Interview with Mart Laar, the pioneer of Europe’s flat tax revolution

[Emsworth]

I think we can get some guidance from the flat tax without actually implementing one.

I would tend to agree. It is not so important that the tax rate is uniform; rather, it is important that taxes are not too high. A "progressive" tax in which the top marginal rate is reasonable, would be perfectly acceptable to me. (For instance, the income tax scheme imposed under Andrew Mellon was excellent.)

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I am in absolute agreement here. The AMT is one of the most disagreeable parts of the tax system.

[Emsworth]

... is anyone here old enough to remember "Shock Therapy" (extreme free-market measures adopted by Eastern European Governments in the early '90's)? If so, how much do you know about it's effects? Not a lot I suspect; it was an utter failure when looked at objectively...

I would agree that shock therapy may have several undesired effects. In the long term, however, economic liberalization would lead to better results than the continuance of communism.

It is difficult to suddenly liberalize an economy that has so long been accustomed to a vastly different system. I would think that a more gradual change from communism to capitalism would have eventually produced positive results, without the problems associated with a sudden change (very high unemployment, and the accompanying increase in crime rates).

[Emsworth]

The average student pays a higher percentage tax rate (income tax, NI, student loans, top up fees etc) than a millionaire.

I wouldn't count loans or fees under tax rates. They are paying them for specific services that they are receiving, but the millionares are not.

[Emsworth]

Of course, one might argue that taxes should be lower overall - but you don't need a "flat tax" for that.

That's perfectly correct. Uniformity in tax rates is not what is significant; rather, it is important that they should not be too high.

As to your comments on spending: expenditure should ideally be cut throughout, not just redistributed. I hardly think it important whether pork barrel projects are going to West Virgina or California: the point is that they are going somewhere, when they should be going nowhere. The transfer of resources to the Northeast and West, accordingly, would not trouble me particularly.

[Emsworth]

All "pork barrel" together is relatively small peanuts compared to the budget as a whole. It's there, but you won't be able to cut taxes much by eliminating the obvious pork barrel excesses (and even that would be tough politically).

Of course it would be difficult to eliminate. However, I include not only the pet projects of several members of Congress, but also other narrow and locally tailored spending, including several appropriations relating to defense (remember the big fuss about BRAC?), transportation, agriculture, the interior, energy, and education.

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To a degree you are correct, but we can still consider the theoretical virtues of a hypothetical tax plan, regardless than a the probability of it being implemented in the first place.
 

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Of course, I don't think that we are necessarily advocating such flat rates, which would for the highest earners be pretty much the same as the current effective rate anyway.

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Naturally, it's non-discretionary spending that should be cut. I believe that it occupies about 2/3 of the federal budget. For example, assuming that we are considering politically realistic options, Medicaid spending could be cut by fixing the federal contribution at 50% of the total cost. Currently, the federal government on average funds approximately 60% of Medicaid. States, thus, are less likely to be fiscally responsible, when they know that the bulk of the tab is being picked up by the federal government. Reducing the federal contribution would encourage states to be more careful in Medicaid spending, and would probably save about $50 billion, if not more.

Similarly, the Prescription Drug Benefit should never have been approved. It's a highly irresponsible measure that will eventually cost the government billions.

Such measures, with respect to non-discretionary spending, would eventually add up sufficiently to ensure that the budget can be balanced.

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That assumes that lower tax rates would necessarily yield less revenue, which is at the very least a debatable premise. Lower taxes (especially lower corporate taxes and capital gains taxes, and an elimination of the AMT) would probably encourage more economic growth, and thereby increase overall tax revenue. It would depend, however, on one's perception of the Laffer curve.

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Here I would agree. The long-term effects of appropriate reform would undoubtedly be highly beneficial, though in the short term it would be politically suicidal. I feel that Lyndon Johnson's "War on Poverty" is particularly responsible for this mentality.

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It is curious that the current state of affairs was brought about precisely by such a crisis.