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Tuesday, April 21, 2009


More proposed amendments from Milton Friedman's book Free to Choose.
The Congress shall have the power to lay & collect taxes & incomes of persons, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration, provided that the same tax rate is applied to all income in excess of occupational and business expenses and a personal allowance of a fixed amount. The word "person" shall exclude corporations and other artificial persons.
This would involve the repeal of the US 16th Amendment which first authorised an income tax. This is a Flat Tax amendment. The advantage of flat tax is that it is much easier to administer. Most calculations of flat tax have suggested that the same amount of money could be raised with a 20% rate & an untaxed allowance of about £15,000. This does depend not just on smaller administrative costs but on some economic growth because of the increased incentives, which is a reasonable but not certain assumption. Part of the problem in Britain is that we have both income tax & national insurance which, despite being run but different departments, are both income taxes. On the other hand this suggests the possibility of even more savings in income tax.

The fact is that income taxes don't particularly hit the wealthy because they have more incentive to search for loopholes. It is one of the big secrets of government that the poor tend to pay a higher proportion of their incomes in tax than the rich. As Friedman says
Although there is agreement between left & right that lower taxes, fewer loopholes & a reduction in the double taxation of corporate income would be desirable, such a reform cannot be enacted through the legislative process. The left feel that if they accepted lower rates & less graduation in return for eliminating loopholes new loopholes would soon emerge - and they are right. The right fear that if they accepted the elimination of loopholes in return for lower taxes & less graduation, steeper graduation would soon emerge - and they are right.

This is a specially clear case where a constitutional amendment is the only hope of striking a bargain that all sides can expect to be honoured.

Incidentally I think this is a particularly clear example of how Friedman & libertarianism generally is not "right wing" in any traditional, being respectful to the toffs, meaning.

I should say that on one point I disagree with this intent. I think there should be tax allowances for children. Particularly in advanced economies where most women are having fewer children than the replacement rate. Families are socially required if society is to continue & society should be willing to give such supports & ideally considerably more generous ones than now obtain. Without that a disproportionate share of the burden of producing the next generation is borne by parents (ok this is obvious & cannot be fully equalised but it is right for society to take more of the burden). Perhaps, as written this amendment, under the term "personal allowance of a fixed amount" would allow parents to add the fixed allowance of their children to their own but if so I think that should be formally stated.

Defense spending in the US is around 5%, so an income tax of 6% could cover the military and any other minor expenses. I think a flat tax of say 6.5% with a deduction for those under say $20k would allow for the needed revenue.

Second, once we eliminate most of the government Congress can focus its attention on the Defense Department to eliminate waste, possibly further reducing expenses.
I didn't realise it was quite that high though I knew it was equal to the next 26(ish) countries in the world combined. I think this is more a sign of government departments getting money because they are there than facing any real military threat/needs the US has. When the US was growing to preeminence it had a very small military & this may be a factor in why it passed Britain which was busy policing the world.
I'm going off memory, so I would advise looking it up.

The claim that the United States spends more than the next 26 combined is false. We do spend more than many do individually, but China massively underreports its spending, and we do not get 5% in value from the spending. Also, the expenses per soldier are far higher in a first world country than they would be in a third world country since our soldiers (until a few months ago) had other options that might pay more. Many of the countries in your list of 26 probably would have higher defense spending if we did not protect them.

If we did not police the world, no one would buy our bonds, and we would be bankrupt. Japan doesn't buy American debt out of the goodness of its heart. Of course, we wouldn't have a budget deficit if we did not have social programs, or the Blacks and airhead-liberals to whine for them. So our defense spending ties in with our large welfare system.

Finally, there are nondefense items in the budget that shouldn't be there.

So please don't repeat the line that the US spends more than the next 26 countries combined unless you massively qualify it. It is a throwaway line used by the far left to delegitimize the US and really any attempt by the US to have a military. After the Korean war the US had defense spending of a little under 10% with spending only modestly going up as a part of the economy under Reagan. Defense spending declined as part of the budget after money was diverted to welfare after Lyndon Johnson's Great Society was launched.
Certainly if you counted all Chinese soldiers, or Indian ones, at the same wage level as US ones they would be a lot closer. Most of the military assessments of the USSR were built on that. However that comparison is little more reasonable than it is across industry. Technical quality is at least as important in the military as in manufacturing - else Israel wouldn't be there any more.
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