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November 16, 2006
Milton Friedman Dead at 94
Joseph J. Thorndike

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Milton Friedman, one of the most important economists of his generation, died November 16 in San Francisco at the age of 94. Renowned for his scholarly work on monetary theory, consumption analysis, and stabilization policy, he won the Nobel Memorial Prize in Economic Sciences in 1976. Friedman was an active and prominent champion of libertarian ideas, and some of his most enduring -- and popular -- publications underscored the connection between political and economic liberty.

Friedman was not a specialist in the economics of taxation, but he served a brief stint in the Treasury Department's division of tax research during World War II. While there, he helped design the modern withholding system -- an administrative innovation that he later disparaged as a prop for bloated government.

Friedman is widely considered the father of the modern flat tax. The consumption-based flat tax popularized and championed by economists Robert Hall and Alvin Rabushka commands center stage in current policy debate. But the Hall-Rabushka tax plan drew its inspiration from the flat rate tax on income that Friedman proposed in 1962.

In his classic brief for libertarian ideology, Capitalism and Freedom, Friedman devoted relatively few pages to taxation. But those pages loom large in the political history of contemporary tax reform. The book challenged the legitimacy of progressive taxation when it enjoyed nearly universal support (a few legal skeptics like Walter Blum and Harry Kalven notwithstanding). Friedman believed that progressivity in the service of redistribution was indefensible. "I find it hard, as a liberal, to see any justification for graduated taxation solely to redistribute income," he declared. "This seems a clear case of using coercion to take from some in order to give to others and thus to conflict head-on with individual freedom."

Instead, Friedman made the case for a flat rate tax on income. Such a levy was consistent with the benefit principle, he wrote: "A proportional flat-rate-tax would involve higher absolute payments by persons with higher incomes for governmental services, which is not clearly inappropriate on grounds of benefit conferred." More important, a flat rate tax would leave no room for punitive taxation of the rich; people would be unable to impose higher taxes on the rich without imposing the same heavy burden on themselves. In other words, a flat rate tax would constrain the freedom of a vindictive political majority to work its will on a well-heeled economic minority.

Friedman was not a purist on the subject of proportionality; he believed that exemptions could be used to protect the poor from further suffering at the hands of the tax collector. He even proposed a negative income tax to provide a government subsidy for those below some minimum economic threshold. Limited interference in the distribution of market rewards was reasonable, Friedman believed, since it did not derive from the political tyranny of the majority. "It is very different for 90 per cent of the population to vote taxes on themselves and an exemption for 10 per cent," he wrote, "than for 90 per cent to vote punitive taxes on the other 10 per cent -- which is in effect what has been done in the United States."

Friedman loathed tax preferences, insisting that they violated canons of fairness. Using the tax law to advance social goals was unjust, vitiating the principle that all people should be treated equally under the law. Existing taxes were "capricious and unequal," he complained, and riddled with loopholes. His list of nefarious provisions included a few items that might surprise some of his modern-day fans: preferential treatment for capital gains, exemptions for interest on state and local government bonds, and various incentives granted to the oil, gas, and other extractive industries.

Friedman predicted that a flat rate tax of 23.5 percent would raise as much money as the existing graduated rate structure, at least as it existed in 1962. His estimate assumed that lawmakers would broaden the tax base by eliminating a range of credits, exemptions, and other preferences. Indeed, Friedman suggested, the flat rate tax might raise more revenue than the graduated system it replaced, eliminating distortions that hindered tax collection and economic growth.

In the short term, Friedman's tax fell flat, as it were. He later recalled that even his friends dismissed the idea as "radical, impractical, and visionary." But if Capitalism and Freedom was ahead of its time, its time most certainly came. By the early 1980s, Friedman's seminal thinking had paved the way for a range of more successful tax plans. While the flat tax has a checkered history in American politics, the European "flat tax revolution" owes much -- in intellectual fervor, if not in policy design -- to Friedman's work.