Milton Friedman - Why Tax Reform Is Impossible

why is it that the tax system is so complicated why are the rates so graduated why do we have a tax system which has an almost infinite number of rules and regulations so that nobody in this room could possibly know them all with tax rates that started for an individual at 14% on the personal income tax and go up to 70% and that's on top of corporate taxes so that the owners of corporations pay a double tax why do we have such a system well one argument people might make is that it's for equity but it's not so you can go from the left of the political spectrum to the right and have a hard time finding anybody who will say that our present personal income tax system is an equitable system people who are fundamentally in the same economic position will pay very different taxes according to all sorts of accidental elements the form in which their property is whether they've been clever or not at getting tax shelters all sorts of things that ought to have nothing to do with the tax burden well then if we don't have it for equity maybe we have this complex and highly graduated system for revenue not so it doesn't yield any revenue let me demonstrate that to you in a very simple way suppose you were to consider the following change in a law you leave the personal income tax exactly where it is except you replace every tax rate which is higher than 25 percent by 25 percent don't make any other change so the 70% rate becomes 25 percent at cetera the highest rate becomes 25 percent now you might say to me well that'll cost you a lot of money not so in the first instance if you supposed that under that system everybody reported exactly the same amount of income that he now reports tax receipts would go down by seven and a half percent but that would be only the first step if the top rate were twenty five percent would it pay you to spend fifty cents on the dollar to get a tax shelter would it pay you to hire these expensive tax lawyers to avoid twenty five cents on a dollar you know in 1929 the top rate was 25% if you take the number of people who reported high incomes in 1929 and adjust for what has happened to the price level and the population and so on there were 10 times as many as there are today that isn't because the income distribution has changed that much it's because with our present tax system the private enterprise system has been very efficient in finding ways to avoid those high taxes but not without cost if you had a top rate of 25 percent the amount of income that would be reported for tax purposes would go up sharply I guarantee you that if you take the time to look at the detailed figures you will agree with me that there is no doubt whatsoever that a top rate of 25 percent with a law otherwise the same would yield more revenue than you get now the Treasury would get more money and the taxpayer would be better off now how can that be that looks as if somehow or other I'm getting a free lunch not at all you must distinguish sharply between the revenue from a tax system to the Treasury and the cost to the taxpayer of paying those taxes your taxes are really higher than the checks you send to the government in addition you should include in the cost of taxes the cost to you of tax shelters the cost to you of decisions that are made on tax grounds of spending one way rather than another because that will avoid taxes of not engaging in an activity because it just isn't worth it given that for every dollar extra you earn you'll only get to keep a little so there is no doubt that the total revenue to the Treasury would go up and the total cost to the taxpayer would go down and nobody would get hurt except for two important groups which is why this reform is impossible the who are those two groups well one of them is very obvious it's the tax lawyers and accountants but the other is less obvious but more important it's the members of Congress you put a 25 percent top rate on the tax system and what the congressmen have to sell in order to raise campaign funds I am NOT saying this as a pleasantry it is literally true if you're a congressman you have to engage in activities which will enable you to get reelected one of the most important of those activities is making the tax system more complicated by making the tax system more complicated on the one hand you get people who are willing to contribute to you and work for you in order to try to get a special provision which will benefit them on the other hand you play the other side of the street as well you have people who are willing to contribute to you in order to avoid having a special burden placed on them now if you had a simple tax system of a kind which undoubtedly would be preferable that possibility would disappear let me put this in another way you might think offhand that there's a real basis for compromise between what for simplicity I'll call the left and the right on this issue if you talk to people on the left they will say our present tax system or personal tax system is unconscionable because of all the loopholes all of the special deductions the tax shelters that can be created and they would say to you if you said to ask them would you be willing to accept lower tax rates in order to get a broader base almost every one of them will say yes suppose now I go to the so-called right and I say to them would you be willing to accept a broader base and fewer deductions in order to have lower rates almost everybody would say yes so offhand it looks if there's a compromise here there's a deal as you could get both right and left together on a great simplification of the tax system which would eliminate a great