NCPA - National Center for Policy Analysis

A Flat Tax Could Fatten Government

February 24, 2004

There has been growing support for the adoption of a flat tax, a system of taxation whereby every activity in the economy is taxed by a fixed amount. While it is often said that a flat tax would raise revenue far more efficiently and equitably, few have questioned its influence on the size of government. That is, it is commonly assumed that government spending is independent of the system of taxation.

According to two Nobel laureate Gary S. Becker and economist Casey B. Mulligan, this simplistic perspective does not reveal the full impact of a flat tax.

In order to predict the real impact of a flat tax on government behavior, they developed a model that incorporates the competition for political favors by taxpayers and beneficiaries of government subsidies. Defining more efficient taxes as those that carry less deadweight cost for revenue raised, the researchers determined that more efficient taxes, such as the flat tax, would actually increase the amount of government spending:

  • Government spending will tend to grow when it uses more efficient taxes because taxpayers will have a tendency to lower their resistance against higher tax rates.
  • Highly activist taxpayers may be better off with a flat tax -- even if government spending increases -- because they will not expend as many resources on lobbying efforts.
  • The impact of lobby groups that want more spending, but don't care how the money is raised, is distorted by the presence of free-riders seeking particular tax benefits -- contributing to the mix of efficient and less efficient taxes seen in the economy.

Previously, it had been argued that value-added taxes (VAT) -- which are a form of flat tax -- are easier to increase because they are hidden from consumers. This study suggests that the VAT may be easier to increase due to their higher level of economic efficiency.

Source: Gary S. Becker and Casey B. Mulligan, "Deadweight Costs and the Size of Government," Journal of Law and Economics, October 2003.


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