Can anyone beat the flat tax?

Social Philosophy and Policy

Volumn 19, Issue 1, 2002, Pages 140-171

  Epstein, Richard A ^a  

^a UNIVERSITY OF CHICAGO   (United States)

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EID: 0040669582     PISSN: 02650525     EISSN: None     Source Type: Journal    
DOI: 10.1017/S0265052502191072     Document Type: Article

References (71)

1. Aristotle, Nicomachean Ethics, in Richard McKeon, ed., The Basic Works of Aristotle (New York: Random House, 1941), 1132a2-3.
2. For an early description of the basic system, see Ives v. South Buffalo Ry. Co., 201 N.Y. 271, 285, 94 N.E. 431, 436 (1911), which noted that "every employer who is engaged in any of the classified industries shall be liable for any injury to a workman arising out of and in the course of the employment by 'a necessary risk or danger of the employment or one inherent in the nature thereof;. provided that the employer shall not be liable in respect of any injury to the workman which is caused in whole or in part by the serious and willful misconduct of the workman.' " ("Classified industries" here referred to those typically dangerous trades that were covered under the early versions of the workers' compensation laws.)
3. Some of the classic works relevant to this debate are Edwin R. A. Seligman, Progressive Taxation in Theory and Practice, 2d ed. (Princeton, NJ: American Economic Association, 1908); F. W. Taussig, Principles of Economics (New York: Macmillan, 1911); and Walter J. Blum and Harry Kalven, Jr., "The Uneasy Case for Progressive Taxation, " University of Chicago Law Review 19, no. 3 (1952): 417-520. For a more modern treatment, see David Gauthier, Morals by Agreement (Oxford: Clarendon Press, 1986).
4. Some of the classic works relevant to this debate are Edwin R. A. Seligman, Progressive Taxation in Theory and Practice, 2d ed. (Princeton, NJ: American Economic Association, 1908); F. W. Taussig, Principles of Economics (New York: Macmillan, 1911); and Walter J. Blum and Harry Kalven, Jr., "The Uneasy Case for Progressive Taxation, " University of Chicago Law Review 19, no. 3 (1952): 417-520. For a more modern treatment, see David Gauthier, Morals by Agreement (Oxford: Clarendon Press, 1986).
5. Some of the classic works relevant to this debate are Edwin R. A. Seligman, Progressive Taxation in Theory and Practice, 2d ed. (Princeton, NJ: American Economic Association, 1908); F. W. Taussig, Principles of Economics (New York: Macmillan, 1911); and Walter J. Blum and Harry Kalven, Jr., "The Uneasy Case for Progressive Taxation, " University of Chicago Law Review 19, no. 3 (1952): 417-520. For a more modern treatment, see David Gauthier, Morals by Agreement (Oxford: Clarendon Press, 1986).
6. Some of the classic works relevant to this debate are Edwin R. A. Seligman, Progressive Taxation in Theory and Practice, 2d ed. (Princeton, NJ: American Economic Association, 1908); F. W. Taussig, Principles of Economics (New York: Macmillan, 1911); and Walter J. Blum and Harry Kalven, Jr., "The Uneasy Case for Progressive Taxation, " University of Chicago Law Review 19, no. 3 (1952): 417-520. For a more modern treatment, see David Gauthier, Morals by Agreement (Oxford: Clarendon Press, 1986).
7. Just by way of clarity, the discussion of the flat tax here has nothing in common with the proposals to switch to what amounts to a rather novel form of consumption tax. My proposal is one that assumes the current income base and then imposes a unified rate over the base from first to last dollar. For an exposition and exposé of the new flat tax, see Marvin Chirelstein, "The Flat Tax Proposal - Will Voters Understand the Issues?" Green Bag 2d ser., 2 (1999): 147-61. "Briefly stated, the Flat Tax (Forbes/Kemp/Armey etc. version) is not an income tax at all, flat or otherwise. Rather, it is a Value Added Tax with a rebate to low-wage workers." Ibid., 150.
