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Friday, March 24, 2006

March 24, 2006


Flat Tax, Comrade
March 24, 2006

Tax reform is in the air in Beijing, so we'll throw our two renminbi in: Instead of twiddling at the edges, why doesn't the People's Republic adopt a flat tax?

Today, China's tax system -- not unlike the regimes in New York or California -- resembles a bowl of sloppy noodles. A mix of progressive personal income taxes, corporate taxes, consumption taxes, value-added taxes, property taxes . . . well, you get the idea. This week, Beijing's tax authorities announced that as of April 1, new levies will be imposed on luxury goods like yachts and golf balls, in an effort to penalize the rich and redistribute their money to the poor. Oh, and a 5% tax on wooden chopsticks too, to slow deforestation.

What a fiddle. China's newest taxes aren't going to meaningfully impact its fiscal balance, which runs around a 1.5% budget deficit. And who ever said that it was wrong to get rich? Certainly not Deng Xiaoping, who called wealth glorious, thereby firing the starting gun for China's economic miracle.

Listen closely, Comrade: a flat tax is simple. It's easy to implement. It would be easy to monitor, helping to combat rampant local corruption. It would boost tax receipts, giving more room for relief to the rural poor -- something the Party is trying to do anyway. Lower tax rates would stimulate workers to work harder, lifting productivity. And best of all, the Party could sell a flat tax as fair treatment for everyone, which it is. After all, isn't that what the People's Republic is supposed to be all about?

The political left -- meaning whatever Communist ideologues are still around -- will wail that a flat tax is some kind of sinister plot to boost the rich at the expense of the poor. But as much of the enlightened former Soviet bloc has learned, if you're really out to squeeze the rich, the best way to do it is to generate more rich people, and give them more incentive to report their income by keeping rates low.

Wednesday, March 22, 2006

March 22, 2006



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Bernanke's 'Deadweight'
March 22, 2006; Page A16

Congratulations to new Federal Reserve Chairman Ben Bernanke, who addressed the Economic Club of New York Monday and managed to confuse the financial press about monetary policy more thoroughly than even Alan Greenspan used to.

Yesterday's papers contained acres of analysis suggesting that Mr. Bernanke had said that the current low long-term bond yields could be caused by any number of factors that could lead to either higher (or lower) short-term interest rates, and in any event meant that central bankers had to be flexible and rely on all sorts of economic indicators rather than get pinned down by one or two. Or something like that. With remarks of such studied opacity, Mr. Bernanke is well on his way to joining the central banker hall of fame.

On the other hand, we also heard his speech and think Mr. Bernanke did make news on fiscal policy. One of the evening's questioners, Columbia Business School Dean (and Journal contributor) Glenn Hubbard, pointed out that Mr. Bernanke's recent criticism of budget deficits had received wide attention. Mr. Hubbard wanted to know if the Fed chief believes it matters to economic growth how deficits are lowered -- whether by spending reductions or tax increases?

Mr. Bernanke replied that there was a "big difference" between having the deficit balanced at, say, 15% of GDP versus 25% of GDP. That difference was in the "resources" that are taken out of the private economy that could otherwise be put to productive use. He also cited Milton Friedman's famous analysis of the "deadweight loss" and "extra burden" on economic growth that often exceed the direct cost of greater government spending.

Ultimately, the Fed chief added, any answer to the question depends on how much you value the things that government would spend the money on. This is surely true. But we think we heard Mr. Bernanke saying as clearly as any central banker every will that policy makers need to appreciate there is a cost in lower economic growth and efficiency from higher taxes. This isn't a message that goes down well with a financial press that largely agrees with Robert Rubin that tax increases are urgently needed. But we thought it was a useful warning from a new Fed chairman who may be around for a while, and that our readers might even like to know about it.