Economics is a data driven social science. It is a social science because economists are trying to understand why people do what they do. It is data driven because economists hardly ever agree on anything.
Beginning with the first course in economics as undergraduates and continuing into graduate school, economists learn about many alternative types of theories. Over time, after being exposed to these alternatives, economists tend to become comfortable with those theories they think “work.” By “work,” we mean that these theories seem to do the best in explaining why people do what they do. For example, I tend to fall into the free market category. In my understanding, theories based on free market principles do a good job explaining human behavior.
The next thing we do is to see if our preferred theories are supported by real world data. This is why economics is beautiful. The theories that we love and use must be consistent with data collected from real world observation. Remember, the goal — we want to know why people do what they actually do. Theories that are not supported by the data may be a great brain exercise, but they are useless in helping us understand reality.
Here is a piece of data. Between 1968 and 2015, in the aggregate, the percent of national income going to income tax collections is 17.35 percent. A horizontal line set at 17.35 percent nicely represents a graph of the actual individual annual percentages. Yet, over this same period, the top tax rate has ranged from a high of 77 percent to a low of 28 percent while ending at the current 39.6 percent. Viewed another way, no matter how hard the federal government tries to capture our income through tax collections, they ultimately only get 17.35 percent. At a top rate of 77 percent, we work very hard to find ways to not pay taxes. As the rate falls we don’t work so hard at tax avoidance.
So, if Congress is currently working on tax reform, why not go all the way to work on tax simplification and let it be data driven. If, in the end, all we are going to give the government averages 17.35 percent, why not just have one tax rate of — go figure — 17.35 percent. Do away with all deductions and the like state and local taxes, mortgage interest, childcare — all of them.
Have one standard deduction based on family size, period. In this world, every one will use a post card and the IRS bureaucracy could be reduced. This is what the data tell us. Should we listen? Or better yet, should our political leaders listen?
Reg Murphy Center