Treasury Dynamic Analysis of Tax Reform Options

Office of Tax Analysis, U. S. Department of the Treasury ^ | May 25, 2006 | R. Carroll, J. Diamond, C. Johnson, J. Mackie III

[Bigun]

...the real loss of freedom we have experienced over the past century has been our freedom of economic choice.

Hear Here! Which is why I have been known to say:

"We will never again be a truly free people so long as we have an income tax and the IRS."

[StJacques]

"'We will never again be a truly free people so long as we have an income tax and the IRS.'"

Yes; bring on the FairTax, turn the collection over to the States, establish revenue sharing to avoid dual payments by the citizenry for the same services, and abolish the IRS and a significant amount of "dual purpose bureaucracy."

And then we'll all be a lot more free and a lot more wealthy.

[Bigun]

AMEN! And the nation will be FAR healthier as well!

[pigdog]

"Dual purpose bureaucracy" ... LOL!!!

[StJacques]

""Dual purpose bureaucracy" ... LOL!!!"

Yes; and even though many Freepers on numerous other threads have accused me of NOT being a true conservative when we discuss topics like The Theory of Evolution vs. Intelligent Design, Immigration policy, the history of the Arab/Israeli conflict, and more; THIS is what draws the line for me. I believe that without a clearly-defined objective of limiting government power through a rationally-sensible program with its basis in sound economic theory that frees up private enterprise to work its magic, NO ONE makes the grade.

Too much of what many people consider to be "conservative" these days comes down to cultural issues. On many of those I fit in; I'm pro-life, opposed to Euthansia, opposed to research in stem cell cultures drawn from aborted fetuses, I oppose gay marriage, I rail against judicial activism, and more. However; none of that, in fact not all of that taken together, marks one as a conservative in my opinion. Either you want to control the power of the state (as a political scientist would use the term) to a far greater degree than it is now controlled and you have ideas on how to do it sensibly, or you're not a conservative.

The states and the federal government duplicate many functions in their bureaucratic structures. Health care and health policy, environmental policy, police power, business regulation, industrial standards, and on and on. It is not an accident of history that these functions were, for the most part, duplicated AFTER the federal income tax became law with the passage of the 16th Amendment and especially after FDR's increase of marginal income tax rates in the second world war. It is the IRS that has brought the true assault on our liberty.

And to anyone who doesn't think I'm a conservative, just put my views to Hillary Clinton, Michael Moore, Ted Kennedy, and the rest of their ilk and see how they label me.

I'm really enjoying this thread. It gives me the chance to rant a lot.

[Bigun]

Either you want to control the power of the state (as a political scientist would use the term) to a far greater degree than it is now controlled and you have ideas on how to do it sensibly, or you're not a conservative.

To this point sir you and I are completely in agreement.

Many who would CALL themselves "conservative" are not! For example, they do not see the harm in the local state university taking tax money and building facilities (apartment complexes) which compete directly in the markets from which the tax monies they used to build them are derived! I could launch into my own "rant" here but will reserve it for latter and suffice it to say that when the golden goose is dead he's DEAD!

[Bigun]

BTW: I usually get crosswise with many "conservatives when I say things like:

"I believe in personal responsibility, therefore we should repeal all laws (drug use, motorcycle helmet, seat belt, etc.) which seek to protect people from themselves."

[pigdog]

If you go back before FDR to Woodrow Wilson you'll see the genesis of many of the governments "socializations". Many began with Wilson who was truly a socialist and merely accelerated after that (FDR's masterstroke was the tax withholding - you should read Beardsley Ruml's speech from 1946).

[Mind-numbed Robot]

True, but to an economist "Capital" is more than just money, it is "any asset that is available for use in the production of other assets."

Because of the comment below I zeroed in on money rather than capital.

...if more investment capital is placed in the hands of private entrepreneurs that there will be more growth.

That seems to be talking about money, in my mind.

....value was subjective in nature....