8. Just by way of clarity, the discussion of the flat tax here has nothing in common with the proposals to switch to what amounts to a rather novel form of consumption tax. My proposal is one that assumes the current income base and then imposes a unified rate over the base from first to last dollar. For an exposition and exposé of the new flat tax, see Marvin Chirelstein, "The Flat Tax Proposal - Will Voters Understand the Issues?" Green Bag 2d ser;, 2 (1999): 147-61. "Briefly stated, the Flat Tax (Forbes/Kemp/Armey etc. version) is not an income tax at all, flat or otherwise. Rather, it is a Value Added Tax with a rebate to low-wage workers." Ibid., 150.
9. Richard A. Epstein, "Taxation in a Lockean World, " Social Philosophy and Policy 4, no. 1 (1986): 49-74.
10. See generally Restatement (Third) of Restitution sec. 1, cmt. a (preliminary draft, October 1998): "Liability in restitution is triggered by receipt of a benefit, under circumstances such that the recipient is not justified in retaining the benefit without paying for it."
11. Ibid., sees. 19-21.
12. Ibid., sees. 5-12.
13. U.S. Constitution, art. 1, sec. 8: "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States." It has been held that "uniform" here refers to geographical uniformity, as may be implied from the last phrase, "throughout the United States." But even here the rule has been read, wrongly in my view, to allow for deviations from the geographical norm, as when the U.S. Supreme Court allowed the U.S. Congress to exempt Alaskan oil from the Crude Oil Windfall Profit Tax of 1980; see United States v. Ptasynski, 462 U.S. 74 (1983). The removal of the constraint creates too much discretion for too little good purpose. There is no reason to modify an excise tax to subsidize the production of high-cost Alaskan oil. (There was no reason to impose this tax in the first place, either.)
14. There are important exceptions to this principle. A firm offer - I agree, gratis, that you should have ten days to decide whether to purchase my home for $100, 000 - should be binding for a limited period of time even though the offeree has not supplied consideration in exchange. Such offers are made in order to induce a greater study by the offeree and thus should be treated as a part of the exchange process. The more difficult questions arise in connection with promises to make gifts; these promises are often not enforceable in the absence of formalities, such as seals, notarization, or witnesses. But these important side points do not detract from the overwhelming centrality of exchange relationships in the law of contract.
15. For the judicial pronouncement, see Coppage v. Kansas, 236 U.S. 1, 17 (1915): Indeed a little reflection will show that whenever the right of private property and the right of free contract co-exist, each party when contracting is inevitably more or less influenced by the question whether he has much property, or little, or none; for the contract is made to the very end that each may gain something that he needs or desires more urgently than that which he proposes to give in exchange.
16. For a fuller discussion of the implications of this principle, see Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain (Cambridge, MA: Harvard University Press, 1985).
17. For a more detailed discussion of this rule, see Richard A. Epstein, Bargaining with the State (Princeton, NJ: Princeton University Press, 1993), 91-103.
18. See Gaius, Institutes, bk. III, 150.
19. Aristotle, Nicomachean Ethics, 1131a30.
20. John Locke, Second Treatise of Government, in Locke, Two Treatises of Government, ed. Peter Laslett (1689; reprint, Cambridge: Cambridge University Press, 1999), 362. Locke then goes on, evasively, to write, "But still it must be with his own consent, i.e., the Consent of the Majority, giving it either by themselves, or their Representatives chosen by them." Ibid. Of course, the difference between individual consent, which renders taxation nugatory and decision by majority rule, which could make it mischievous, is of fundamental importance But tor Locke it was a detail, for from his next sentence it is clear that his true target was dictatorial imposition of taxes: "if any one shall claim a Power to lay and levy Taxes on the people, by his own authority, and without such consent of the People, he thereby invades the Fundamental Law of Property, and subverts the end of Government." Ibid, (emphasis in original). Matters get much more difficult once we have rejected dictatorship and confine our search to the ideal democratic formula.
