Few policy debates are as persistent as the question of how governments should tax their citizens. Economist Dan Mitchell shares his perspective on fairness, simplicity, and the role tax policy plays in shaping economic incentives and prosperity.
About the Guest
Economist Daniel J. Mitchell is President of the Center for Freedom and Prosperity. He writes on tax policy, economic growth, and fiscal issues at his blog, International Liberty.
Interview
Simon Sarevski: Why do debates about taxation generate such strong disagreements?
Dan Mitchell: Tax debates generate so much heat because they’re really debates about values. Economists can analyze incentives, growth rates, and revenue effects, but underneath those technical discussions are deeper questions about liberty, fairness, and the role of government.
Many people on the left see the tax code as a tool for redistribution. They believe government should use taxes to reduce inequality and transfer resources from those with higher incomes to those with lower incomes. If you begin with that premise, progressive taxation naturally seems attractive.
I start from a different premise. I believe the purpose of a tax system should be to raise the revenue government needs while doing the least possible damage to economic performance and personal freedom. In other words, taxes should finance a very small government, not serve as a mechanism for social engineering.
Another reason these debates are so contentious is that people often focus on who pays taxes while ignoring what government spends. In my experience, spending is usually the more important issue. Every dollar government spends must ultimately be financed through taxes, borrowing, or inflation. If spending keeps growing, taxpayers eventually bear the burden regardless of how politicians try to distribute it.
There is also a practical economic dimension. High marginal tax rates discourage productive behavior. They reduce the reward for entrepreneurship, investment, saving, and work. People respond to incentives, and tax systems are no exception. That’s why I spend so much time emphasizing growth-oriented tax policy.
Ultimately, reasonable people can disagree because they’re often pursuing different objectives. If your goal is redistribution, you’ll favor one type of tax system. If your goal is maximizing prosperity and protecting liberty, you’ll likely favor another.
Tax reform is often justified in the name of fairness, yet fairness itself is seldom defined. How would you define a fair tax system?
Dan Mitchell: Whenever politicians start talking about a “fair tax,” my first reaction is to ask what they mean by fairness. It’s one of the most commonly used terms in tax policy and one of the least precise.
Many advocates of progressive taxation believe fairness means people with higher incomes should pay a larger share of the tax burden. Others argue that fairness means equal treatment under the law, with everyone paying according to the same rules. These are very different concepts.
My own view is that fairness begins with neutrality and equal treatment. The tax code should not favor one person over another because of income level, occupation, investment decisions, or political influence. Unfortunately, modern tax systems are filled with special preferences that reward certain activities and penalize others. That strikes me as fundamentally unfair.
A fair system should also be transparent. Citizens should be able to understand how much tax they pay and why. Complexity often hides the true cost of government and creates opportunities for special-interest lobbying.
I also think fairness has to account for economic consequences. If a tax system discourages productive behavior and reduces growth, it ultimately harms workers, consumers, and investors alike. Economic damage may not show up immediately, but over time it reduces wages and living standards.
That said, fairness is ultimately a moral concept rather than an economic one. Economics can tell us what happens when tax rates rise or fall. It can estimate effects on growth, employment, and investment. But economics cannot determine whether one person’s moral definition of fairness is superior to another’s.
That’s why tax debates often persist even when people agree on the facts. They’re not merely arguing about economics. They’re arguing about competing visions of justice, equality, and freedom.
You have long been a proponent of the flat tax. What exactly is a flat tax, and what problems does it seek to solve?
Dan Mitchell: A flat tax is a system that applies one tax rate to income after a basic exemption. Instead of multiple tax brackets with rising marginal rates, everyone pays the same rate on taxable income above a specified threshold.
A flat tax also creates neutrality between consumption today and consumption in the future, which is simply a wonky way of saying there would be no more double taxation of income that is saved and invested. That means no death tax, no capital gains tax, and no double tax on interest or dividends.
And it’s a cash-flow system, so complicated depreciation schedules are replaced by a simple system of expensing. This reform would reduce the tax penalty on new investment.
One of the biggest misconceptions is that a flat tax means low-income households pay exactly the same amount as billionaires. That’s not how most flat-tax proposals work. A family would first receive a substantial exemption, ensuring that basic income is tax-free. As a result, higher-income households would still pay more in absolute dollars, but the marginal tax rate would be the same.
