Since I started this food fight about New Jersey taxation, I feel compelled to make a few additional points. We are having two debates.
The first debate is about what we think is good policy. The second debate is whether it is politically feasible to promote good policy.
Regarding the first issue, I feel that one of our challenges in controlling the growth of government is caused by the fact that so many people get government for free. If a group of people are exempted from tax, it is understandable that they will demand more government. Just on that score, it seems to me that Lonegan’s plan is a worthy one.
I also disagree with Ramesh that making lower-income earners pay some taxes might prevent Republicans from achieving other higher priorities. In fact, if one of the priorities is to reduce the size of government by cutting spending, I can’t think of a better way to do it than to make everyone feel its burden in the first place.
Moreover, beyond its low rate, a flat tax has many features that make it a superior tax than a progressive income tax. It’s simple; it doesn’t double tax income (thereby ending the bias against saving and investment). It’s also a good tax in the sense that it ends industrial policy and corrupt insider-dealing through the tax code.
Also, states are supposed to be a laboratory where policies are tried out before maybe going national. I like to think that the implementation of the flat tax in New Jersey could lead other states to reform their income tax. Let’s unleash the liberalizing power of tax competition and force politicans to do the right thing. I hope we all agree that a flat tax would be good for New Jersey’s economy. The evidence is pretty strong that the economies of states with no income tax grow the fastest, flat-tax states grow the second fastest, and progressive income tax do not grow.
And who knows, we might end up with a flat tax at the federal level (call me a dreamer).
Finally, let me address the political issue. While I understand Ramesh’s concerns about the political feasibility of the flat tax (particularly if it is designed so that some people pay more) and the risks to the Republicans for pushing such proposal, I would like to ask the following question: Isn’t the Republican party in the situation it is currently in because it concerned itself with political feasibility rather than sound economic principles? The Bush administration kept adopting bad policies (corrupt farm bills, pork-filled transportation bills, the no-bureaucrat-left-behind education scheme, Sarbanes-Oxley, steel tariffs, and Medicare expansion) in order to achieve political success.
I don’t pretend to be a expert on these matters, but it certainly seems like the recent election debacles for the GOP suggest a Reaganite approach would have generated better policy AND better political results.