A Simple Tax System

One of the more interesting topics in last nights Republican Presidential debates concerned the flat tax. It should be noted that the flat tax is now generally referred to as the “fair tax.” The sound of a fair tax is more appealing then a flat tax I suppose. Each candidate expressed interest in either the flat tax or a simplification of the tax code. This is a step in the right direction. The benefits to a flat tax are available and will likely increase productivity and possibly generate more tax revenue. The problem, however, is that only one of the candidates discussed dealing with the powerful Tax Lobby. A $250 billion a year industry will not go away lightly and it will require a President and a Congress strong enough to ignore this lobby. The California Legislature was unable to pass such measures after a pilot program proved extremely successful. Let’s hope it is time for such changes because returning $250 billion in money spent to prepare taxes would be in itself a great start.

Efficiency and Equity

Economists are generally concerned with efficient markets. The issue that is rarely addressed is equity within markets. That is to say, equity in the form of the allocation of resources or income distributions. It might surprise you that economists are seldom interested in equity. Equity is a normative concept that relies on value judgements. Efficiency is a positive concept with clearly defined properties. It is important to remember that economists, when forming policy, are not concerned with equitable distributions. This is a major reason economists favor policies like free trade, because free trade promotes efficiency. The problem then lies in determining the distributional consequences of a free trade scheme.