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Tax Reform According to Milton Friedman

by Michael Tasselmyer / /

Today would have been the 101st birthday of renowned economist Milton Friedman, who has been recognized by his peers as one of the most influential figures in modern economic thought and received numerous awards and honors for his achievements, including the Nobel Prize and the Presidential Medal of Freedom. NTUF and our fellow policy analysts at the Tax Foundation will be commemorating his life and work by hosting an event tonight from 6-9 PM in downtown Washington, D.C. You can participate online and find out more by visiting our #Milton101 page here.

Friedman's contributions to economics and the ways in which we frame public policy discussions were numerous. But what did he have to say on the issue of tax reform?

As a founder of the Chicago school of economic theory, Friedman generally believed that less government intervention in the economy would lead to increased prosperity and growth. When applied to tax policy, this idea led him to an unequivocal determination: "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever possible."

A crucial issue that Friedman found with the U.S. tax system (both then and now) was the sheer complexity of the code. He lamented the lack of incentive for those on either side of the aisle in Washington to simplify the complicated system of deductions and loopholes that we know today. Even though the video below was filmed in 1978, many of the problems Friedman discusses still apply to our modern debates.

Friedman has been noted as a prominent advocate of the "negative income tax," a system in which those who earn below a specific income threshold would receive a stipend from the government to make up a percentage of that difference. He contended that such a system would maintain a progressive bent -- one that would not unduly punish the less fortunate -- while doing so in a more efficient manner:

"[Friedman] was above all a pragmatist, and he emphasized the superiority of the negative income tax over conventional welfare programs on purely practical grounds. If the main problem of the poor is that they have too little money, he reasoned, the simplest and cheapest solution is to give them some more. He saw no advantage in hiring armies of bureaucrats to dispense food stamps, energy stamps, day care stamps and rent subsidies."

Friedman also made the case for a flat tax, most notably in his seminal 1962 work "Capitalism and Freedom". He stated in a 1996 article in the Wall Street Journal:

"All things considered, the personal income tax structure that seems to me best is a flat-rate tax on income above an exemption... I would combine this program with the abolition of the corporate income tax, and with the requirement that corporations be required to attribute their income to stockholders, and that stockholders be required to include such sums on their tax returns. The most important other desirable changes are the elimination of percentage depletion on oil and other raw materials, the elimination of tax exemption of interest on state and local securities, the elimination of special treatment of capital gains, the coordination of income, estate, and gift taxes, and the elimination of numerous deductions now allowed."

In a 1976 People magazine article in which he referred to the modern income tax system as an "unholy mess", Friedman contended that a flat tax would bring in enough revenue to allow for lower overall rates (which would benefit the less wealthy). A flat tax and fewer deductions, he said, would also eliminate the "tax shelter industry" that many high earners use to avoid paying certain taxes.

In both cases, Friedman was adamant that a vastly more efficient system would bring with it a significant economic boom. He favored simplicity over complexity while trying to combine fairness with effectiveness.