Low Tax, Simple Tax, Flat Tax, by Robert Hall and Alvin Rabushka, New York: McGraw-Hill, 1983, 144 pp., $18.95/$9.95 paper.
Low Tax, Simple Tax, Flat Tax is an example of how unsatisfying sound economic analysis can be when offered without the support of moral arguments. Authors Robert Hall and Alvin Rabushka argue correctly that the present system of taxing higher-income brackets at rates of 50 to 70 percent reduces the incentive for the most economically successful members of society to work. They also argue correctly that the effort spent avoiding taxes is a net loss to society. Lawyers and accountants who spend their entire careers discovering tax loopholes for their clients could spend their careers doing something genuinely productive.
In a limited sense, this book is successful. The authors make correct points in a well-documented but readable manner. However, the book as a whole disappointed me and is likely to disappoint REASON readers. It disappoints, because the authors approach the moral aspects of taxation in an entirely conventional—and hence entirely unsatisfactory—way.
For instance, the authors tells us that "the flat tax is a protest against the dishonesty and cheating that has infected millions of otherwise law-abiding Americans," without ever questioning the premise that attempting to recover one's own income from the IRS is somehow cheating. At several points in the book, we are told that the flat tax is fair because it taxes everyone at the same rate. The authors never consider whether stealing equally from everyone is somehow more fair than random stealing or whether there can ever be such a thing as a fair method of confiscation.
But these omissions are the conventional ones. Hall and Rabushka are not radical libertarians and are not pretending to be. It would be asking a great deal to expect them to confront these issues in a book of this sort. However, there are other issues that I did expect them to address. These neglected topics, one a positive and the other a normative, constitute my major disappointment with this book.
The most important neglect is that there is no discussion of the effect of the flat tax on the growth of government. The authors discuss at length the effect of their tax reform on the incentives for taxpayers, but they never mention the incentives for tax leviers and tax collectors. There are plausible arguments on both sides of the question of whether a flat tax would encourage or restrain government spending.
On the one hand, taxpayers might be more likely to protest tax and spending increases under a flat tax. All taxpayers could see how much the government is costing them. No one could be misled into supporting a program because the rich will somehow be soaked to pay for it. Tax reform could eliminate the "tax illusion" that someone else will pay for your pet program. This argument holds more strongly, the greater the share of federal revenue raised through income taxes. If a program will be paid for by a gas tax, a telephone tax, a tariff, borrowing, or inflating, then of course the program will retain its appeal for the beneficiaries.
On the other hand, a simple, efficient tax code may encourage politicians to raise the overall level of taxation. The evidence of the withholding tax supports this conjecture. The income-withholding scheme was introduced during World War II. There is no doubt in my mind that the painlessness of collecting taxes via payroll deduction has contributed mightily to the growth of the federal government since World War II.
I would have expected Hall and Rabushka to argue, in support of their flat-rate proposal, that the flat tax would reduce "tax illusion." They do not explicitly mention the effect of the flat tax on the size of government. In fact, they hint that the flat tax might generate more revenue and that this would be advantageous: "[Liberals] fear that the rise of the underground economy and the tax cheating that high rates promote may reduce the flow of revenue to Washington D.C. and jeopardize the raft of government programs they have built over the past few decades. The flat tax can thus better serve the cause of liberals than the present system. It could provide more, not less, revenue to sustain government spending on social programs."
Now, of course, for a given tax level, full compliance with the tax code will generate more money than partial compliance. If this is all Hall and Rabushka mean by this statement, they are of course correct. But the more interesting question of whether a simple, efficient tax code will encourage politicians to raise the overall level of taxation is never discussed.
My second major disappointment with this book is that the authors do not challenge the prevailing view that progressivity is ethically desirable in a tax system. Throughout the text, Hall and Rabushka assure us that their flat-rate proposal is progressive, because it includes a large personal allowance. The poor pay a smaller fraction of their income in taxes than the rich, because the $3,800 personal exemption accounts for a larger fraction of a poor person's total income. So the Hall-Rabushka flat tax proposal is progressive, but less so than the current graduated tax system. I was amazed that the defenders of a flat-rate tax proposal take for granted that progressivity is good. The authors missed a golden opportunity to protest the punishment of ability and effort that a progressive tax implies.
On this issue, the contrast between the Hall-Rabushka approach and Milton Friedman's approach is enlightening. Friedman first advocated a flat-rate tax in the 1960s in Capitalism and Freedom. But one of Friedman's motivations was to reduce progressivity. As Friedman says, "I find it hard, as a (classical) liberal, to see any justification for graduated taxation solely to redistribute income. This seems a clear case of using coercion to take from some in order to give to others and thus to conflict head-on with individual freedom."
There are moral arguments to be made in favor of the flat-rate tax, as well. Hall and Rabushka don't make them. Even if they had made them, I think the moral arguments against the flat tax are more powerful. And, after all, avoiding taxes through the complex tax code is one of the few methods of protest and resistance that remains open to us.
In short, read this book if you want a thorough economic picture of the flat-rate tax. But don't expect to be persuaded by it.
Jennifer Roback is an economics professor at Yale University.
This article originally appeared in print under the headline "Fair Theft?".