Mr. Johnston explores “case studies” involving basic economic principles (the collective action problem). Special interests tend to capture the legislative and regulatory agenda, because the special interests can earn a positive economic return on their investment to capture the agenda. The remainder of the population (free riders) are not incentivized to counter the efforts of the special interests, because the cost of opposition exceeds the benefit of opposition. In the real world, the collective action problem translates into wasteful and inefficient policies that would not pass muster if a given special interest did not have its toe on the social “cost-benefit” scale.

After exploring the impact of the collective action problem in the real world, Mr. Johnston makes several conceptual leaps that have no foundation in economic theory or real world facts. I only have time to highlight two:

- Mr. Johnston is an advocate of the view that “paying higher taxes can make you richer, while paying lower taxes can make you poorer.” With this comment (above), we see that Mr. Johnston’s view of economics is upside down from traditional economic theory (and real world behavior). Econ 101 demonstrates that taxes decrease economic activity. That may be a “good” thing if legislators impose taxes on a “bad” activity (e.g., cigarettes). In other words, the social utility of a tax policy may be positive because a tax policy discourages certain behavior. However, if we are attempting to promote long-term macroeconomic growth, we should be focused on maintenance of low tax rates. Quite contrary to Mr. Johnston’s view, high-tax policies will NOT foster economic or jobs growth, or make us “richer” in the long run.

- Mr. Johnston seeks to link the increased concentration of wealth at the tippy-tip of the income spectrum to a “tax system that redistributes money upwards.” This is politically motivated mumbo jumbo — motivated by a viewpoint that we need to “spread the wealth around” (if not petty jealousy). The individuals at the tippy-tip of the income spectrum have certain intangibles (technological genius; an entrepreneurial gene; good timing and luck) that they have been able to commercialize and monetize with extraordinary success. Obviously, taxes are relevant for these individuals, but they did not reach the tippy-tip of the income spectrum on the backs of lower-income taxpayers.

Ultimately, taxes distort behavior and markets, thus hindering macroeconomic growth and discouraging entrepreneurial activity and class mobility. Mr. Johnston expresses mock outrage at the distortions, while arguing that higher taxes (perhaps paid by a more “enlightened” taxpayer base) will help to eliminate the distortions. The political ideology rippling under the surface of his articles impeaches the credibility of his “fact finding” exercises.

However, as I mentioned in the beginning, we can all agree that the current tax system is a complete disaster and needs a major facelift.

I agree there’s a disconnect between the rhetoric and the facts, but I think that disconnect is perpetuated by the pro-tax, big government crowd every bit as much as it is by the anti-tax, small government crowd.

Politics ain’t bean bag.

By the way, you did not define “hidden gifts.”

You wrote: “Law Student, the empirical evidence is that the Laffer curve is one of those simplistic ideas that looks simple on paper and does not hold up in real life. Go study more. You will find there is even evidence that lower tax rates can increase cheating, which is counterintuitive, as well as studies showing that raising a tax in Florida of one mill to two mills resulted in a doubling of tax avoidance efforts.”

(1) The Laffer-curve has been demonstrated to be correct several times over. Telling someone to go study more when you know nothing about them or their education is incredibly arrogant and childish.

(2) There is no evidence that lower taxes increases tax avoidance – that is just silly. The corollary to your assertion would then be that a government that imposes a 100% tax rate (i.e. a soviet style command and control economy) would be flush and we know that is not the case. Similar to prohibition on drugs and alcohol, which we know increase black-markets for those products, increasing the cost of earning income (i.e. income taxes) increases the incentive for avoiding those costs – the higher the tax the greater the reward for successfully avoiding it.

You wrote: “most of the increased complexity in the tax code has to do with favors to help this or that favored (and usually better off) individual, group, entity or industry get a tax favor. 22 million tax returns take just one page and 36 million more are the simple 1040A .”

This is part Conservative complaint about the current tax system. I completely agree that there are people and businesses that are rent-seekers. They either want special treatment under the tax code or exemptions from regs or they have a product that no one wants and they exert political influence to cause government to force people to consume the product (e.g. solar panels, windmills, “green jobs”, “clean-energy”, CAFÉ standards, Obamacare, compact fluorescents). The current BP mess is a great example of a rent-seeking company lobbying for Cap-and-Tax and liability caps and several other things that benefit them but are not good for consumers. I am all for eliminating corporate income tax (corporations do not pay taxes) removing all of the special treatments for BP in the tax code and regs and exposing them to full liability for their torts. Problem is this would take a lot of power away from statist politicians.

As for regulations, that is also a valid issue, but again the point I raised was the disconnect between the rhetoric about tax burdens and the reality.

BTW, most of the increased complexity in the tax code has to do with favors to help this or that favored (and usually better off) individual, group, entity or industry get a tax favor. 22 million tax returns take just one page and 36 million more are the simple 1040A .

