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BoardofContributors: RegardingHenry... ByHerbertStein 1,306words 30January1996 TheWallStreetJournal J A18 English (Copyright(c)1996,DowJones&Company,Inc.) IsupposethatIamoneofthefewsurvivorsoftheclassthattook HenrySimons'scourseinpublicfinanceattheUniversityofChicago60 yearsago,andIamcertainlyoneofhisgreatestadmirers.SoIwas pleasedtoseeRobertBartleyrecognizingonthispageSimons'sgreat influenceonmodernthinkingabouttaxpolicy,aninfluencethatremains 50yearsafterhisdeath("JackKempvs.HenrySimons,"Jan.18).Of course,Mr.Bartley'sobjectivewasnottopraiseSimonsbutto congratulateJackKempon"layingtheghost"ofSimonstorest.Idonot thinkthatMr.Kemp,orMessrs.KempandBartleytogether,havedone that--orthatSimons'sargumentnowdeservestobedismissed.Infact, today'sflat-taxershaveagreatdebttoSimons,whowastheleading advocateofacomprehensivetaxsystemthatmadenodistinctionsamong sourcesandusesofincome. Mr.BartleyhastwoquarrelswithSimons--oneaboutprogressivity inthetaxsystemandtheotheraboutthedefinitionofthetaxbase. Mr.BartleysaysthatSimonswas"godfatherofthenotionthatthetax systemshouldbeusedtoredistributeincome."Idon'tknowwhatit meanstobea"godfather"inthisconnection,asdistinguishedfrom beinga"father,"butSimonswasneither.Thenotiongoesbackway beforeSimons.Infact,onecanhardlythinkofagovernmentthatdoes notusetaxationtoredistributeincome.Imposingastrictly proportionalpropertytaxtofinanceuniversalfreeeducationwouldbea useofthetaxsystemtoredistributeincome.SowouldMr.Kemp'swell knownproposedenterprisezoneplan. Whatwearereallytalkingaboutisprogressivityintheincometax --thatis,takingahigherproportionofincomefrompeoplewithhigh incomesthanfrompeoplewithlowincomes.Simonswasnotthegodfather ofthatideaeither.WhatSimonsdidwasfreetheideafromalotof pseudo-sciencewithwhichpreviouseconomistshaddecorateditandget downtothebasiccaseforprogressivity. Page1of4©2015Factiva,Inc.Allrightsreserved. Earliereconomistshadarguedthatbecausetheutilityofanother dollarofincomeissmallerthelargeraperson'sincomeis,takinga dollarfromarichpersonimposedlesssacrificethantakingadollar fromapoorone.Sowegottheideathataprogressiveincometaxcould minimizetotalsacrifice.Butoncewerealizedthattherewasnowayto compareoraddtogethertheutilitiesofdifferentpeople,theideaof minimizingsomenationaltotalofsacrificeflewoutthewindow. Simons'sargumentforprogressivitywassimply,butpowerfully,that hefoundextremeinequalityunjustorunlovelyandthataprogressive incometaxwasawaytoreduceinequality.Thatleaveseveryonethe opportunitytosaythathedoesn'tthinkextremeinequalityisunjustor unlovely,justaseveryonewasfreetosay150yearsagothatslavery wasnotunjustortosaytodaythatheprefersgangstaraptoMozart. (AmIrevealingprejudiceshere?) Wehaveaprocedurefordecidingwhetherinequalityisunjust,orhow muchisunjust.Itiscalleddemocracy.Simonssaid,aboutsuch questionsofvalues:"Societyisalwaysright--provideditisthe rightkindofsociety.Thesocialprocessesofafreesocietyare,if notinfallible,theonlyreliablemeanstomoraltruthandthebest meanstosecurityunderlaw."Thecurrentdiscussionsoftaxreform,and ofwelfarereformandotherrelatedmatters,arepartofaprocessfor findingoutwhatthesocietydoesthinkaboutinequalityandthewaysto mitigateit.Butitisnotpermissibletorulesuchquestionsoutof orderasiftheuseofthetaxsystemtoredistributeincomewerenota legitimatefunctionofgovernment. AsfarasIcansee,noneofthetaxreformproposalsnowin circulationwouldrejectprogressivity.Theflattaxwouldhavetwo