Cochrane's Alternative Maximum Tax

Today is the national tax filing deadline, tax day.  And today John H. Cochrane of the University of Chicago wants to start a national conversation about a maximum tax.  I will oblige him to some extent by linking to his blog post, which also appears as an opinion column into today's Wall Street Journal.

His point in offering this alternative to the alternative minimum tax (AMT) is primarily economic, but it also ventures into the moral.

Economically, he asks: "How much is the most anyone should have to pay? When do taxes indisputably start to harm the economy and produce less revenue—when government takes 50% of people's income? 60%? 70%?"

Morally, part of an answer to this question will involve what a government should do?  If taxes fund government initiatives and mandates, then, assuming taxation is legitimate, a proposed cap on the sum of all taxes -- federal, state, local, plus social insurance, car registrations, and everything -- must reflect one's view of what government should or should not do with that money.

About that people will always disagree.  Moreover, whether out of principle or greed, most people will seek a way to pay less to the government in taxes, even those who may complain that the government doesn't tax enough.  For instance, at points Bill Gates, Hillary Clinton, and Warren Buffett have famously griped that the wealthy are not taxed enough.  I am unaware, however, if any of these wealthy persons has written a voluntary check to the Treasury Department to make up the difference.  Doing so is perfectly legal.

I have a coffee mug that reads, "Al Capone, Convicted of Tax Evasion, 1931."  Underneath is a photo of the Chicago gangster facing another man in a suit.  Behind them are two calendars, one with April 15 highlighted in bold.  Underneath reads a caption, "We should've call the other accountants..."

The income tax only became a permanent national fixture with the passage of the 16th Amendment in 1913.  In the income tax's infancy, Al Capone and others more law-abiding were trying to sidestep it.  That hasn't changed in one hundred years, especially as taxation rates and forms have increased.  It probably won't change ever.  Professor Cochrane's proposal is less a new measure to avoid taxation than an economic defense of why taxation above a certain aggregate level may be more harmful than helpful.  In debating that thesis, we should not lose sight of the moral and political dimensions as well.