Ask yourself who benefits from tax complexity — and also why it is business that seeks many of the complex and costly regulations you cite. (Answer: businesses.)

Define “hidden gifts.”

There is well established data from the 1960′s (Kennedy’s tax cut and subsequent increase in revenue to the fed treasury) to the 1980’s (Reagan’s tax cuts and the subsequent increase in revenue to the fed treasury) that tax reduction to a certain level optimizes federal revenue. Art Laffer demonstrated this with the Laffer-curve and the optimal level of taxation.

@ Peter

Your post handles the insolent deep-thinker more than adequately. However, just looking at the fed and state income tax rate at 1979 and today does not tell the whole story. The hundreds of thousands if not millions of pages in the Federal Registry that represent all the regs that individuals and businesses must comply with and the literally hundreds of millions of man hours that are wasted navigating and complying with them is a tax that people don’t mention enough. Great post and reply Peter.

Stephen

But that is not really the issue here — which was about the reasons that our debate fails to reflect the sharp decline in tax burdens, creating a mythology not based in fact.

Conflating issues doe snot advance our understanding as much as examining each.

As for waste and abuse of taxpayers, how about starting with the issues I raised in my most recent bestseller, FREE LUNCH — that hundreds of billions of your tax dollars do not go to government services, but rather are used as hidden gifts to Warren Buffett, the Walton family, Donald Trump, Chrysler, Home Depot and others?
How about focusing then on the companies and entire industries whose profits derive not from the market, but from subsidies, including the Big Four commercial sports and Cabela’s?
And then try PERFECTLY LEGAL, which shows how the tax system abuses millions of taxpayers and redistributes money upward (which Free Lunch also documents).

The poster above also reminds of a significant fact — the American revolution was not about taxation (colonists paid one 25th to one 50th the taxes per capital of Britons at the time), but about representation.

And here is a matter to ponder — paying higher taxes can actually make your richer, while paying lower taxes can make you poorer. (See my Tax Notes column about Council Rock Ave., which illustrates this point.)

The reverse is also true.

But waste and inefficiency are NOT the same issue as tax burdens.

I am for taxes. We need them. What I oppose is the government asking for more money after spending unwisely what we already gave it.

The government will never get serious about controlling spending and eliminating waste until the people get serious and refuse to give it a raise.

When the tax discussion arises, you generally hear that everyone’s taxes should be lower (we all want more $), and that US businesses have the highest tax rate in the world. Around this time, we see the “Tea Partiers” waving the yellow flags with the “Don’t Tread on Me” montra and the coiled snake. But these people have it all wrong.

First, the colonists in the time of Ben Franklin were rebelling against the Crown because they were forced to pay taxes to England, but had no representative in the Parliment. The overwhelming stance of the colonists was that they would gladly have paid the tax to the Crown if they were given a representative. This would be like taking away Iowa’s senators and representatives, but still requiring the Iowans to pay federal taxes. However, this is not happening today. Today’s “Tea Partiers” have a say. They voted, and presumably their candidates did not win. However, there are two senators and various representatives from every state, so their classification as “Tea Partiers” makes absolutely no sense. Ben Franklin would be appalled at the nonsensical way these people have acted.

Second, while the US may have a high tax rate that most businesses are supposed to pay, everyone should know that out businesses don’t pay that high rate. Many have SPE’s set up off shore, and use the low long-term capital gains rate to game the system. However, I would bet that most of the people who are livid about the high taxes in this country don’t understand the dynamics of the system. Warren Buffet (we all know he’s a billionaire), showed the world that through the 15% long-term capital gains rate, he pays a lower rate than his secretary (who falls somewhere around the 28%). It is clear, US businesses don’t pay anywhere near the highest taxes in the world.

Third, I understand the conservative mantra of low taxes, low spending, and small government. I agree that large bureaucracies can be wasteful. However, many things that the government spends on are needed to keep society at a functioning level. Roadways, bridges, hospitals, education, etc. These are things that cost money. If we stopped spending on these, then the rich will continue to have the best, and the majority of the country would be poor and have none of this. Need I remind those in favor of this low level of spending that in governments such as these, the large underclass tends to become violent and rebellious, such as the colonists who had no say in their government.

Finally, those same conservatives who champion tax cuts and low spending, have no problem with huge military spending and the unavoidable debt that goes with that. This, again, makes no logical sense.

I don’t think anyone can make a good argument that we are paying more today than when the tax rates were tremendously higher (such as in the 1970′s). We are paying much less. And, as a bankruptcy scholar, I would like to point out that implementing huge tax cuts did nothing to prevent the current recessionary period. Several economists like Paul Krugman (I know he is liberal) have shown that these tax cuts did not, as the politicians and pundits claimed “pay for themselves.” If you truly believe that lowering taxes has an beneficial effect on the economy as a whole, please make your case. I have yet to hear a rational, reasoned, well-thought-out explanation. As far as I can tell, we have 9 years of proof that it doesn’t work.