The primary advantage of a flat tax is simplicity. Today’s tax systems are riddled with deductions, credits, exclusions, loopholes, and special-interest provisions. This complexity imposes enormous compliance costs and encourages political favoritism.
The second advantage is better incentives. Under a flat tax, there is no penalty for moving into a higher tax bracket because there are no higher tax brackets. People can earn additional income without facing increasingly punitive marginal rates.
A third benefit is greater transparency. Citizens can more easily understand the tax burden they face, which promotes accountability and discourages hidden tax increases.
My support for the flat tax is rooted in a broader principle: taxes should interfere with economic decisions as little as possible. Government needs revenue, but it shouldn’t use the tax code to manipulate behavior or reward politically favored activities.
The ideal system would tax income only once and at a low rate. A properly designed flat tax moves us significantly closer to that objective than the complicated systems that dominate much of the developed world.
Why was the flat tax appealing in Eastern Europe but less successful in the West?
Dan Mitchell: The post-communist countries of Eastern Europe had a unique opportunity. After the collapse of central planning, they were rebuilding economic institutions almost from scratch. That gave policymakers a chance to adopt simpler and more growth-oriented tax systems.
Countries such as Estonia became pioneers of flat-tax reform. Rather than inheriting decades of complicated tax provisions, they implemented systems designed to encourage investment, entrepreneurship, and economic growth. These reforms helped signal that they were moving decisively away from the failed policies of the communist era.
Another important factor was political economy. In many Eastern European countries, there were fewer entrenched interest groups benefiting from existing tax preferences. Reformers didn’t have to overcome the same level of resistance that exists in older welfare states.
By contrast, countries such as the United States, France, Germany, and Italy have accumulated countless deductions, credits, exemptions, and special rules. Every one of those provisions has beneficiaries who lobby aggressively to preserve them. Tax simplification sounds attractive until someone proposes eliminating a favored tax break.
There is also a philosophical difference. Many Western policymakers view the tax code as an instrument for redistribution and social policy. They are reluctant to adopt systems that reduce opportunities for progressive taxation.
The lesson I draw from Eastern Europe is not that the flat tax is a magic solution. No tax reform can compensate for bad spending policies, weak institutions, or excessive regulation. But those countries demonstrated that simpler tax systems can improve incentives, attract investment, and support long-run growth. Their experience remains one of the strongest real-world examples of successful tax reform in modern economic history.
If you had to choose, would it be a flat income tax or a consumption tax?
Dan Mitchell: The question needs to be clarified because the flat tax is a consumption tax. An income tax that doesn’t have double taxation is a consumption-base tax.
The simple example is that a properly designed flat tax — no death tax, no capital gains tax, no double tax on dividends and interest, etc. — taxes one time, at one low rate, when income is earned. A consumption tax, like a VAT or national sales tax, taxes one time, at one low rate, when income is spent.
The current income tax, however, imposes multiple layers of taxation on saving and investment. You earn income and pay tax on it. If you save part of that income, you may later pay taxes on interest, dividends, capital gains, or business profits generated by those savings. In effect, the same income can be taxed multiple times.
That’s a serious problem because saving and investment are essential for economic growth. Capital formation increases productivity, raises wages, and improves living standards.
A consumption-base tax largely avoids this problem. Individuals are free to save and invest without facing additional layers of taxation. From an economic standpoint, that approach is generally more efficient and less harmful to growth.
If the question is which consumption-based tax is best, I prefer flat-tax proposals. They are politically achievable and represent a substantial improvement over existing systems. My concern with a national sales tax is that politicians will introduce that new levy and then conveniently forget to abolish the current system. The result is a larger overall tax burden rather than genuine reform.
What do you consider the strongest arguments against the flat tax?
Dan Mitchell: Any serious policy proposal has weaknesses, and advocates should acknowledge them honestly.
The strongest criticism of the flat tax is probably philosophical rather than economic. Many people believe those with higher incomes should pay a higher tax rate because they have a greater ability to contribute. If someone starts from that moral premise, a flat tax will appear insufficiently progressive regardless of its economic benefits.
A second criticism is transitional. Tax systems develop over decades, and many households make financial decisions based on existing rules. Moving to a new system can create winners and losers, even when the long-run outcome is positive.
A third argument is political feasibility. Eliminating special preferences sounds wonderful in theory, but every deduction and credit has a constituency. Reform is much easier to describe than to enact.
