Alan Blinder has a distinguished resume. He’s a professor at Princeton and he served as Vice Chairman of the Federal Reserve.

So I was interested to see he authored an attack on the flat tax – and I was happy after I read his column. Why? Well, because his arguments are rather weak. So anemic that it makes me think there’s actually a chance to get rid of America’s corrupt internal revenue code.

There are two glaring flaws in his argument. First, he demonstrates a complete lack of familiarity with the flat tax and seemingly assumes that tax reform simply means imposing one rate on the current system.

Here’s some of what he wrote in a Wall Street Journal column.

Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn’t one of them. The truth is that 100% of the complexity inheres in the definition of taxable income, which takes up millions of words in the tax laws. None inheres in the progressive rate structure. If you don’t believe that, consider the fact that the corporate income tax is virtually flat once a corporation passes a paltry $75,000 in taxable income. Is it simple? Back to the personal tax. Figuring out your taxable income can be quite an effort. But once that is done, most taxpayers just look up their tax bill on an IRS-provided table. Those with incomes above $100,000 must perform a simple calculation that involves multiplying two numbers together and adding a third. A flat tax with an exemption would require precisely the same sort of calculation. The net reduction in complexity? Zero.

I can understand how an average person might think the flat tax is nothing more than applying a single tax rate to the current system, but any public finance economist must know that the plan devised by Professors Hall and Rabushka completely rips up the current tax system and implements a new system based on one tax rate with no double taxation and no loopholes.

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One of my frustrating missions in life is to educate policy makers on the Laffer Curve.

This means teaching folks on the left that tax policy affects incentives to earn and report taxable income. As such, I try to explain, this means it is wrong to assume a simplistic linear relationship between tax rates and tax revenue. If you double tax rates, for instance, you won’t double tax revenue.

But it also means teaching folks on the right that it is wildly wrong to claim that “all tax cuts pay for themselves” or that “tax increases always mean less revenue.” Those results occur in rare circumstances, but the real lesson of the Laffer Curve is that some types of tax policy changes will result in changes to taxable income, and those shifts in taxable income will partially offset the impact of changes in tax rates.

However, even though both sides may need some education, it seems that the folks on the left are harder to teach – probably because the Laffer Curve is more of a threat to their core beliefs.

If you explain to a conservative politician that a goofy tax cut (such as a new loophole to help housing) won’t boost the economy and that the static revenue estimate from the bureaucrats at the Joint Committee on Taxation is probably right, they usually understand.

But liberal politicians get very agitated if you tell them that higher marginal tax rates on investors, entrepreneurs, and small business owners probably won’t generate much tax revenue because of incentives (and ability) to reduce taxable income.

To be fair, though, some folks on the left are open to real-world evidence. And this IRS data from the 1980s is particularly effective at helping them understand the high cost of class-warfare taxation (click to enlarge).

There’s lots of data here, but pay close attention to the columns on the right and see how much income tax was collected from the rich in 1980, when the top tax rate was 70 percent, and how much was collected from the rich in 1988, when the top tax rate was 28 percent.

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Or, how to turn a dynamic state economy into a basket case in just a few years. As you know, Illinois has raced past California to claim the mantle of most fiscally irresponsible state. Its bonds are just a tad above junk status and it has to patch up a $13 billion hole–half its general fund budget–within days, to pay a back-log of unpaid bills and cover a missed payment to the public employee pension fund. (Then they’ll have to do it all over again next year.)

Because the  state government is dominated by Democrats, the legislators in Illinois have decided to increase taxes. By a lot! Again, because they are Democrats, they plan to hike the income tax by 75% and increase cigarette taxes by $1 a pack. Business taxes would almost double.

Okay…so far, so same-old-same-old. They’re Democrats. Raising taxes is what they do.  Here is the part where Illinois’ budget gurus get into Apple Dumpling Gang territory:

The personal income-tax hike is expected to net the state roughly $6.2 billion, and a corresponding corporate income tax increase could raise an additional $1 billion…

[State Senate President] Cullerton said the state would use the income-tax hike to borrow $12.2 billion. Of that, $8.5 billion would pay overdue bills and $3.7 billion would cover a government worker pension payment lawmakers skipped when putting together the current budget

Brilliant!

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I hope the title of this post is an exaggeration, but it’s certainly a logical conclusion based on what is written in the Congressional Budget Office’s updated Economic and Budget Outlook. The Capitol Hill bureaucracy basically has a deficit-über-alles view of fiscal policy.

CBO’s long-run perspective, as shown by this excerpt, is that deficits reduce output by “crowding out” private capital and that anything that results in lower deficits (or larger surpluses) will improve economic performance – even if this means big increases in tax rates.