21. Adam Smith, The Wealth of Nations (New York: Modern Library, 1937), 777.
22. Frédéric Bastiat, "The Law, " in Bastiat, Selected Essays on Political Economy, ed. George B. de Huszar, trans. Seymour Cain (Irvington-on-Hudson, NY: Foundation for Economic Education, 1950), 22.
23. Friedrich A. Hayek, A Constitution of Liberty (Chicago: University of Chicago Press, 1960), 314.
24. Epstein, "Taxation in a Lockean World, " 69. For the full catalogue of supporters of proportionate taxation, see Barbara Fried, "Why Do Libertarians Love Proportionate Taxation?" (manuscript); and Barbara Fried, "The Puzzling Case for Proportionate Taxation, " Chapman Law Review 2, no. 1 (1999): 157-95.
25. Epstein, "Taxation in a Lockean World, " 69. For the full catalogue of supporters of proportionate taxation, see Barbara Fried, "Why Do Libertarians Love Proportionate Taxation?" (manuscript); and Barbara Fried, "The Puzzling Case for Proportionate Taxation, " Chapman Law Review 2, no. 1 (1999): 157-95.
26. Epstein, "Taxation in a Lockean World, " 69. For the full catalogue of supporters of proportionate taxation, see Barbara Fried, "Why Do Libertarians Love Proportionate Taxation?" (manuscript); and Barbara Fried, "The Puzzling Case for Proportionate Taxation, " Chapman Law Review 2, no. 1 (1999): 157-95.
27. For an early influential exposition, see Mancur Olson, Jr., The Logic of Collective Action (Cambridge, MA: Harvard University Press, 1965).
28. Smith, The Wealth of Nations, 777.
29. Ibid. This point was anticipated by Aristotle in the Nicomachean Ethics, when, in speaking about proportion, he writes, "For the justice that distributes the common possession is always in accordance with the kind of proportion [i.e., geometrical] mentioned above (for in the case also in which the distribution is made from the common funds of a partnership it will be according to the same ratio which the funds put into the business by the partners bear to each other)." Aristotle, Nicomachean Ethics, 1131b30.
30. Ibid. This point was anticipated by Aristotle in the Nicomachean Ethics, when, in speaking about proportion, he writes, "For the justice that distributes the common possession is always in accordance with the kind of proportion [i.e., geometrical] mentioned above (for in the case also in which the distribution is made from the common funds of a partnership it will be according to the same ratio which the funds put into the business by the partners bear to each other)." Aristotle, Nicomachean Ethics, 1131b30.
31. See R. Duncan Luce and Howard Raiffa, Games and Decisions: Introduction and Critical Survey (New York: Wiley, 1957), chap. 6, esp. sec. 6.8.
32. It is in part for this reason that I am skeptical of the game-theoretical derivations for the pro rata rule that characterizes David Gauthier's work. See Gauthier, Morals by Agreement, 137. Gauthier derives the rule through use of the principle of "minimax relative concessions, " which provides "that given a range of outcomes, each of which requires concessions by some or all persons if it is to be selected., an outcome [should] be selected only if the greatest or maximum relative concession it requires, is as small as possible, or a minimum, that is, is no greater than the maximum relative concession required by every other out-come." Ibid. (emphasis in original). I am not the only one to find this formulation obscure, but the payoff seems to be pro rata concessions by persons with unequal shares of wealth - that is, a flat tax on income.
33. See Fried, "The Puzzling Case for Proportionate Taxation, " 165-68.
34. On the theory of regulation, see Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics, 2d ed. (New York: Macmillan, 1992), 350, where it is noted that responding to a natural monopoly by using a system of optimal price regulation produces the competitive solution. For a judicial account of rate regulation, see Duquesne Light Co v. Barasch, 488 U.S. 299 (1989). For one analysis of the relevant difficulties, see Richard A. Epstein, Principles for a Free Society: Reconciling Individual Liberty with the Common Good (Reading, MA: Perseus Books, 1998), chap. 10.
