Critique of Fareed Zakaria’s article “Complexity Equals Corruption”
Fareed Zakaria recently wrote an article in TIME Magazine concerning Cain’s 9-9-9 plan. It’s somewhat of a promotion, not for Cain’s ” specific policy proposals but their general thrust.”
Humorously, the title is about the only thing I agree with, but even there I have some minor quibbles.
Cain’s 9-9-9 plan involves eliminating the entire tax code and replacing it with a 9% income tax, a 9% corporate income tax, and a 9% sales tax (as well as a 9% payroll tax Cain conveniently forgets to mention).
Most Americans believe that the federal tax code is highly complex and fundamentally corrupt. They are right. The federal code (plus IRS rulings) is now 72,536 pages in total. The code itself is 16,000 pages. The statist French have a tax code of 1,909 pages, only 12% as long as ours. Countries like Russia, the Czech Republic and Estonia have innovated and moved to a flat tax, with considerable success.
Complexity equals corruption. When John McCain was still a raging reformer, he pointed to the tax code as the foundation for the corruption of American politics. Special interests pay politicians vast amounts of cash for their campaigns, and in return they get favorable exemptions or credits in the tax code. In other countries, this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America it is institutionalized and legal, but it is the same—cash for politicians in return for favorable treatment from the government. The U.S. tax system is not simply corrupt; it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money to its favored funders through the tax code—without anyone realizing it. The simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away: preferential tax treatment. A flatter tax code with almost no exemptions does that
Now while I agree with this statement, it should be noted that tax simplification is only a form of delaying corruption. All governments are corrupt by nature. Getting rid of tax exemptions is only getting rid of a symptom. If you have power concentrated in one place, corruption will follow; it’s just a matter of time. In addition, adding a sales tax to the federal roster for possible taxes in the long run will do more harm than good. If you want to simplify, don’t add any new taxes.
Zakaria goes on to point out the benefits of a sales tax, stating there will be less tax fraud and that it would be a more stable form of income:
Second, it provides the government with a more stable source of revenue than income taxes, which fluctuate greatly between boom and bust years. Third, Americans consume too much, often using credit and leverage to do so. A consumption tax would moderate this behavior. Government will always get less of behaviors it taxes and more of what it subsidizes.
Both of these points would be solved by eliminating the Federal Reserve. Over consumption, in not just the US, but in countries all over the world are caused by the easy credit the Fed (as well as fractional reserve banking) provides. Not just in the literal sense of banks giving loans that individuals spend needlessly, but also because of the fact that easy credit to businesses spawns a boom for the economy, leading to a production structure where consumption and investment are abnormally high, only possible because of the capital consumption that takes place, leading to an eventual and inevitable bust (as explained by the Austrian business cycle).
Even more annoying is Zakaria’s application of the common fallacy that sales taxes discourage consumption. Although this is true in a literal sense (all taxes reduce consumption), the idea that Zakaria is referring to is undoubtedly that consumption taxes encourage savings and discourage consumption. This is incorrect. A consumption tax discourages savings just as an income tax does. The flaw lies in observing the direct payer of the tax rather than the true payer of the tax.
Take an example of a retailer selling a box of Oreos at the store for 4 dollars. Now add a 10% tax in. The price of the Oreos is now $4.40. Consumers will buy less and save more right? Now that the price is higher? Nope!
Think of it this way instead. A retailer is already selling at the price that gives him his maximum profit. If he could have raised the price to $4.40 and received a larger profit, he would have done so before the tax. There was nothing stopping him from raising the price before the tax was even in place. The fact that the price was at $4.00 rather than $4.40 proves that $4.00 was his profit-maximizing price. The addition of the tax necessarily hurts his profits. His price will most likely be higher than $4.00 (inclusive of the tax), but lower than $4.00 (without the tax).
So the the retailer will lower his demand from the factory, and eventually this reduced demand will hit the land owners/capital owners, who will in turn, reduce savings. The tax gets shifted backwards. (I will probably make a future post more detailed about this process, but consider the logic I have just mentioned for now)
Zakaria ends the article by announcing his own form of Cain’s tax plan:
My version of Cain’s proposal would be flatter but not flat: 9% for the first 90% of Americans, 18% for the next 9% (incomes starting at $150,000) and 27% for the top 1% (incomes starting at about $500,000). I would keep a few straightforward deductions—state and local income taxes and charitable contributions. I would lower the corporate rate to 18% and impose a VAT of 9%. Finally, I would enact a 50% inheritance tax, because nothing is more un-American than an inherited elite that perpetuates itself. So my proposal is a bit more complex—the 9-18-27-18-9-50 plan. Don’t expect it to catch fire on the campaign trail anytime soon.
Ironically, it’s quite a bit more complex, even with “straightforward deductions” that would assuredly be expanded over time. Also somewhat comically, after just stating that government “will always get less of behaviors it taxes and more of what it subsidizes,” he decides to add a value added tax(VAT) of 9% to his tax code. It seems like Zakaria wants a tax code discouraging value! And here I would agree, that’s exactly what would take place.
As for a 50% inheritance tax, I think Zakaria and I disagree on American values. He attempts to demagogue by saying “nothing is more un-American than an inherited elite that perpertuates itself.” He might as well have said nothing is more un-American than gift giving! I would say the most fundamental American value is liberty. And liberty to give and receive gifts is part of this liberty. If you want to be upset at inherited elites who perpetuate themselves, be upset at those who abuse the power of government to do so, rather than those peacefully passing on what they have accumulated in their lifetime.