Taxpayers in Iraq

By DAVID MOON, Moon Capital Management
January 18, 2004

Republicans have lusted after it for years. They've postured, pleaded and politicked. Finally, they have their Holy Grail of conservative fiscal policy: a flat national income tax. Starting January 1, the highest marginal federal tax rate on individual earned income is fifteen percent. Some people may pay a lower rate, but most taxpayers will simply send the federal government fifteen percent of their income. No deductions. A simple form. A simple system. Taxpayers are going to love it.

Taxpayers in Iraq, that is.

When you have a benevolent dictator, tax reform is pretty simple to achieve. U.S. administrator in Iraq, Paul Brewer, simply declared the new tax rate. Giving Brewer the benefit of the doubt, I am presuming he is benevolent. There is no question he has dictatorial powers. This requires no legislative concurrence, no national debate. Thus sayeth The Administrator.

There are still a few nuisance taxes that linger from the Sadaam era, such as levies on real estate, gasoline and hotel charges. (Interestingly, U.S. contractors rebuilding Iraq are exempt from the hotel tax. Journalists are not.)

Previously the top Iraqi tax rate was 45 percent. But that number is irrelevant; no one paid taxes before. The government simply took what it wanted. Be skeptical if Jack Kemp or Steve Forbes touts a large increase in Iraq tax collections as a result of the reduction in the top marginal rate. Of course collections will increase. Anything is greater than zero.

Don't be fooled by claims of better Iraqi taxpayer compliance due to the lower rates. Yes, there is good evidence in the U.S. that fewer people cheat on their taxes when the rewards for doing so are reduced. But Tikrit isn't Knoxville; it's not even Washington. When you live in a country where you can be stuffed into a meat grinder at the whim of a single man, compliance with the tax code loses a bit of its societal significance.

The tax experiment in this volatile economic test tube will be interesting. But it will hardly be conclusive. It may not even be instructional. I hope that flat tax proponents don't try to use Iraq as justification for changing our own tax code. Don't get me wrong; I'm all for a flat tax in the U.S. A simple, low flat tax. Have a single high exemption that excludes the most impoverished. Then let the rest of America participate in paying for the functions of our federal government. The rate should be low enough to influence as few as possible economic decisions. And it should be high enough that when applied evenly to the bulk of American taxpayers, it provides, at most, the current levels of revenue. I'm all for that type of system. But the Iraqi experiment is fraught with possible statistical traps. It will not be a valid justification for any change in this country.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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