A literalist approach to “supply-side” economic policy

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Some thoughts on Herman Cain’s 9-9-9 Plan

The existing U.S. federal tax code is a monstrosity. According to the IRS, Americans spend more than 3% of GDP on compliance costs each year. The deductions and exemptions in the existing code favor some industries over others and some behaviors over others. Why should Google and GE pay only a few percent of their profits in taxes when Wal-Mart has to pay nearly 40%? Why should a financier pay a lower tax rate than a doctor?

Unsurprisingly, many people have called for replacing the tax code with something simpler and more fair. One alternative that has recently been featured in the news is the 9-9-9 plan devised by Republican presidential candidate Herman Cain.

How does it compare to the current system? What are its assumptions? Are the criticisms justified? Would it accomplish its objectives?

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A few issues with U.S. corporate tax policy

We know that the U.S. federal government collects revenue from individuals in a manner both arbitrary and opaque. Its taxation of companies is even less transparent and more distortive.

Some get handsomely subsidized for doing what they would do anyway, while others get penalized for being in an unfavored industry.

Just to make matters worse, the current system makes us more vulnerable to financial crises than we otherwise would be.

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A tax reform you probably haven’t heard of

All tax systems are inherently unfair. Only if everyone paid the state for the value of the services provided (or if no one paid any taxes because the state did not exist) would it be possible to justify a particular tax schedule as morally superior to all alternatives. But neither of those regimes are realistic. After all, most government spending is meant to prevent or ameliorate severe poverty. If the beneficiaries of that government spending could afford to pay the amount of taxes that is “fair,” they would not need to receive state aid in the first place.

Suppose the government confined itself to providing basic physical security to its citizens. It is still not clear what would constitute a “fair” system. Would the salaries of the police and the cost of their equipment be split equally among all members of the population? Or do those with more property derive greater value from the security that the state provides?

So every tax system has to be somewhat arbitrary. This does not mean, however, that there are no better systems than the one we have. Today, I will present a practical alternative that is never discussed: the progressive continuous income tax. Read more of this post