host of deductions and subtractions and would sharply lower the rates you know how low those rates could go if you kept present exemptions and eliminated all deductions and simply taxed at a flat rate all income in excess of present exemptions and strict occupational expenses the best estimates are that it would take a flat rate of about 16 percent to raise the same revenue that you now raise from these rates from going to 14 to 70 percent almost everybody would be better off under that arrangement and as I say you might think you have a deal for it but you don't why not for three reasons the first is that neither side trusts the other and both are right the left would say we make this deal and the first thing that will happen is that those deductions will creep back in and they're right that's exactly what would happen and the right will say we'll make this deal and the first thing we know those rates will start to rise and become more graduated and there's where they're right that's exactly what would happen so this is not a deal that can be carried off except only if you could do it through constitutional amendment which would really freeze it second reason is the importance of appearance versus reality everybody really knows deep down that these highly graduated taxes do not produce any equity everybody knows deep down they don't produce any revenue but you got to maintain appearances everybody wants to be on the side of equity everybody wants to be on the side of revenue and so we have the people operating in this political marketplace who will tell you we have to in those high rates because we must appear to be taxing the rich on a different rate than the poor the third-most of reason and the most important of all is the one I've already mentioned if you made such a deal and got such an arrangement and such a simplified tax system Congress would be out of business it would be very very much it difficult for them to have something to sell well how can we proceed then I submit that the way we have to proceed is by facing up to our situation and asking what is the fundamental explanation why is it that we have been having a situation in which in a democratic society government spending has been going up as a fraction of the income even though very few people get the feel they get their money's worth I believe that the fundamental explanation is that there is a defect in our political structure and then we must not kid ourselves into thinking that we're going to remedy it by the easy way of electing the right people to office that will not work once they get into office they are going to be subject to the same pressures and the same drives as the people we might regard as the wrong people in fact I have often said that the right solution is not to elect the right people to office but to make it politically profitable for the wrong people to do the right thing because unless it's politically profitable for the wrong people to do the right thing the right people won't do it either and I should think by this time and we have had ample experience to demonstrate the validity of that proposition but what is this defect why is it this happens I believe the fundamental defect is that the way in which a government budget is constructed is by voting individual pieces and then adding them up with respect to each individual piece there's a group that feels very strongly about it they are going to make a big effort to get that in the cost is very little and it's spread over everybody then nobody makes a big effort to stop it the result is that you get one little piece piled on top of another the total adds up to more than the public at large would like to spend but the public at large never gets a chance to vote on that total and when they come to vote for their individual representatives they are much more likely to vote form on the basis of the special measure that they feel strongly about than they are to vote for them on the basis of some kind of overall reduction consider your own position I've talked to members of state legislatures and federal Congress and they will say to you well now here are these people who come to me and say we have to have more money spent on on let's say education or on mental health facilities or on water resources you name it and I say to them well you know that's fine but where are we going to get the money then our budget is already too big and they say to me hmm you mean you're a hard-hearted cold-blooded fellow who wants to stamp on the mental defective or on the ill or on whatever other emotional group you can bring in now a legislature will tell you this particular measure by itself is going to raise taxes by $1 a person there is nobody who comes around and knocks on my door and says don't you put that extra dollar on my taxes if you look at the record the plain fact is that increasing government spending has always been politically more profitable than reducing taxes and the reason as I say is because the expenditures are concentrated and people know that they are benefited the taxes are defused you

Channel: LibertyPen

Views: 235,690

Keywords: tax, system, complex, graduated, rules, regulation, code, rates, personal, income, corporate, double, equity, elements, property, clever, shelter, burden, revenue, distribution, private, enterprise, cost, treasury, taxpayer, preparation, decisions, considerations, activity, politicians, economics, lawyers, accountants, sell, campaign, funds, complication, simplicity, loopholes, deductions, left, right, deal, reality, politics, spending, incentives, special, interests

Id: TruCIPy79w8

Length: 14min 28sec (868 seconds)

Published: Fri Jun 29 2012