Henry Hazlitt: For True Tax Reform

Henry Hazlitt (1894-1993) was one of the 20th century’s greatest writers on economics. His 1946 classic Economics In One Lesson is still an excellent introduction to the subject for the general reader. And, for a number of years, he was columnist in Newsweek, bringing economic insights to the issues of the day and expressing them with clarity. The article below is a classic example of this. It appeared in Newsweek on this day in 1963.

Opinion is beginning to clarify about the President’s tax cut and tax “reform” proposals, but a good deal of ambiguity remains.

Practically everybody favors a tax cut. But the tax cut advocates fall into at least five groups: those who want a tax cut (1) with increased expenditures; (2) with unchanged expenditures; (3) with a smaller cut in expenditures; (4) with an equal cut in expenditures, and (5) those who favor a tax cut only with a big enough cut in expenditures to balance the budget. The whole discussion would be clearer if everybody stated frankly to which of these five groups he belonged.

It is impossible to discuss taxes realistically in isolation from the level of expenditures. Too many people seem to have forgotten that the only reason we have to pay taxes at all is to meet government expenditures. And we do have to meet them. The planned $12 billion deficit for 1964 has been well described as a plan to borrow $12 billion from the American people to pay for their own tax cut.

But we can ask ourselves this hypothetical question: given the necessity of raising the same amount as existing taxes raise, could a better tax system be devised for doing it? This is the question of tax reform.

PUNITIVE RATES

True tax reform would be far more thoroughgoing than, and quite different from, the “reforms” the President has advocated. True reform would reconsider our balance between direct and indirect taxes. And it would re-examine the whole principle of the “progressive” income tax.

This device rests ostensibly on grounds of “social justice.” Yet it embodies the morally dubious assumption that a majority has a right to impose on a minority punitive tax rates that it would not dream of accepting for itself. The moral, legal, and economic harm done by the application of this discriminatory principle has been analyzed at length by F.A. Hayek, Milton Friedman, and other economists.

Our steeply graduated rates have not been successful even in raising revenue. It has been calculated that a flat income-tax rate of 23½ percent, with present exemptions, would raise as much revenue as the whole present scale of rates ranging from 20 to 91 percent. It has also been calculated that the basic rate of 20 percent yields 85 percent of the entire personal income-tax revenue, which means that the whole progression up to 91 percent yields only 15 percent. Finally, all the progressive rates above 50 percent yield less than $1 billion—i.e., less than 1 percent of our total revenues (including those from flat-rate social-security taxes) and enough to run the government for only four days.

DESTROY ING INCENTIVES

Yet the harm that these punitive rates above 50 percent do in destroying incentives to effort, production, and investment, and in siphoning off the major part of the funds otherwise available for investment, is incalculable. Our present tax system is probably more responsible for our present slow rate of economic growth, of which the Administration is constantly complaining, than any other factor.

Public opinion is not yet prepared to accept a simple proportional income tax. But wiping out all tax rates above 50 percent would give an immense impetus to effort, risk-taking, and investment. The moral argument for such a ceiling is that any tax above 50 percent is prima facie confiscatory. As former Under Secretary of the Treasury Roswell Magill has put it, “a taxpayer’s interest in earning a dollar of additional income should at least equal the government’s.” The economic argument for such a ceiling is that it would do more in the long run to increase the real disposable income of workers and others in the lower income brackets than any temporary cut in their own tax rate.

Such a ceiling might possibly in the first year result in a trifling loss of revenue, but it would be certain in the long run to bring a substantial increase in revenues.

This 50 percent top should, of course, apply not only to personal income taxes, but to corporate taxes and estate taxes.

John Phelan is an economist at Center of the American Experiment.