The NYT Reveals the Real Reason For a Flat Tax: If Congress Can Mug Big Oil, It Can Mug Anyone

When Robert Hall and Alvin Rabushka proposed the flat tax more than a quarter century ago, they justified it on the grounds of economic efficiency and tax simplification. We now understand their real reason we need a flat tax.

Under our current federal tax system, everyone pays different tax rates depending on their lobbying clout, political donations, or interest group. Differences in realized tax rates are brought about by exemptions, loopholes, and preferences, most justified as promoting the common good. If you are in good with Congress or the administration (like GE or Hollywood), your breaks are secure and you get new ones. If you cross them or are a convenient target (like “Big Oil”), they take them away. Many have learned the bitter lesson: “What one hand giveth, the other taketh away.”

Our tax code has become a blunt instrument for political mugging, shakedowns, and intimidation. It insures a steady flow of political contributions. Anyone can find themselves a target. But everyone should remember that tomorrow the shoe can be on the other foot.

Our federal tax code is not a rule of law, but a rule of the political jungle.

The New York Times, Monday May 9, provides a case in point: “Senate Democrats say they will move forward this week with a plan that would eliminate tax breaks for big oil companies…..As currently written, the bill would apply only to what Democrats have identified as the five largest and most profitable oil companies.”

The long-forgotten Article 1, Section 9 of the U.S. Constitution forbids Bill of Attainders – legislation that punishes specific persons or groups without judicial review. But the NYT declares that the proposed Democrat legislation is written specifically to deprive BP, Exxon Mobil, Shell, Chevron, and Conoco Phillips of tax advantages that other companies enjoy. These five oil companies are not named specifically, but the legislation is written to apply only to companies that meet their profile.

What would the framers of the Constitution think about this?

A concern expressed in the NYT article is that the recent drop in oil prices will reduce prices at the pump, and there will less support for this legislation. I guess this means that we should base tax regulations on good or bad fortune. If doctors are doing well, let’s take away their home mortgage deduction. Those who aren’t doing so well can keep it. If people are paying more for movie tickets, let’s take away subsidies for film producers. If unions succeed in obtaining higher fringe benefits, let’s tax them as regular income, but only for union members. This is where the logic leads us.

The flat tax has been adopted with the least difficulty in the new countries of Eastern Europe. They have been free to choose optimal institutions before powerful interest groups form. We have reached a point of no return. Too many politicians, companies, and individuals benefit from our crazy system. They have too much to lose if we move to a rational system.

NYT’s Expose: But GE Is Doing Exactly What is Expected of Them

President Obama’s appointment of GE CEO Jeffrey Immelt as his job czar signaled his “move to the center.” The pro-business President declared a “government-business partnership” to create jobs, green technology, and other good things. Now a NYT investigation reports that GE paid no U.S. taxes, aggressively lobbied Congress for subsidies and sweetheart deals, and spends millions (billions?) to minimize its tax bill. The NYT was shocked, as was Claude Rains in Casablanca, to find such skullduggery, from GE, no less. The NYT concludes that one of the most striking advantages of GE is not its jet engines and washing machines but “its ability to lobby for, win and take advantage of tax breaks.”

A more realistic interpretation is that GE is faithfully pursuing Obama’s vision of, what is called in other countries, crony capitalism. Under this philosophy, “crony corporations” should follow where government incentives lead them. If Obama wants green jobs, they will build windmills, with healthy subsidies of course. If the government wants more lending, crony corporations will lend with a bailout if the loans go bad. A “green car” should be no problem. The government will pick up most of the price tag for leery consumers. Insofar as crony corporations, like GE, can “negotiate” their tax bill with Congress, they are a ready source of campaign contributions or other perquisites.

Such crony capitalism changes the normal rules of economics. Those who play the “business-government partnership game” better than others win. Those who do not play well lose, even if they are superior entrepreneurs or innovators.
From an economic perspective, it is not even clear that GE is a real “winner.” In pursuing subsidies and tax advantages, GE engages in activities that yield lower returns than other alternatives. The government payoff compensates them for making otherwise unwise economic decisions. The GEs of the world also have to waste enormous resources on the lobbying game. If we factor in all these economic costs and losses, GE may have been better off not playing the crony capitalism game after all.

The NYT’s disclosures, coupled with Obama’s appointment of Immelt, are an embarrassment, but they offer a rare backroom glimpse of crony capitalism in action. Our crony capitalism takes place, respectably and legally, in board rooms, in congressional and executive offices, or “on bended knee” before Charles Rangel. In other less civilized countries, it takes the form of shakedowns, threats of violence, and arbitrary prosecutions, but the game is played with the same results.

In Russia, it is called State-Mafia capitalism. In the U.S., it is corporate welfare.