35. On the theory of regulation, see Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics, 2d ed. (New York: Macmillan, 1992), 350, where it is noted that responding to a natural monopoly by using a system of optimal price regulation produces the competitive solution. For a judicial account of rate regulation, see Duquesne Light Co v. Barasch, 488 U.S. 299 (1989). For one analysis of the relevant difficulties, see Richard A. Epstein, Principles for a Free Society: Reconciling Individual Liberty with the Common Good (Reading, MA: Perseus Books, 1998), chap. 10.
36. Here is not the place to indicate why some defense of territory and liberty is indeed possible even under Hobbesian assumptions, but the core of that defense relies on the insight that in equipoise, a good defense beats a good offense. Hence, if two individuals or families are of equal strength, normally neither can take the other: they therefore divide territories. The actual advantage that is needed to secure dominance can easily be quite large, so that even a powerful adversary could relent in its pursuit of a weaker rival. This tendency is increased because sharply aggressive actions against one group will expose even the winner, after its resources have been depleted, to incursions by a third group that stood aside during the initial encounter. Hence, two adversaries may well develop a steely truce that with time can harden into a boundary. But lots of blood will be spilled along the way.
37. By way of contrast, winners gain relatively little from a system of progressive taxation, which reduces the stock of wealth as it seeks to improve its overall distribution. See Section VI of this essay.
38. For a brief account, see Joel Slemrod and Jon Bakija, Taxing Ourselves: A Citizen's Guide to the Great Debate over Tax Reform, 2d ed. (Cambridge, MA: MIT Press, 2000), 49.
39. Joseph Bankman and Thomas Griffith, "Social Welfare and the Rate Structure: A New Look at Progressive Taxation, " California Law Review 75, no. 6 (1987): 1913. For a parallel, it could be assumed that taking out a home mortgage does not change the behavior of the holder of the equity interest. This may well be true when the value of the property is far above the lien, but it is demonstrably false when the property's value is equal to or less than the lien. In such cases, quick foreclosure is necessary to hold back rapid deterioration of the underlying asset.
40. Smith, The Wealth of Nations, 778. He then goes on to note: "Where it is otherwise [e.g., when taxes are arbitrary], every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself." Smith thus focuses on the discretion of the individual tax-collector, but a similar, albeit lesser, mischief arises when there is discretion with respect to overall rates.
41. See Fried, "The Puzzling Case for Proportionate Taxation, " 6-8.
42. People in fact do accept some progressive taxation. See, for example, Blum and Kalven, "The Uneasy Case for Progressive Taxation, " 420, where the authors accept a system of "degressive taxation" whereby the first tier of income is wholly exempt from taxation. Similar sentiments are found in Hayek, A Constitution of Liberty, 314. This sort of system is, of course, not a flat tax system, but a two-tier system. From here it is easy to insist that if there are two tiers, then twenty would be permissible as well. See Fried, "The Puzzling Case for Proportionate Taxation, " 161. The right response, in my view, is to retract the move to a two-tier system. It is important, I think, that all persons be subject to first-dollar tax constraints of some sort, if only for the way they influence individuals' political participation. It is just ever so much more difficult to vote for spending measures if you will be required to help fund them.
43. People in fact do accept some progressive taxation. See, for example, Blum and Kalven, "The Uneasy Case for Progressive Taxation, " 420, where the authors accept a system of "degressive taxation" whereby the first tier of income is wholly exempt from taxation. Similar sentiments are found in Hayek, A Constitution of Liberty, 314. This sort of system is, of course, not a flat tax system, but a two-tier system. From here it is easy to insist that if there are two tiers, then twenty would be permissible as well. See Fried, "The Puzzling Case for Proportionate Taxation, " 161. The right response, in my view, is to retract the move to a two-tier system. It is important, I think, that all persons be subject to first-dollar tax constraints of some sort, if only for the way they influence individuals' political participation. It is just ever so much more difficult to vote for spending measures if you will be required to help fund them.
