Tax Reform Is the Right Way to Lower the So-Called Tax Gap

Many politicians in Washington think they could get a lot more money to redistribute if Americans could be compelled into being fully compliant with the internal revenue code. Yet the world’s leading expert on the underground economy estimates that the United States has less evasion than any other nation [.pdf]. Moreover, the Wall Street Journal notes that the vast majority of noncompliance is the result of tax code complexity, which is why the only pro-growth way to generate more revenue is lower tax rates and simplification:

The “tax gap” is the difference between what the Internal Revenue Service thinks taxpayers should be paying and what it collects. The IRS currently estimates this at about $290 billion a year. Ask any Congressional chairman how he intends to close the deficit, expand the Medicare drug benefit, reform the Alternative Minimum Tax or subsidize college education, and the answer is invariably “close the tax gap.” Last year the Senate held some half-dozen hearings in search of this pot of gold. …We suppose politicians are allowed to dream. But it’s worth recalling that Washington has searched for this revenue Atlantis for decades without success. …Nina Olson, the IRS’s taxpayer advocate, told Congress last year that IRS auditors have found that an estimated 94% of noncompliance is the result of honest mistakes by tax filers who simply don’t understand the 17,000-page beast of a tax code. One obvious answer would be to simplify the code (more on that later). But this requires political will, so Congress naturally prefers the easier route of ratcheting up taxpayer regulation and enforcement. …Our personal favorite would require that Americans withhold taxes from any cash payments they make to such individual contractors as babysitters, gardeners or plumbers. They’ll love that one in the suburbs. Implicit in all these new plans is a much bigger IRS staff to monitor and chase tax miscreants. Here’s another bad idea: Many doctors and lawyers who are incorporated under subchapter S will often pay themselves lower wages but higher dividends, in order to reduce self-employment taxes. The law is vague on the limits of this practice, and it is undoubtedly abused. But the Joint Tax Committee’s preferred solution is to make all professional income – even dividend payments – subject to self-employment taxes; this is nothing more than a backdoor tax hike. …There is a better way. The more complicated a tax system, the more likely taxpayers won’t understand, or will try to dodge, the rules. Simple tax regimes, such as a single flat rate, encourage compliance and efficiency, not to mention economic growth. This has been the experience of many Eastern European countries after they imposed a flat tax, and the U.S. had similar jumps in reported tax income from “the rich” following the 1986 tax reform that cut rates and closed loopholes.

Capitol Hill Briefing Re: Standard Health Insurance Deduction

At noon this Friday, the Cato Institute will host a Capitol Hill briefing on President Bush’s proposal to replace the tax exclusion for employer-sponsored coverage with a standard health insurance deduction.

Discussing the proposal will be: Katherine Baicker of the president’s Council of Economic Advisers, Leonard Burman, director of the Urban-Brookings Tax Policy Center, and me.

The room number and video of the event can be found where you preregister, here.

Friedman or Plato?

As noted earlier, today is Milton Friedman Day.  My modest contribution is this essay.

I call this the Fundamental Problem of Political Economy. How do we limit the power that idiots have over us?

One solution, that might be traced to the expression “philosopher-king” associated with Plato, is to hand the reins of government to the best and the brightest. Since the late 19th-century, the Progressive Movement in American politics has championed this approach…

The other way to avoid having our lives run by idiots is to limit the power that others have over us. This is the approach that was embedded in our Constitution, before it was eviscerated by the Progressives. It is the approach for which Milton Friedman was a passionate advocate.

Please Help This Young Man

This case is extremely important.  The fates of a young man and of freedom of speech are at stake.  Abdelkareem Nabil Soliman will be sentenced on Thursday for alleged crimes in Egypt, including insulting the president.  Please read about his case at http://www.freekareem.org/.

Please send a respectful letter by fax or email to the Egyptian Embassy requesting that the Egyptian government correct the error of arresting him and allow him his freedom.

Toward a Neo-Khomeinist Foreign Policy*

From the annals of irony, this from Laura Secor’s interesting rundown of the Iranian political scene in the NYT Magazine:

Composed partly of military and paramilitary elements, partly of extremist clerics like [Taqi] Mesbah-Yazdi and partly of inexperienced new conservative politicians, those in Ahmadinejad’s faction are often called “neoconservatives.” But to the extent that they have an ideology, it is less new than old, harking back to the early days of the Islamic republic. Since that time, the same elite has largely run Iranian politics, though it has divided itself into competing factions, and the act of wielding power has mellowed many hard-liners into pragmatists. Ahmadinejad’s faction, on the other hand, came into power speaking the language of the past but with the zeal of the untried.

Ali Ansari refers to “Iran’s neoconservatives” repeatedly in this book, but I thought it was more rhetorical flourish than an actual description that people use in Iran.

* Title reference here.

Criminal Justice in Georgia

Here’s the problem with consensual crimes, plea bargaining, and mandatory minimum sentencing …

This guy shouldn’t be in jail at all, but he’s in a Georgia prison serving a ten year sentence.  The case of Genarlow Wilson is also a dramatic illustration of the bizarre mentality of too many prosecutors.  Which is not to say that the legislators are very far behind them.

More here and here.  

Competition among Cantons Boosting Swiss Competitiveness

Federalism is a marvelous structure, both because it allows preferences for different policies to be satisfied and because it creates competition among units of government. While federalism has been somewhat eroded in the United States, it still exists and presumably is one of the reasons why America is relatively prosperous (thanks to a less oppressive level of government). Switzerland is an even bigger success story. The central government represents less than one-third of total government (as compared to two-thirds in the US), and the concomitant competition between cantons has helped control the size of government. And as a Swiss news report indicates, this has generated big benefits for the Swiss economy:

Zurich is poised for a further influx of foreign firms and workers after the relocation of Kraft Foods’ European headquarters and the expansion of Google this year. The moves earlier this month from the two United States giants offer further evidence that the region offers prime conditions for companies, according to the Greater Zurich Area relocation service. …”The relocation of headquarters and the nice growth of Google that we have seen in the last couple of months shows that we have very good basic conditions in the region,” commented Greater Zurich Area chief executive Willi Meier. …A more controversial lure for foreign companies is the low corporate tax rates offered by many cantons in Switzerland. …The competition among cantons to set the lowest business tax was intensified at the beginning of last year when Obwalden slashed its rates to a Swiss low of just 6.6 per cent. Obwalden attracted 376 new firms in the first 11 months of 2006, three times more than in the previous year. But Meier insists the Zurich region is not afraid of the increased competition. “The tax competition among Swiss cantons makes Switzerland as a whole more competitive on an international basis. Kraft has chosen Zurich despite the fact that we don’t have the lowest tax rate in Switzerland, but on an international scale its still a very competitive rate,” he said.