focus has probably shifted to other important areas now when you gotten the fundamentals in place. Over time, the initial assumptions changes about how things works, you can't get perfect regulatory bodies and monetary polices on the first try, so there is probably a lot of tinkering with the system as time goes by, why should the tax code be exempt from that tinkering? Why assume that the tax code was perfect on the first try but not the other policies? How do you know that the lack of economic growth is due to the tax code changes and not the changes in monetary policies?

As I said in the beginning, I haven't read the paper so I can be mistaken. It probably answers a lot of these questions, but these kind of articles that quotes a few lines and then passed around on the internet as legitimate argument does not help.

"Use this one trick to save the US economy"

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