Debate Magazine

Laff(er)ing at Ted Cruz and His Ridiculous Flat Tax Proposal / End the IRS Platform

Posted on the 25 March 2015 by Doggone

So, now Ted Cruz joins past presidential candidate wanna-bees on the right in proposing a flat tax.  Flat taxes have been proposed by most recently Herman Cain and the Nut Gingrich, but have also been floated in the past as far back as Steve Forbes when he wanted to be the right wing nut candidate.
There is a problem with the Fat Tax.  It doesn't work, in that it does not offer the promised benefits in tax revenue or growth.  What it DOES do -- and why we should expect it from the right wing, hand maidens to the wealthy, is to benefit the rich and to expand wealth and income inequality.  It also tends not to have provided adequate revenue -- much the way the Bush tax cuts failed to produce adequate (much less increased) revenue and economic growth.  The flat tax also does not promote adequate revenue or optimal job growth, much the way we have seen the tax cuts in regressive states like Kansas and now Wisconsin have not produce either economic growth or job creation and increases in business growth.
There has been experimentation with the flat tax, mostly in formerly eastern bloc European countries and Russia.  Many of those countries, after implementing a flat tax, DID see economic growth, but for other reasons than the flat tax, and those countries have been hit hard by the 2008 global economic recession.  And another factor not generally noted - most of the countries that have implemented the flat tax have also been widely regarded as highly corrupt, with Russia being regarded as the MOST corrupt - one of the most corrupt in the world, which should be considered in any reference to increased tax compliance.
This is significant because Cruz also wants to abolish the IRS, making compliance apparently entirely on the honor system.
Yeah, like THAT is going to work.
So lets start with the famous IMF study of flat tax implementation and success / failure from 2006 -- before the big global economic collapse.  At that point the range of time during which there was evidence on the implementation of the flat tax ranged from ten years to two years in the countries examined.
From the 2006 IMF study of the flat tax
One of the most striking tax developments in recent years, and one that continues to attract considerable attention, is the adoption by several countries of a form of “flat tax.” Discussion of these quite radical reforms has been marked, however, more by assertion and rhetoric than by analysis and evidence. This paper reviews experience with the flat tax, seeking to redress the balance. It stresses that the flat taxes that have been adopted differ fundamentally, and that empirical evidence on their effects is very limited. This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the  distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance;  adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.

So for those of you who either have forgotten the lessons of your economics classes or never took them, let's first review the significance of that bold typed part of the above study excerpt.  What is the Laffer curve and Laffer-type behavior? This is key to the selling of a flat tax by Cruz and other right wingers; it is the fundamental premise and promise of the flat tax, in  exactly the same way that it has been the promise for tax cuts generating economic growth and increased revenue -- in other words, a CON, a SCAM, a FRAUD, a HOAX, a LIE.
Don't take my word for it; there are consistent right wing failed ideology / right wing  failed economic policies are consistent in increasing the wealth and income inequality gap, by any means possible, consistently rsulting in the middle and lower economic demographics getting poorer, and the richer getting richer, especially the 1% who comprise the big-spending big-controlling donor class.  The flat tax is just one more variation on that theme.
To elaborate, from January of this year, a real world analysis demonstrating the Laffer curve:
Since the economic collapse that began in 2008, politicians and lawmakers all across the United States have been on the move to enact policy that will stimulate the economy and bring back jobs. Tax policy has inevitably become part of this national discussion. The Laffer Curve, an economics theory that posits that cutting taxes is beneficial for economic stimulation, has been put to the test in two real life scenarios that have played out in Kansas and California. The results provide significant evidence that calls into question the well-worn principle that a higher minimum wage decreases overall employment and income.
The Laffer Curve, one of the fundamental tenets of supply-side economics, was popularized by the economist Arthur Laffer in the late 1970s. As a curve, it merely demonstrates the relationship between tax rates and total tax revenues collected by the government. According to this construct, the effect of a lower tax rate is an increase in work, output, and employment whereas a high tax rate penalizes these activities. The curve is often used to explain and justify the pro-growth worldview of supply-side economics. It should be noted, however, the Laffer Curve does not say definitively that a tax cut will raise or lower revenues. For example, a tax rate of 100% wouldn’t collect more money than a rate of 25%, as no one would be willing to work for an after-tax income of $0. The value of the Laffer Curve is its ability to predict economical behavior based on simple arithmetic truths.

Kansas Tax Cuts & California Tax Hikes

In the case of Kansas, after the election of Sen. Sam Brownback as governor in 2010, the state rolled out a new tax policy, a virtual low-tax paradise that was eventually meant to eliminate the state income tax. Brownback’s administration consulted Laffer on tax cuts and enacted these measures in the hopes that, according to the Laffer Curve, they would help to fuel the stagnant economy. The measures, called “the largest tax cut ever” at the time, were enacted in 2012. It quickly became clear that Kansas’ economy was not following the upward trajectory the Laffer Curve predicted it should. As a result, the state’s credit rating was lowered, first by Moody’s Investors Service and later by Standard & Poor’s, who cited “a structurally unbalanced budget.”Meanwhile in California, tax rates were rising as much as 30 percent, raising the sales tax to the highest in the nation at 7.5 percent. The Laffer Curve indicates that California’s job growth should have slowed to a crawl and brought the state’s economy to a grinding halt. This October Governor Jerry Brown was happy to announce that the measures had quite the opposite effect, stating “California is back.”
Contradictory to what proponents of the Laffer theory may have predicted, it was California that came out the winner. Jobs in the state grew at a rate 3.4 times greater than in Kansas, and non-farm payroll jobs increased 7.2 percent in California compared to just 2.1 percent in Kansas. California’s credit rating also improved, unlike Kansas’, which means that the state can borrow money at much lower rates than Kansas can. So what happened? Do these real-life contradictions mean that the Laffer Curve doesn’t work?

