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Milton Friedman - Why Tax Reform Is Impossible — Transcript

by LibertyPen · 2,036 words · 320 segments · language en · Watch on YouTube

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0:02[Music]
0:13why is it that the tax system is so
0:15complicated why are the rates so
0:18graduated why do we have a tax system
0:22which has an almost infinite number of
0:25rules and regulations so that nobody in
0:27this room could possibly know them all
0:30with tax
0:31rates that started for an individual at
0:3514% on the personal income tax and go up
0:38to
0:3970% and that's on top of corporate
0:43taxes so that the owners of Corporations
0:46pay a double
0:47tax why do we have such a
0:50system well one argument people might
0:54make is that it's for Equity but it's
0:56not
0:57so you can go from the left of the
1:00political Spectrum to the
1:02right and have a hard time finding
1:05anybody who will say that our present
1:07personal income tax system is an
1:09equitable
1:10system people who are fundamentally in
1:13the same economic Position will pay very
1:15different taxes according to all sorts
1:16of accidental elements the form in which
1:19their property is whether they've been
1:22clever or not at getting tax
1:25shelters all sorts of things that ought
1:27to have nothing to do with the tax
1:31burden well then if we don't have it for
1:33Equity maybe we have this complex and
1:35highly graduated system for Revenue not
1:39so it doesn't yield any
1:42Revenue let me demonstrate that to you
1:45in a very simple
1:47way suppose you were to consider the
1:49following change in a law you leave the
1:52personal income tax exactly where it
1:55is except you replace every tax rate
2:00Which is higher than 25% by
2:0325% don't make any other change so the
2:0770% rate becomes 25% Etc the highest
2:10rate becomes
2:1225% now you might say to me well that'll
2:15cost you a lot of
2:16money not so in the first instance if
2:21you supposed that under that system
2:24everybody reported exactly the same
2:26amount of income that he now
2:28reports tax receipts would go down by
2:3375% but that would be only the first
2:36step if the top rate were 25% would it
2:39pay you to spend 50 cents on the dollar
2:41to get a tax
2:43shelter would it pay you to hire these
2:45expensive tax lawyers to avoid 25 cents
2:47on a
2:48dollar you know in 1929 the top rate was
2:5425% if you take the number of people who
2:57reported High incomes in 192 29 and
3:01adjust for what has happened to the
3:02price level and the population and so on
3:05there were 10 times as
3:07many as there are
3:10today that isn't because the income
3:13distribution has changed that much it's
3:16because with our present tax
3:19system the private enterprise system has
3:21been very efficient in finding ways to
3:23avoid those high
3:25taxes but not without cost
3:30if you had a top rate of
3:3325% the amount of income that would be
3:35reported for tax purposes would go up
3:39sharply I guarantee you that if you take
3:41the time to look at the detailed
3:44figures you will agree with
3:46me that there is no doubt whatsoever
3:50that a top rate of 25% with a law
3:52otherwise the same would yield more
3:54Revenue than you get
3:57now the treasury would get more money
4:00and the taxpayer would be better off now
4:02how can that be that looks as if somehow
4:06or other I'm getting a free
4:08lunch not at all you must distinguish
4:12sharply between the revenue from a tax
4:16system to the treasury and the cost to
4:19the
4:20taxpayer of paying those
4:23taxes your taxes are really higher than
4:25the checks you send to the
4:27government in addition you should incl
4:29include in the cost of
4:32taxes the cost to you of tax
4:34shelters the cost to you of decisions
4:38that are made on tax grounds of spending
4:40One Way rather than another because that
4:42will avoid taxes of not engaging in an
4:45activity because it just isn't worth it
4:47given that for every dollar extra you
4:49earn you'll only get to keep a little so
4:52there is no
4:53doubt that the total revenue to the
4:57treasury would go up
5:00and the total cost to the taxpayer would
5:02go down and nobody would get
5:05hurt
5:07except for two important groups which is
5:11why this reform is
5:14impossible who are those two groups well
5:17one of them is very
5:18obvious it's the tax lawyers and
5:23accountants but the other is less
5:25obvious but more important it's the
5:28members of Congress
5:31you put a 25% top rate on the tax system
5:34and what do Congressmen have to sell in
5:36order to raise campaign
5:39funds I'm not saying this as a
5:42pleasantry it is literally true if
5:44you're a congressman you have to engage
5:46in activities which will enable you to
5:48get
5:52reelected one of the most important of
5:54those activities is making the tax
5:57system more complicated
6:05by making the tax system more
6:07complicated on the one
6:13hand you get people who are willing to
6:16contribute to you and work for you in
6:18order to try to get a special provision
6:20which will benefit them on the other
6:22hand you play the other side of the
6:24street as
6:25well you have people who are willing to
6:27contribute to you in order to avoid
6:29having a special burden placed on them
6:31now if you had a simple tax system of a
6:34Kind which undoubtedly would be
6:37preferable that possibility would
6:43disappear let me put this in another
6:47way you might think offhand that there's
6:50a real basis for compromise between what
6:52for Simplicity I'll call the left and
6:54the right on this
6:56issue if you talk to people on the left
6:58they will say
7:00our present tax system our personal tax
7:03system is unconscionable because of all
7:05the loopholes all of the special
7:07deductions the tax shelters that can be
7:10created and they would say to you if you
7:12said to ask them would you be willing to
7:15accept lower tax rates in order to get a
7:18broader
7:19base almost every one of them will say
7:22yes suppose now I go to the so-called
7:25right and I say to them would you be
