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Con: Flat taxes won’t restore our global competitiveness

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William F. Shughart II
July 2, 2011
EDITOR’S NOTE: The writer is addressing the question, Would adopting a flat tax benefit the United States?

Over the past decade or so, China’s policy of export-led growth has triggered double-digit economic gains, leading some commentators to predict that the Chinese economy—already second-largest in the world—would soon eclipse our own.


Meanwhile, beginning with the popping of the real estate bubble five years ago, the United States slid into recession. Although the National Bureau of Economic Research found that the slump ended in June 2009, the recovery has remained weak, with unemployment still hovering around 10 percent.


Has America lost its competitive edge? Are we doomed to be overtaken as an economic superpower only a decade into the 21st “Chinese” century? Maybe so, but switching from the current tax code—admittedly a giant mess—to a flat tax will not by itself solve our economic woes.


To be clear: I strongly favor junking the maze-like federal income tax code, 9 million words long and shot full of arcane provisions supplying tax breaks to special interest groups whose Gucci-shod lobbyists patrol the halls of Congress whenever taxes are on the agenda.


Replacing those 9 million words with a single tax bracket of, say 17 percent—applying to all income, however earned, with few deductions or exemptions and no loopholes—would produce huge economic benefits.


Complying with the current tax code costs at least $350 billion a year, valued in terms of the time lost by people who fill out their own returns and the fees charged by lawyers, accountants and other paid preparers.


A flat tax would eliminate this and free up for more productive uses the resources now wasted in lobbying for special tax treatment, in record keeping and reporting, and in staying abreast of an ever-changing set of tax rules and tax forms.


More important, simplifying the tax code would allow pink slips to be sent to an army of intrusive IRS agents who from time to time have been known to conduct audits of people and organizations named on presidential enemies’ lists and for other political purposes.


However, a flat tax is no silver bullet for what ails the U.S. economy.


Milton Friedman once said that government’s burden on the private economy is best measured not by how much revenue it collects, but how much it spends.


And federal spending is out of control, producing budget deficits exceeding $1 trillion annually and piling up mountains of debt for future generations of taxpayers.


Shifting to a flat tax won’t help because any flat tax proposal with a chance of winning approval will have to be “revenue neutral,” extracting about the same amount of money from taxpayers’ wallets as the existing tax code. This means that unless Washington cuts expenditures dramatically, the federal budget will stay in the red.


Restoring America’s global competitiveness requires balancing the public budget, not by raising taxes, but by cutting spending: reducing the size of government. It also requires reducing the job-killing regulatory burden on the private sector—the thousands of pages of rules and regulations that bind the hands and increase the costs of business —and maintaining a sound and stable currency.


Rapid economic growth in China and slow growth in the United States already has narrowed the wage gap between Chinese and American workers, so much so that prominent U.S. manufacturers have begun moving some of their production facilities back home.


China is a red herring that should not distract taxpayers from demanding that Washington get its fiscal house in order. Most of our economic problems are self imposed. If we are serious about maintaining our economic leadership we should reduce these burdens.


William F. Shughart II, a senior fellow with The Independent Institute (www.independent.org), is J. Fish Smith Professor in Public Choice at Utah State University. Readers may write to him at 3500 Old Main Hall, Logan, Utah 84322-3500.

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