The Flat Tax...

A friend emails to ask about the flat tax, as a friend told her it would be good since it would close corporate loopholes. Here's how I responded.

I'm deeply skeptical of your economist-friend's claims. I think s/he is probably correct that closing loopholes which allow the rich and corporations to avoid paying taxes need to be closed (although, again, at this point wait until the recession is clearly over), but this seems to me to be a separate issue than whether you've got a flat tax or a progressive tax. For example, Exxon Mobil had profits in 2009 of $45.2 billion (and this comes after they paid their executives lavishly, their CEO got $22 million -- in 2005, their CEO took home $400 million), and their federal tax liability was 0 (since they've got these subsidiaries located in places such as the Bahamas and the Grand Caymans). Having corporations like Exxon Mobil pay no taxes effectively subsidizes oil, even though oil has all of these negative externalities, like pollution, carbon emissions, global warming, oil spills and paying money to countries like Iran and Saudi Arabia.
This stuff, of course, is outrageous and I think it plays well on TV. Also, there are easier ways of "simplifying" the tax code. You could eliminate all the deductions and credits and just make a simple progressive tax scale. And the progressive tax scale clearly needs to be designed to do something about $400 million salaries. Such as, all income above $30 million should be taxed at 65% instead of 35%. The basic problem is that Exxon Mobil has many shareholders, and those shareholders own many other corporations, and for no individual investor would it be rational to spend all their time policing executive pay, when $400 million divided by $45 billion is such a small number... As a result, there is vast looting of corporations which have really strong market power.

If we have a flat tax of 30%, we'll see more $400 million salaries, and this will hit graduate students like myself very, very hard. I'd react by buying fewer books/newspapers and eating cheaper food. Millionaires will react by buying more houses, more yachts, more expensive wine, etc... Poor people spend a higher proportion of their income on childcare, food, health care and education than do the ultra rich. So, I'm going to have to say that a flat tax, in making America even more unequal, would slow growth.

Lastly, to make this confusing, I should add that there are ways of doing a flat tax that would make it progressive. Like, everyone gets $10,000 automatically and then pays 33% on everything they make. So, if you make nothing, you get $10,000. If you make $30,000, you pay nothing, $60,000, you pay $10,000. Only issue is that, again, it's tough to do anything about the 400 million dollar salaries with a flat tax... And I think giving people money automatically rather than make the unemployed show proof that they are job-searching to get benefits is a bad idea... Anyway, can you imagine the Congress getting rid of child tax and education tax credits? Neither can I.

Also (christ, this email is getting long), there is this bill that Republicans keep blocking which would allow the IRS to calculate everyone's tax liability after answering a questionaire, which would save everyone a lot of time and hassle in paying income taxes. The Republicans block it so that paying taxes is especially annoying... (Forget what the bill is called and what the exact measure entails, however...)