"Raise Taxes on the Poor?" is the headline on the latest piece from libertarian law professor Richard Epstein, who makes the case for a flat tax as an improvement on the alternative progressive rate structure:
Under a progressive system, the amount of a tax owed depends both on the person who earns the income and the year in which that income is received. Given the taxing difference between high and low brackets, high net-worth taxpayers have strong incentives to shift their taxable income to their low income relatives, artificial tax entities, into low income periods, or all three.
Any government that is determined to enforce its progressive system has to close these legal loopholes, which means the creation of complex rules to deal with partnerships, trusts, and corporations, all vehicles that allow money earned by one individual to appear on the tax forms filed by others. But, these various devices are so critical to the effective operation of the economy that it is impossible to ban their use or to decree that their incomes be taxed at the highest marginal rate.
Unfortunately, all the money that is spent in creative tax planning (which gets an added fillip from the efforts to minimize exposure to gift and estate taxes) is tax deductible, reducing yet again government revenues by sparking high-powered schemes that would never see the light of day in a world without taxes, or, more importantly, in a world of flat taxation.
He goes on:
A large number of Americans are incentivized to either support or tolerate tax increases on the rich. Why? It is a lot easier to vote for increases in government spending when all the additional costs are borne by other individuals.
Human nature what it is, most ordinary citizens will be tempted by government largesse, despite the potential losses from hamstringing the economy with higher taxes. It is for that reason that whenever there is a revenue shortfall, political forces now clamor to "tax the rich." In the end, this is a plea for steeper progressivity, which in turn cuts deeper into long-term economic growth.
The willingness to call for tax increases is dulled, however, when rates are flat. Then, the proponents of tax increases know for certain that they will have to foot their part of the bill for each new program.