CBO has also examined an alternative fiscal scenario reflecting several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. That alternative scenario embodies small differences in outlays relative to those projected under current law but significant differences in revenues: Under that scenario, most of the cuts in individual income taxes enacted in 2001 and 2003 and now scheduled to expire at the end of this year (except the lower rates applying to high-income taxpayers) are extended through 2020; relief from the AMT, which expired after 2009, continues through 2020; and the 2009 estate tax rates and exemption amounts (adjusted for inflation) apply through 2020. …Under those alternative assumptions, real GDP would be…lower in subsequent years than under CBO’s baseline forecast. …Under that alternative fiscal scenario, real GDP would fall below the level in CBO’s baseline projections later in the coming decade because the larger budget deficits would reduce or “crowd out” investment in productive capital and result in a smaller capital stock.

There’s nothing necessarily wrong with CBO’s concern about deficits, but looking at fiscal policy through that prism is akin to deciding who wins a baseball game by looking at what happened during the 6th inning. Yes, government borrowing drains capital from the productive sector of the economy. And nations such as Greece are painful examples of what happens when governments go too far down this path. But taxes also undermine economic performance by reducing incentives to work, save, and invest. And nations such as France are gloomy reminders of what happens when punitive tax rates discourage productive behavior.

What’s missing for CBO’s analysis is any recognition or understanding that the real problem is excessive government spending.

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There’s been a bit of chatter in the blogosphere about a recent post on Ezra Klein’s blog featuring estimates from various economists about the revenue-maximizing tax rate. It won’t come as a surprise that people on the right tended to give lower estimates and folks on the left had higher guesses. Donald Luskin of National Review estimated 19 percent, for instance, while Emmanuel Saez, Dean Baker, Bruce Bartlett, and Brad DeLong all gave answers around 70 percent.

There are two things that are worth noting.

First, every single answer is to the right of the Joint Committee on Taxation. The revenue-estimators on Capitol Hill assume that taxes have no impact on overall economic performance. As such, even confiscatory tax rates have very little impact on taxable income. The JCT operates in a totally non-transparent fashion, so it is difficult to know whether they would say the revenue-maximizing tax rate is 90 percent, 95 percent, or 100 percent, but it is remarkable that a mini-bureaucracy with so much power is so far out of the mainstream (it’s even more remarkable that Republicans controlled Congress for 12 years, yet never fixed this problem, but that’s a separate story).

Second, very few of the respondents made the critically important observation that it should not be the goal of tax policy to maximize revenue. After all, the revenue-maximizing point is where the damage to the overall economy is so great that taxable income falls enough to offset the impact of the higher tax rates. Greg Mankiw of Harvard and Steve Moore of the Wall Street Journal indicated they understood this point since they both explained that the long-run revenue-maximizing rate was lower than the short-run revenue-maximizing rate. But Martin Feldstein of Harvard explicitly addressed this issue and hit the nail on the head.

Why look for the rate that maximizes revenue? As the tax rate rises, the “deadweight loss” (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue…. I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living.

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President Obama and congressional Democrats are claiming that a giant new entitlement program will reduce red ink.  It’s tempting to laugh and dismiss such a preposterous claim. After all, these are the same people who told us that squandering $787 billion on a so-called stimulus would create jobs. Unfortunately, the joke’s on us. According to the “official” scoring estimates on Capitol Hill, Obamacare supposedly will lower the deficit because taxes are being increased more than spending is being increased (not that this should matter since America’s fiscal crisis is spending and deficits are merely a symptom). But these numbers, produced by the Congressional Budget Office and Joint Committee on Taxation, are highly suspect. I’ve explained elsewhere why the spending projections from the CBO are grossly flawed, and many other experts have made similar observations. The same problem exists on the revenue side of the ledger.  This video explains why we should be very skeptical of any numbers produced by the Joint Committee on Taxation.

Let’s put this in context by reviewing the supposedly nonpartisan numbers that the JCT has produced. The Senate bill has big tax increases on insurance companies, medical device makers, and so-called cadillac health plans. The House plan, meanwhile, largely relies on higher income tax rates on investors and entrpreneurs. And both bills impose huge marginal tax rate increases on middle class taxpayers thanks to the phase out of subsidies, as explained in gruesome detail by my Cato Institue colleage Michael Cannon.

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According to the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT), the government-run healthcare plans in the House and Senate will reduce budget deficits. To use a technical phrase, this is utter nonsense. A giant new entitlement program will be a budget buster. This new video from the Center for Freedom and Prosperity provides 12 reasons in less than 6-1/2 minutes – including real-world evidence showing how Medicare and Medicaid cost far more than originally forecast.

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