rates--zeroandsomepositivenumber,say20%.Peoplewithincomes belowthepersonalexemptionwouldpayzerotax,peoplewithincomes twicetheexemptionwouldpay10%oftheirtotalincome,peoplewith10 timestheexemptionwouldpay18%oftheirtotalincome,andpeoplewith 100timestheexemptionwouldpay19.8%.Isthattoolittleprogression, ortoomuch,orjustright?Weshallseewhat"society"thinks,andmust hopethattheissuewillbepresentedtruthfullyandwithoutclaimsto knowwhatwedonotknow. WhatSimonswouldthinktodayistheproperdegreeofprogression,I don'tknow.Iwill,however,offeronelawderivedfrom60yearsof observationsinceItookhiscourse:Whateveristheexistingdegreeof progression,peoplewhopaythetopratewillthinkitistoomuch, Idon'tthinkMr.BartleyiscorrectinsayingthatSimonschosethe definitionoftheincometobetaxedinorderto"facilitatethe reductionineconomicinequality."Ithinkthebasicconsiderationhere wasthatpeoplewhoareequalaccordingtosomerelevantcriterion shouldbetaxedequally.Thisraisesthequestionofwhatisthe relevantcriterion.Simonssaidthatitwasthesumofthetaxpayer's consumptionplustheadditiontohisnetassets. Again,theredoesn'tseemtobeanyobjectivewayofdemonstrating thatthisisorisnottherelevantcriterion.IfMr.Bartleysaidthat peopleshouldbetaxedinproportiontotheirweight,Iwouldn'tknow Page2of4©2015Factiva,Inc.Allrightsreserved. howtoreplyexcepttosaythatIdon'tagree.Themainalternativeto taxingincomeistaxingconsumption,and"society"willdecidewhichis therelevantcriterion.Thequestioniswhetherapersonwhohasan incomeof,say,$200,000andspendsonconsumption$40,000shouldbe taxedlikeapersonwhohasanincomeof$40,000andspends$40,000on consumptionorlikeapersonwhohasanincomeof$200,000andspends $200,000onconsumption.PresumablyinthecomingdebatestheAmerican peoplewillfacethatquestionandgiveananswer. Messrs.Bartley,Kempandotherstrytogiveananswertothat questionintermsoftheeffectsonthegrowthofproduction.Simons certainlythoughtthatwasimportant.Hesaid,afterdiscussing redistribution,"However,ourprimaryproblemisproduction."Buthere weencounterquantitativequestionsthatSimonsdidnotanswerandthat Messrs.Bartley,Kemp,etal.havestillnotanswered.Howmuch additionalgrowthdowegetforhowmuchlessredistribution,andwho arethebeneficiariesofthatgrowth? Withoutatleastsomeguessesaboutthosethingswecannotthink intelligentlyaboutwhetherthetrade-offofsomeequalityforsome growthisworthwhile.Expansiveassertionsaboutgrowtharenothelpful. Obviously,wedon'tdoeverythingpossibletopromotegrowth,and shouldn't. OnewordmissingfromMr.Bartley'scritiqueofSimonsontaxationis "adequacy."Ifwedidn'tneedsomerevenue,thetaxproblemwouldbe simple.Wefacetheprospectsofenormousdeficitsinthenextcentury withpresenttaxesandexpenditureprograms.Responsibledecisionsabout taxescanbemadeonlyinthecontextofsomeideasabouthowfar expenditureprograms,whichrealisticallymeansSocialSecurityand Medicare,canandshouldberestrained.Untilweseethissideofthe picture,wewillnotknowwhattomakeofanyofthetaxreform proposalsnowonthetable. --- Aformerchairmanofthepresident'sCouncilofEconomicAdvisers, 1972-74,Mr.SteinisanAmericanEnterpriseInstitutefellow. (Seerelatedarticle:"...Here'sHisTakeOntheFlatTax"--WSJ Jan.30,1996) Documentj000000020011014ds1u003ys SearchSummary Text steinandsn=WallStreetJournal Date 01/01/1996to02/01/1996 Source AllSources Author AllAuthors Company AllCompanies Subject AllSubjects Industry AllIndustries Page3of4©2015Factiva,Inc.Allrightsreserved. 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