Yes, beauty is in the eyes of the beholder but the market sets prices and money is the medium we use for bartering. There is intrinsic value, which is subjective, and market value which is reflected in price. Market wise, the value of anything is dependent upon what someone will pay for it.

[StJacques]

I am very familiar with Woodrow Wilson. I do not think it is correct to refer to Wilson as a "socialist," unless you look very carefully at the sense of the term before 1917, when many would have looked at English Fabian Socialism as the model, one that implied an evolutionary process of government responsibility for social justice, achieved primarily through regulating the power and wastefulness of monopoly capital. Wilson rejected Marxist doctrine from the outset and he was nothing but horrified at what he saw in the Bolshevik Revolution, which created more problems for him than a lot of people realize. And it is hard to make a case, in my opinion, that Wilson's New Freedom reforms of 1913-1915 look anything like Socialism. The Underwood-Simmons Tariff of 1913 was the first downward revision of tariffs since the Civil War, the Federal Trade Act establishing the FTC was meant to restore competition in the marketplace by curbing illegal business practices, the Clayton Anti-Trust Act of 1914 gave definition to the terms "monopoly" and "monopolistic business practice" -- again enhancing competition, and the Federal Reserve Act of 1913 created the cornerstone of American capitalism in the Federal Reserve. It can be argued that Wilson began to turn his legislative agenda more towards social justice in 1916 and that major reform legislation such as the Keating-Owen Child Labor Act, the Adamson Railroad Act, and the Federal Farm Loan Act were designed to appeal to the Left, who already liked Wilson's opposition to the war, and to "bring them in," but I don't think it approaches the label of "socialist" as we use it today.

It is worth pointing out that Wilson's decision to take the U.S. into the war in 1917 cost him the support of everyone on the left, which started the process of breaking up the reform coalition he put together. The Socialists opposed this completely.

[StJacques]

". . . That seems to be talking about money, in my mind. . . ."

Yes it was.

[pigdog]

But to me the real start of Wilson's socialism really got going at the end of WWI when his "14 points" were deconstructed and, basically, laughed out of Dodge and he then more and more became a big government fancier.

And I'm sorry but I don't think of the Federal Reserve as a high water mark of capitalism - quite the contrary I consider it an early step in government's control and manipulation of the economy. And Wilson was definitely in favor of that.

We'll have to disagree about Wilson since I find him to be the first modern socialist President (followed all too soon by others).

IAE, here's a link to Beardsley Ruml's interesing speech Taxes For Revenue Aare Obsolete.

[n-tres-ted]

Now that I've read more of the report, the plans they analyzed (particularly including the "progressive consumption tax") are pretty pathetic compared to the Fair Tax. Why they spent the money on this and left out the Fair Tax is difficult to defend.

[Bigun]

Found a very nice article, germane to the subject at hand, and thought you both might enjoy it as well.

The Philosophical Origins of Austrian Economics

[pigdog]

Fine article -TYVM Bigun!!

[StJacques]

On "The Philosophical Origins of Austrian Economics" . . .

First of all, thank you for the link Bigun. I've just spent the last hour reading through it and many of its points were known to me regarding the origins of Austrian Economic Thought, though the specific information contained in the later section on the assault on Austrian Economics by the Logical Positivists in the early 20th century, which I knew had occurred, was more or less new to me. You might note that the author of the article is really explaining the philosophical foundations and justification for the methodological approach of Austrian Economics, and especially "methodological individualism," which may help to highlight his reasons for writing the article, which I thought was excellent.

Since Austrian Economics is new to a lot of people, I wanted to put up another link that may help to put the author's subject in perspective:

Overview of the Austrian School

I would particularly call your attention to the "bulleted list" of major characteristics of Austrian School thought, located very near the top of the article; especially their emphasis upon Subjectivism and Deductive Method as helping to explain some of the major tenets of Austrian Economics the author of the article is trying to make clear.

