Monday, January 14, 2013

The Wall Street Journal's Bad Plan for Greece

by Josh Barro


January 14, 2013

The Wall Street Journal ran a staff editorial in today's newspaper urging Greece to adopt a flat tax as a road out of its economic troubles. This is a demonstration of the first rule of the Journal's editorial writing: Whatever your problem is, it can be fixed with a flat tax.

Greece has lots of public policy failures available to criticize, including unsustainable public benefits and an apparent inability to enforce its tax laws. Most problematically, Greece gave up control over its currency and therefore can't devalue when it desperately needs to.

Yet the Journal has chosen to focus on a Greek economic policy problem -- being on the downslope of the Laffer curve -- that doesn't actually exist. Tax rates in the range of 26 percent on corporate income and 42 percent on high personal incomes are consistent with prosperity and growth, as seen in the northern European countries that Greece is constantly told to emulate.

Reading the editorial, you might get the impression that the conservative policy outlook is untethered to real-world conditions. But let’s indulge the editorial writers for a moment. What would happen if Greece adopted a flat income tax?

Moving from a progressive income tax system to a flat one always means a tax cut for the highest earners. You could offset that by raising taxes on the poor and middle class. This would be another dose of austerity for Greece, further depressing the economy and pushing the populace back into the streets to protest. That hardly seems wise in a country where the far left is likely to form the next government and fascists are also gaining popularity.


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