Bloomberg: The Wall Street Journal's Bad Plan for Greece

By Josh Barro

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.

Or, you could not offset the tax cut at the top, reducing overall tax revenue and growing thebudget deficit. But financing such a deficit would require even greater dependence on theInternational Monetary Fund and the rest of the European Union, a phenomenon that the Journal also bemoans. And it would be an inefficient method of fiscal stimulus, as the largest tax savings would accrue at the top portions of the income spectrum.

In short, a flat tax for Greece is a really stupid idea.

In 2011, the Journal ran the dumbest opinion column of all time, in which Holman Jenkins argued that the euro was a success because it forced Greece to confront its uncompetitiveness instead of inflating it away. Today’s editorial didn't quite top that piece, though it was a pretty good effort.

It would all be pretty hilarious if it weren't for the fact that the Journal's editorial page represents the state of the art in conservative economic policy thinking. The same people telling Greece to fix its problems with a flat income tax also exert influence over Republican policy makers inWashington, which means the joke is on us.

read more at http://www.bloomberg.com/news/2013-01-14/the-wall-street-journal-s-bad-plan-for-greece.html