There are only two things that are certain in life, death, and taxes! Nobody likes to pay them but many begrudgingly do so to pay for the upkeep of a society and nation from infrastructure to the army (e.g. the social contract).
There are various models to set tax levels, from progressive models to flat-rate taxation. Here we explore some interesting taxation proposals from Robert Ernest Hall and see how they differ from other forms of tax.
Who is Robert Ernest Hall?
Robert Ernest Hall ("Bob") is an American economist and a Robert and Carole McNeil Senior Fellow at Stanford University's Hoover Institution. He is best known as a macroeconomist but tends to prefer to refer to himself as an "applied economist".
"I’m an applied economist with interests in employment, technology, competition, and economic policy in the aggregate economy and in particular markets." - Robert Hall.
Robert earned his BA in Economics from the University of California in Berkeley and also holds a Ph.D. in Economics from MIT. At MIT his Ph.D. thesis was entitled Essays on the Theory of Wealth under the supervision of Robert Solow.
Hall is most famous for joint-creating the principle of a flat tax with Alvin Rabushka. The two men co-authored a book by the same name, The Flat Tax, and regularly work as advisers in Eastern European countries who wish to adopt the principle in their economies as well as various American government agencies.
"I have advised a number of government agencies on national economic policy, including the Justice Department, the Treasury Department, the Federal Reserve Board, and the Congressional Budget Office, where I serve on the Advisory Committee. I served on the National Presidential Advisory Committee on Productivity. I have testified on numerous occasions before congressional committees concerning national economic policy." - Robert Hall.
Robert is currently a member of the Hoover Institution, the National Academy of Sciences, a fellow at both the American Academy of Arts and Sciences and the Econometric Society, and a member of the National Bureau of Economic Research (NBER).
He is also the "chairman of the Business Cycle Dating Committee, the body responsible for setting the start and end dates of U.S. economic recessions. Hall served as President of the American Economic Association in 2010 and is a long-time member of the Brookings Panel on Economic Activity." - Wikipedia.
Today, Hall's research focuses "on levels of activity and stock market valuations in market economies and on the economics of high technology, particularly the Internet.
His most recent book, Digital Dealing: How e-Markets Are Transforming the Economy, was published by W. W. Norton in 2001." - Hoover Institute.
What is a flat-rate tax?
A flat tax, short for flat-rate tax, is a taxation system with a constant marginal rate. It is generally applied to individual or corporate incomes.
"A true flat tax would be a proportional tax, but implementations are often progressive and sometimes regressive depending on deductions and exemptions in the tax base. There are various tax systems that are labeled "flat tax" even though they are significantly different." - Wikipedia.
Historically some nations have instituted flat-rate taxes, like the tax reforms by Emperor Augustus in the Roman Empire. Today some countries, like Russia, Latvia Lithuania, Hungary, and Estonia, currently implement flat-rate tax rates.
In its purest form, a flat-rate tax would be a set amount regardless of someone's income. It cannot attract deductions and is deemed by many to be one of the fairest forms of taxation.
Of course, it also has its many critics.
A famous example, though very unpopular at the time, was the proposed Community Charge (so-called Poll Tax) introduced into the UK in the early 1990s. The idea was to provide a single flat-rate per-capita tax on every adult, at a rate set by the local authority.
What is Hall's Flat-Rate Tax proposal?
Hall and Rabushka's flat tax proposal was based on consumption. Their idea was to tax income fairly but exclude any and all investments made by an individual or a corporation.
Some other blend's of flat-rate taxation exist including, but not limited to: -
Marginal flat tax - This allows for deductions to be made to a point beyond which tax rates are flat. It differs from a true flat-rate tax rate in that it excludes certain types of income as being defined as taxable.
Tax owed by an individual will increase as their income increases over time. It is to fairly tax individuals and reduces the tax burden on lower-income individuals. Critics believe that it disincentivizes success and effectively "punishes" higher-income individuals and families.
For example, in 2016, the top 1% of taxpayers paid more than 90% of all income tax for that year. Is this fair? We'll let you decide.
A flat tax with limited deductions - This is a form of flat-rate tax where very limited deductions are permitted. Charitable deductions and mortgage interest payments being examples.
Negative income tax - Proposed by the great Milton Friedman in 1962, this is a form of a flat-rate tax with a twist. The basic idea is the same as a flat-tax with deductions. However, where deductions exceed income, taxable income is allowed to become negative rather than being set to zero.
This would mean the government could, in theory, owe some citizens money rather than the other way around. Milton envisaged such a tax being used to benefit families on lower-income, and remove them from the welfare trap.
Capped flat tax - As the name suggests, a capped flat tax where rates are fixed to a point. This form of taxation has the effect of turning a nominally flat tax into a "regressive tax" for obvious reasons.
5 interesting facts about Robert Hall
2. Hall was a heavy supporter of Ronald Reagan's tax cuts during his premiership. "If we don't have a tax cut, there will be that much more room for pouring money down rat holes."
3. In 1978, Hall almost single-handily changed the direction of economic research into consumption. He showed, though now questioned, that a person's consumption is based on their perceived expectation of future income rather than value judgments of past income. For this reason, he argued, consumption is inherently unpredictable for a large population (e.g. martingale).
4. Robert has a wide range of interests including technology, competition, employment issues, and economic policy. He frequently contributes to discussions on national economic policy, including monetary policy, fiscal policy, and competition policy.
5. Hall and Alvin Rabushka have been recognized in Money magazine's Money Hall of Fame for their contributions to financial innovation over the past twenty years.