44. People in fact do accept some progressive taxation. See, for example, Blum and Kalven, "The Uneasy Case for Progressive Taxation, " 420, where the authors accept a system of "degressive taxation" whereby the first tier of income is wholly exempt from taxation. Similar sentiments are found in Hayek, A Constitution of Liberty, 314. This sort of system is, of course, not a flat tax system, but a two-tier system. From here it is easy to insist that if there are two tiers, then twenty would be permissible as well. See Fried, "The Puzzling Case for Proportionate Taxation, " 161. The right response, in my view, is to retract the move to a two-tier system. It is important, I think, that all persons be subject to first-dollar tax constraints of some sort, if only for the way they influence individuals' political participation. It is just ever so much more difficult to vote for spending measures if you will be required to help fund them.
45. For one recent defense of steep progressivity, see Martin J. McMahon, Jr., and Alice G. Abreu, "Winner-Take-All Markets: Easing the Case for Progressive Taxation, " Florida Tax Review 4, no. 1 (1998): 1-81.
46. See, for example, Alain Enthoven, Theory and Practice of Managed Competition in Health Care Finance (New York: Elsevier Science Publishing, 1988), 2-4, advocating the obligation to provide "decent minimums, " which includes the "moral obligation to help the poor." For my criticism of the Enthoven position, see Richard A. Epstein, Mortal Peril: Our Inalienable Right to Health Care? (New York: Addison-Wesley, 1997), 27-37.
47. See, for example, Alain Enthoven, Theory and Practice of Managed Competition in Health Care Finance (New York: Elsevier Science Publishing, 1988), 2-4, advocating the obligation to provide "decent minimums, " which includes the "moral obligation to help the poor." For my criticism of the Enthoven position, see Richard A. Epstein, Mortal Peril: Our Inalienable Right to Health Care? (New York: Addison-Wesley, 1997), 27-37.
48. For this account, see Jeffrey A. Schoenblum, "Tax Fairness or Unfairness? A Consideration of the Philosophical Bases for Unequal Taxation of Individuals, " American Journal of Tax Policy 12, no. 2 (1995): 221-22. The difficulty with this sort of political argument is that it has no stopping point at all. Start with a flat tax, and then assume that "the ability to pay" of the rich is greater than it is for the poor. Now new tax increases will be progressive. Keep the same assumption and the next tax cut will concentrate on the poor. This cycle can go on indefinitely so that progressivity becomes ever more steep with each change in rate structure. The optimal-tax literature, whatever its weaknesses, does not make this mistake, for it offers an idealized tax structure that could be used to condemn current rates as either too progressive or too regressive.
49. See the quotation from Smith in note 32 above.
50. For more on this idea, see Brian R. Binger and Elizabeth Hoffman, Microeconomics with Calculus (Glenview, IL: Scott, Foresman, 1988), 104.
51. See Slemrod and Bakija, Taxing Ourselves, 61 ff., where it is noted that the ordinary American thinks that the tax rate of a family that earns $50, 000 is 14 percent and that the rate of a family earning $200, 000 is only 7.5 percent. As Slemrod and Bakija point out, the actual rates paid by these families are, respectively, around 12 and 21 percent.
52. Jon Gruber and Emmanuel Saez, "The Elasticity of Taxable Income: The Evidence and Implications" (NBER working paper), available on-line at http://papers.nber.org/papers7512. A lower estimate of the relevant elasticity, placing it at 0.1 to 0.3, is quoted in Bankman and Griffiths, "Social Welfare and the Rate Structure, " 1923.
53. Jon Gruber and Emmanuel Saez, "The Elasticity of Taxable Income: The Evidence and Implications" (NBER working paper), available on-line at http://papers.nber.org/papers7512. A lower estimate of the relevant elasticity, placing it at 0.1 to 0.3, is quoted in Bankman and Griffiths, "Social Welfare and the Rate Structure, " 1923.