7:27willing to accept a broader base and
7:29fewer deductions in order to have lower
7:32rates almost everybody would say yes so
7:35offand it looks as if there's a
7:36compromise here there's a deal that you
7:39could get both right and left together
7:41on a great simplification of the tax
7:44system which would eliminate a great
7:46host of deductions and subtractions and
7:48would sharply lower the rates you know
7:50how low those rates could go if you kept
7:54present exemptions and eliminated all
7:57deductions and simply taxed at a flat
8:00rate all income in excess of present
8:04exemptions and strict occupational
8:07expense the best estimates are that it
8:10would take a flat rate of about
8:1216% to raise the same Revenue that you
8:15now raise from these rates from going to
8:1714 to
8:2070% almost everybody would be better off
8:22under that Arrangement and as I say you
8:24might think you have a deal for it but
8:26you don't why not for three
8:30reasons the first is that neither side
8:33trusts the other and both are
8:42right the left would say we make this
8:45deal and the first thing that'll happen
8:47is that those deductions will creep back
8:49in and they're right that's exactly what
8:51would happen and the right will say
8:54we'll make this deal and the first thing
8:56we know those rates will start to rise
8:59and become become more graduated and
9:00there's they're right that's exactly
9:02what would happen so this is not a deal
9:04that can be carried off except only if
9:07you could do it through Constitutional
9:09Amendment which would really freeze
9:12it second
9:15reason is the importance of appearance
9:17versus
9:19reality everybody really knows deep down
9:23that these highly graduated taxes do not
9:27produce any Equity everybody knows deep
9:30down they don't produce any
9:32Revenue but you got to maintain
9:36appearances everybody wants to be on the
9:38side of equity everybody wants to be on
9:40the side of Revenue and so we have the
9:44people operating in this political
9:46Marketplace who will tell you we have to
9:50maintain those High rates because we
9:52must appear to be taxing the rich on a
9:56different rate than the
9:58poor the third most reason and the most
10:00important of all is the one I've already
10:02mentioned if you made such a deal and
10:04got such an arrangement and such a
10:06simplified tax system Congress would be
10:08out of
10:10business it would be very very much
10:12difficult for them to have something to
10:14sell well how can we proceed
10:17then I submit that the way we have to
10:20proceed is by facing up to our situation
10:24and asking what is the fundamental
10:26explanation why is it
10:31that we have been having a situation in
10:33which in a Democratic
10:35Society government spending has been
10:37going up as a fraction of the income
10:39even though very few people get feel
10:41they get their money's
10:43worth I believe that the fundamental
10:46explanation is that there is a defect in
10:48our political
10:50structure and that we must not kid
10:52ourselves into thinking that we're going
10:54to remedy it by the easy way of electing
10:57the right people to office that will not
11:00work once they get into office they are
11:02going to be subject to the same
11:04pressures and the same
11:07drives as the people we might regard as
11:10the wrong
11:11people in fact I have often said that
11:14the right solution is not to elect the
11:16right people to office but to make it
11:19politically profitable for the wrong
11:21people to do the right
11:25thing because unless it's politically
11:28profitable for the wrong people to do
11:29the right thing the right people won't
11:31do it
11:33either and I should think by this time
11:36and we have had ample experience to
11:37demonstrate the validity of that
11:40proposition but what is this defect why
11:43is it this happens I believe the
11:46fundamental defect is that the way in
11:48which a government budget is
11:50constructed is by voting individual
11:54pieces and then adding them
11:56up with respect to each individual
12:01peace there's a group that feels very
12:04strongly about it they are going to make
12:07a big effort to get that
12:09in the cost is very little and it's
12:12spread over
12:13everybody and nobody makes a big effort
12:16to stop
12:17it the result is that you get one little
12:20piece piled on top of another the total
12:23adds up to more than the public at large
12:26would like to spend but the public at
12:29large never gets a chance to vote on
12:32that
12:33total and when they come to vote for
12:35their individual
12:37Representatives they are much more
12:38likely to vote for them on the basis of
12:40the special measure that they feel
12:42strongly
12:44about than they are to vote for them on
12:47the basis of some kind of overall
12:50reduction consider your own position
12:53I've talked to members of state
12:54legislatures and federal Congress and
12:57they will say to you well now here these
12:59people who come to me and say we have to
13:00have more money spent on on let's say
13:05education or on uh mental health
13:09facilities or on Water Resources you
13:12name it and I say to them well you know
13:15that's fine but where are we going to
13:17get the money that our budget is already
13:19too big and they say to me hm you mean
13:23you're a
13:25hard-hearted cold blooded fell who wants
13:28to s stamp on the mental
13:31defectives or on the ill or on whatever
13:34other emotional group you can bring
13:38up now A legislature will tell you this
13:41particular measure by itself is going to
13:43raise taxes by a dollar a person there
13:45is nobody who comes around and knocks on
13:47my door and says don't you put that
13:49extra dollar on my
13:51taxes if you look at the
13:53record the plain fact
13:56is that increasing government spending
14:00has always been politically more
14:02profitable than reducing
14:04taxes and the reason as I say is
14:08because the expenditures are
14:10concentrated and people know that they
14:13are benefited the taxes are diffused

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