Author RG Brenner stops short of saying the Laffer Curve does not work at all; I would go further and assert that it has never worked as promoted by right wing politicians, policy wonks and economists.  That is true whether what is promoted is tax cuts (especially for the rich), tax policy in conjunction with deregulation, or the flat tax.  To return to the 2006 IMF paper, it become apparent that the flat tax really is just the same old wolf of tax cuts for the rich, with the implicit blind belief in the failed Laffer Curve application, in a newer and slightly different sheep's clothing.
Much of the enthusiasm of advocates of the flat tax, of course, seems to relate at least as much to tax cuts, particularly in the upper part of the income distribution, as to flatness per se.
Why is this BAD? Because contrary to what right wing nuts aver, the rich getting richer really IS a bad thing.  If you look at states with tax cuts, they have two things --- poor economies with low job growth, and they consistently tend to have huge government revenue shortfalls and huge budget deficits.  A stark contrast would be the billions in state surplus in MN, combined with good job growth and a top performing economy, and the otherwise similar state of WI, where they have a huge deficit, exploding state debt, and incredibly crappy (that's not exactly a technical term) economic growth and job growth.
Comparing more states than just the same old MN / WI comparison, we see that MN is cited below as one of the more progressive taxation states.  A brief check shows that state by state, the progressive state taxation states are thriving, and the  Laffer reliant states are floundering.  In the case of sad old Kansas, literally Arthur Laffer consulted on the taxation passed by their legislatures, and signed by their radical right wing nut governor Sam Brownback.
and from the Christian Science Monitor:
USA Politics DC Decoder
Coming this tax season: tax laws favoring the rich in a state near you (+video)

State and local taxes will consume about 9.4 percent of middle-income earnings, compared with 5.4 percent of income for the high-earning 1 percent of families, according to a recent analysis.

By Mark Trumbull, Staff writer February 18, 2015

Washington — Americans generally voice support for a tax code that's "progressive” – that makes tax rates rise somewhat in proportion to one's income. Yet across America, hidden from easy view, states generally have tax laws that favor the rich over ordinary citizens.

As Americans fill out their tax forms this season, state tax codes contrast sharply with the federal income tax – where the rich pay at higher rates.

State and local taxes – including property and sales taxes – will consume about 9.4 percent of middle-income earnings, compared with 5.4 percent of income for the high-earning 1 percent of families, according to one recent nationwide analysis.

Recommended: What does the federal government do with your money? Take our taxes quiz.

The differences stand out at a time of public concern about income inequality, alongside how to revive jobs and income growth for the middle class.

Test your knowledge What does the federal government do with your money? Take our taxes quiz.
Photos of the Day Photos of the weekend

“The vast majority of states allow their very best-off residents to pay much lower effective tax rates than their middle- and low-income families must pay,” concludes the recent report by the Institute on Taxation and Economic Policy (ITEP), a left-leaning research group.

The organization argues that it’s unfair for wealthy residents of a state to pay lower tax rates, and also that the system is making it harder for states to balance their budgets.

Another research group, the Tax Foundation, offers a different take: It agrees with the basic assessment that state tax codes allow the rich to pay at lower rates, but argues that the appropriate focus for tax policy is on promoting economic growth rather than on income redistribution.

Here’s a look at the how the state tax codes stack up, according to the ITEP report:

• Almost all states take a much greater share of income from low- and middle-income families than from wealthy families. Key reasons, the report says, are the “absence of a graduated personal income tax and overreliance” on sales taxes.

• The most regressive tax codes aren’t confined to any one region. The report’s Top 10 are Washington State (the most regressive), followed by Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana.

• The least regressive states also are geographically diverse. They include California, Delaware, Minnesota, Montana, Oregon, and Vermont.

...A report by International Monetary Fund economists last year, for instance, called lower inequality “robustly correlated with faster and more durable growth.” Specific policies matter, of course, but the study said that evidence from various nations does not support the view that there’s inherently a big “trade-off” between redistribution and growth
To return for a moment to the conclusions drawn by RG Brenner in his comparison of the Laffer Curve/ Laffer effect in looking at Kansas and California -- a conclusion that could as easily apply to MN and WI, or any implementation of conservative economic and taxation policy:
What Real Life Contradictions Mean
No economic model is perfect. If anything, what these real world contradictions tell economists is that their models need more refinement, but it sends a message to politicians as well. The real world will always trump theory, and changes in policy would be better based on actual data about the number of jobs and what they pay rather than projections, ideology and theory.
Let me repeat that -- The real world will always trump theory (and not 'the Donald' kind of trump either).  Our politicians, be it Ted Cruz, John Boehner, or any of the rest of the old wrinkly elephants all KNOW that the real world shows their economic plans do not work, be it tax cuts or anything else.  When they tell us that their NEW AND IMPROVED tax plans will grow the economy or create jobs -- or be more FAIR -- they know better.  They are choosing to be willfully ignorant, and in exchange for support from their donor classes, they are also being deliberately dishonest.
Look at Ted Cruz as making a speech to solicit support from the right wing donor class.  He is sufficiently well educated to know the reality, and it is not that a flat tax will benefit most Americans.  Higher taxation of the wealthy does appear to be good for growth without seriously adversely affecting that 1% -- a view shared by economists who, like Laffer, do a lot of their work in the specialty of taxation,  Peter Diamond and David Cay Johnston.  And for those old fashioned Bible thumpers on the right who don't believe we can or should do anything differently from the Founding Fathers back in the 18th century, it is worth noting they taxed the rich, embracing the first income tax on the wealthy (following the lead of the UK, and Pitt the Younger who gave us Pittsburgh) and they embraced progressive taxation not a flat tax.

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