54. FOr the 1.0 figure, see Bankman and Griffith, "Social Welfare and the Rate Structure, " 1926.
55. Arthur Okun, Equity and Efficiency: The Big Trade-Off (Washington, DC: Brookings, 1975).
56. For a detailed defense of this ideal tax system, see Bankman and Griffith, "Social Welfare and the Rate Structure, " 1945 ff. The standard model of this form derives from James A. Mirrlees, "An Exploration in the Theory of Optimum Income Taxation, " Review of Economic Studies 38, no. 2 (1971): 175-208.
57. For a detailed defense of this ideal tax system, see Bankman and Griffith, "Social Welfare and the Rate Structure, " 1945 ff. The standard model of this form derives from James A. Mirrlees, "An Exploration in the Theory of Optimum Income Taxation, " Review of Economic Studies 38, no. 2 (1971): 175-208.
58. See Samuel Pufendorf, On the Duty of Man and Citizen According to Natural Law [1673], ed. James Tully, trans. Michael Silverthorne (Cambridge: Cambridge University Press, 1991), 64.
59. Ibid.
60. This is one of the main themes in, for example, Marvin Olasky, Compassionate Conservatism: What It Is, What It Does, and How It Can Transform America (New York: Free Press, 2000). At ibid., 19, Olasky notes the importance of "challenging" people to stretch and transform their character.
61. This is one of the main themes in, for example, Marvin Olasky, Compassionate Conservatism: What It Is, What It Does, and How It Can Transform America (New York: Free Press, 2000). At ibid., 19, Olasky notes the importance of "challenging" people to stretch and transform their character.
62. Bankman and Griffith, "Social Welfare and the Rate Structure, " 1951-52
63. Ibid., table 1, p. 1953.
64. Ibid., table 2, p. 1954.
65. For the origins of this line of thought, see Robert H. Frank and Philip J. Cook, The Winner-Take-All Society (New York: Free Press, 1995); and Robert H. Frank, Luxury Fever: Why Money Fails to Satisfy in an Era of Excess (New York: Free Press, 1999). For the direct connection to progressive taxation, see McMahon and Abreu, "Winner-Take-All Markets."
66. For the origins of this line of thought, see Robert H. Frank and Philip J. Cook, The Winner-Take-All Society (New York: Free Press, 1995); and Robert H. Frank, Luxury Fever: Why Money Fails to Satisfy in an Era of Excess (New York: Free Press, 1999). For the direct connection to progressive taxation, see McMahon and Abreu, "Winner-Take-All Markets."
67. For the origins of this line of thought, see Robert H. Frank and Philip J. Cook, The Winner-Take-All Society (New York: Free Press, 1995); and Robert H. Frank, Luxury Fever: Why Money Fails to Satisfy in an Era of Excess (New York: Free Press, 1999). For the direct connection to progressive taxation, see McMahon and Abreu, "Winner-Take-All Markets."
68. Slemrod and Bakija, Taxing Ourselves, 57-61.
69. See, for example, Gary S. Becker, Kevin M. Murphy, and Ivan Werning, "Status, Lotteries, and Inequality" (working paper of the George J. Stigler Center for the Study of the Economy and the State), available on-line at http://gsbwww.uchicago.edu/research/cses/ documents/GSCworkingPapersPDFs.htm.
70. See Ahmad Diba and Noshua Watson, "America's Forty Richest under 40, " Fortune, September 18, 2000, 114: "To our surprise, we found that the value of residences was immaterial [to the rankings]. The home may be the biggest asset for most of us mere mortals, but to an Internet company founder, even a $10 million mansion is just a random tick in the company's stock."
71. See Richard A. Epstein, "Externalities Everywhere? Morals and the Police Power, " Harvard Journal of Law and Public Policy 21, no. 1 (1997): 61-69.