I got my first exposure to Austrian Economics in grad school in the late 1980's when I took a seminar on "The History of Economic Thought" at Texas A & M with Morgan Reynolds, of the Economics Department at the university. Reynolds later went on to become Chief Economist at the Department of Labor in the early years of the Bush Administration. He was then the Editor -- I think -- of the Quarterly Journal of Austrian Economics and his self-admitted bias in favor of Austrian Economic Thought was a highlight of the seminar, which I enjoyed tremendously.

There are several things about Austrian Economic Thought which appeal to me. The first and foremost is that they were the first economic theoreticians to update traditional Laissez-Faire approaches to economic policy, which I always saw as an underpinning of human freedom, within a framework that placed the consumer at the center of economic life in a coherent and cohesive manner. Adam Smith, David Ricardo, et al. had all focused primarily upon producers and, when we trace the development of modern economic thought's emphasis upon consumer-centric economics it is the Austrians who come first.

But there was more in Austrian Economic Thought that appealed to me. I did my grad school work in History, and one of my specializations was in "Quantitative Methods in Historical Research," in which I crunched numbers on everything from voting behavior to demographic trends. One of the things which I had to learn very early on was that the strength of the relationships one developed in Quantitative Analysis of historical data was oftentimes somewhat weak, though strict Demographic Analysis was generally stronger, and the lesson pounded into my head was that a good quantitative analyst examining historical trends needed to complement his number crunching with good documentary research in order to explain "subjective factors" that might explain deviations from the norm when trend analysis was presented. And my Quantitative Methods professor also told me that economic analysts faced the same difficulty since economic trends were often no stronger -- we're dealing with R² values in regression analysis here -- than the ones I was developing.

I carried this "hands on" knowledge of Quantitative Analysis with me into Dr. Reynolds' seminar and, when he arrived at a discussion of the Austrian School and presented its emphasis on Subjectivism I was immediately struck by its "real world" application to human behavior, whether in Economics or any other discipline. And I also noted that this particular bias of Austrian Economics, which does not trust the use of discrete mathematics in economic trends analysis for its attempt to "objectify" human economic activity, made most of the grad students in Economics very nervous, since many of them went from seminar to seminar learning economic formulas used to express trends and then moved on to demonstrate them in analysis. I remember when a discussion of trend analysis in price theory developed that Reynolds told them something like "you guys can never incorporate the varied influences of all economic actors involved in determining prices so you're lost before you even begin." Everyone chuckled as he said it, but I couldn't help but detect some real nervousness on the part of several of those students, some of whom I was sure would be writing theses on price theory which would be presented as support for or opposition to theories some economist had expounded previously.

I wanted to mention all of this because what eventually brought me around to supporting the consumption tax was what I learned in Austrian Economics about prices, which is that they are not a reflection of the objective or intrinsic value of a good or service, but rather a "system for communicating information" to economic actors (see the bulleted list I referred to above). While I do see some weaknesses in Austrian Economic Thought with reference to monetary policy -- I'll skip that -- I pretty much think they've got it right just about everywhere else, but especially on prices, which was one of the key underpinnings of their argument that Socialism could not work as an economic system. I used to be a proponent of the Flat Tax, primarily for reasons of judging that it was more politically expedient an option than the consumption tax, but the more I reflected upon what a pricing system was really about the more I began to turn to the Fair Tax, because the greatest of its many efficiencies is that it reduces economic uncertainty with regard to prices and a modest reduction of economic uncertainty is about all that I believe government can hope to achieve in economic policy.

Well; now you know what I really think. Thanks for the link again Bigun. I enjoyed the article.

[Bigun]

"Well; now you know what I really think."

Thanks for being so open and willing to share some of the experiences which helped to shape your thinking. I won't go quite so far but will say that you and I are in almost complete agreement across the board (I think that there were political considerations which prevented others from speaking openly about the importance of individuals prior to the emergence of the "Austrian School").

If the Austrians are correct - and we know they are - ;>) we MUST be rid of this Marxist monstrosity of a tax system we currently suffer and replace it with something very much like the currently pending Fairtax bill if our nation is to survive in the long term.