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Double Taxation of Income



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Dan Mitchell of the Cato Institute has a useful flow chart showing what a dollar of income is going through under the current tax system and different scenarios:

That chart shows the bias against savings and investment in our country. That can’t be good.  This is one of the many reasons why, over the years, many economists have come to support a simpler, flatter, and broader tax, such as the flat tax or some other consumption based tax. Unlike an income tax, a consumption tax does not double-tax savings. That’s also the case with a flat tax such as the Hall and Rabushka flat tax. Also, a relatively low tax rate wouldn’t induce the same distortions and impact on hours worked as the current high 35 percent marginal rate.

Interestingly, a 1998 paper called “Deadweight Costs and the Size of Government” by economists Gary Becker and Casey Mulligan makes the claim that in spite of these benefits, small-government advocates may want to think twice about reform. They argue that flatter and broader taxes also tend to encourage bigger government because taxpayers offer less resistance to increases in tax rates than in rates of more onerous and less efficient forms of taxation. They write:

Taxpayers offer less resistance to increases in flat tax rates than in rates o more onerous and less efficient forms of taxation.

Who knows, one day we may see President Obama pushing for a flat tax.



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