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Helping Ordinary Workers begins with Simplifying the Tax Code

Years ago, economist Arthur Okun presented us with a tradeoff between efficiency and equity. The more we strove to achieve equity, as in an economy that yields more equal and fair outcomes, the less efficiency. The more efficient it was, the less equitable it would be because there would be a widening gap between the rich and the poor. In an attempt to achieve greater equity Progressives have pushed for more redistribution whereby more taxes on the wealthy could then pay for more programs that would assist the poor. Okun, however, recognized that this would only result in leaky buckets.

The leaky bucket is the program in which not all the money targeted to assist specific populations actually reaches those populations. It just falls through the black hole of Washington bureaucracy. That is, the money from the rich needs to be carried to the poor in leaky buckets, and money will be lost in administrative costs and incentive effects. A leaky bucket, then, is highly inefficient because the money targeted for the poor will not reach them. And yet, one wonders if the source of this false tradeoff between efficiency and equity isn’t the structure of the current tax code, which is more about affecting behavior and less about generating revenue.

In order to offer all of the deductions that the affluent generally, and corporate interests particularly, enjoy, tax rates have to be high enough to pay for them. For those who don’t have any deductions, they are left with tax rates that are higher than might otherwise be the case where taxes are set at low flat rates. Is this efficient? Hardly. Those paying more in taxes have less to spend in the economy. With less to spend in the economy, aggregate demand for goods and services declines, thereby slowing growth.

Even if there are higher taxes on the wealthy, or a minimum tax on corporations as the Inflation Reduction Act establishes, these interests will, through their many deductions, find ways to avoid paying taxes. So a higher tax on the wealthy to pay for more programs will not necessarily lead to the wealthy actually paying higher taxes. And yes, it is the leaky bucket again. Moreover, increasing taxes on the wealthy is no guarantee that the increased revenue, if there really is any, will actually go into new programs. If this is true, then both efficiency and equity have been lost.

When on rare occasions tax rates are lowered, Progressives scream about the tax benefits to the rich and how money is effectively being redistributed from the poor to the rich. Their solution is to have more tax enforcement. Indeed, the Inflation Reduction Act calls for more IRS agents to be hired to conduct and enforce existing laws. Translation? Don’t allow for all the deductions that many claim to actually be taken. And yet, it isn’t efficient to target wealthy taxpayers for audits because they can hire accountants and attorneys and tie the government up in litigation. There is a high probability that the brunt of audits will be experienced by the middle class who will pay the additional costs to the IRS because it would be cheaper than fighting them. Again, this is neither efficient nor equitable.

Still, Progressives are unwilling to do what could be much more efficient and perhaps more equitable in the long term. And that is truly simplifying the tax code so that there are perhaps three or four low flat tax rates with absolutely no deductions. Perhaps this is where the rubber meets the road for all politicians’ hypocrisy (regardless of political party) to be seen by all. It isn’t true that the Democrats and Progressives don’t favor corporate interests the way the Republicans do. On the contrary, they favor different interests because the U.S. is not just capitalism, but it is a country of crony capitalism. All we seem to do in an election is exchange one set of cronies for another.

If tax rates were flat and low, people would have more money to spend, which could result in growth, with wages rising over time. Moreover, there would be no need to spend billions of dollars hiring additional IRS agents because there would be no deductions that could be used to avoid paying taxes. Ah, but without deductions how would we get people to invest in green energy? Without tax credits to the affluent, how would we get them to purchase electrical vehicles?

The elites have been waging a war on the middle class for some time now. The latest example is partial student loan forgiveness. Aside from the fact that the president’s executive order is unconstitutional because the Constitution is clear that the power of the purse belongs to Congress, there is a moral question here. Assuming that the burden will fall on all taxpayers, is it fair, i.e., equitable, to ask the majority of taxpayers who never went to college or paid off their loans to bear the costs of forgiving others. The real culprit here is rising college costs, which were exacerbated when the federal government took over student loans. If we really care about the middle class, then offer free college in state colleges and universities for those who qualify. If anything, loan forgiveness may lead to even higher college costs.

Democrats and Progressives support green energy and Republicans have traditionally supported the oil and gas industries. Elites supporting green energy are effectively waging a war on the middle class. Ordinary wage workers can’t afford electric vehicles; so if they aren’t buying in the first place, they can’t qualify for tax credits. And while Progressives have been pushing for more investment in green energy, they have been waging war on fossil fuels by canceling pipelines and denying leases for drilling. It is true that fossil fuels are on their way out because resources have almost been exhausted. Still, there is no credible nationwide infrastructure in place for electric vehicles and to not build a gradual transition period into planning for the future of only electric vehicles is to add insult to injury.

It is true that equity demands that the wealthy pay more in taxes than those earning less in the distribution, but progressivity can be achieved by having more than one flat tax rate. The key here is to lower all tax rates and eliminate deductions. Homeowners are not going to buy homes simply because they get a mortgage interest rate deduction. Rather, they will purchase homes if they can afford them. They will be more able to purchase them if they have generally greater purchasing power due to both lower taxes and rising wages.

Establishing a minimum corporate tax sounds good on paper. After all, they are profitable. So why shouldn’t they pay for programs that benefit the least fortunate members of society? Because they will not only pass the costs onto their customers in the form of higher prices, but they will also resist efforts to raise their workers’ wages. Here consumers and workers are incurring an indirect tax. It should come as no surprise that when corporate taxes are lower, especially capital gains, businesses can afford to be more generous with their workers and may be more inclined to do so.

If the Democrats in Congress were to become serious about representing the middle class, they would stop waging war on ordinary workers. They could begin by really simplifying the tax code and making it more efficient and equitable. That is, they could truly make an effort to plug the leaky bucket which has only served to enrich the elites at the expense of workers.

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