There is also a legitimate debate about the magnitude of economic effects. While I believe lower marginal tax rates encourage growth, taxation is only one factor influencing economic performance. Institutions, demographics, regulation, education, and culture also matter. A good tax system is important, but it isn’t the only ingredient of prosperity.
None of these criticisms causes me to abandon support for a flat tax. However, they remind us that tax reform is not simply an exercise in economics. It involves politics, institutions, and competing moral visions. Good policy analysis requires understanding those concerns rather than dismissing them.
Advocates of progressive taxation and flat taxation often seem to talk past one another. Is that because they disagree on economic facts, or because taxation inevitably becomes a debate about morality, fairness, and the role of government?
Dan Mitchell: The answer is both, but I think the deeper disagreement is usually philosophical rather than economic.
There are certainly disputes about facts. Economists debate how sensitive investment is to tax rates, how much taxes affect labor supply, and whether higher tax rates generate more or less revenue. Those are legitimate empirical questions.
But in my experience, many tax debates persist even when people broadly agree on the evidence. The reason is that people are pursuing different objectives.
When I discuss taxation, I tend to focus on economic growth, prosperity, and individual liberty. I want a system that raises revenue with minimal distortion. If a tax system discourages entrepreneurship, investment, saving, or work effort, I regard that as a serious problem.
Many advocates of progressive taxation place greater emphasis on redistribution. Their primary concern is often not maximizing growth but achieving what they consider a fairer distribution of income. If that’s your objective, then some economic costs may seem acceptable.
That’s why these discussions often resemble ships passing in the night. One side is asking, “What tax system creates the strongest economy?” The other side is asking, “What tax system creates the fairest distribution of income?” Those questions may point toward different answers.
I don’t dismiss moral arguments. In fact, I think taxation inevitably involves moral questions. Government is claiming a portion of what individuals earn. That naturally raises questions about property rights, personal responsibility, and the limits of political authority.
What concerns me is when politicians pretend these moral disagreements are merely technical matters. They’re not. Behind every tax proposal lies a vision of society and a vision of government’s role within it.
My preference is for a system that respects individual choice and allows people to keep as much of the fruits of their labor as possible while financing a limited government.
Which country has a tax system closest to what you would recommend?
Dan Mitchell: The easy answer is that I want to copy the Cayman Islands or Bermuda, rich jurisdictions that have no taxation of income. Or copy the United States and other Western nations of the 1800s, when they had very small government and no income taxes.
If you hold a gun to my head and ask me to pick from the nations that do have income taxes, one country that has consistently moved closest to the principles I favor is Estonia.
Estonia adopted a flat tax after regaining independence from the Soviet Union and pursued a broader package of market-oriented reforms. The country’s tax system has generally emphasized simplicity, relatively low rates, and reduced double taxation of capital income.
What I admire most is not any single provision but the underlying philosophy. Estonia has often treated taxation as a mechanism for raising revenue rather than a tool for social engineering. That approach has helped create a more competitive environment for investment and entrepreneurship.
At the same time, I don’t want to exaggerate. No country perfectly reflects my ideal tax system. Estonia still has taxes I would prefer to reduce or eliminate, and like every government, it faces political pressures that can push policy in the wrong direction.
One lesson from Estonia is that simplicity matters. A tax code that citizens can understand is generally superior to one that requires armies of lawyers and accountants.
Another lesson is that tax policy works best when paired with broader economic freedom. Good tax policy cannot compensate for excessive regulation, weak property rights, or unsustainable government spending.
Policymakers should also remember that success creates new challenges. As countries become wealthier, political pressure often grows for larger welfare states and more interventionist policies. Maintaining a competitive tax system requires continuous vigilance.
The broader lesson is that economic success is usually the result of institutions that encourage productive activity rather than punish it. Tax policy is only one part of that equation, but it remains an important one.
We talk about taxes, but maybe excessive government spending is the real problem, with tax policy merely being a symptom?
Dan Mitchell: Absolutely.
If I could change only one thing about the public finance debate, it would be getting people to focus more attention on spending and less attention on taxes.
Taxes are not the disease. They are one of the symptoms of the real disease, which is excessive government spending.
Every government program eventually has to be financed through taxes, borrowing, inflation, or some combination of the three. When politicians promise new spending while avoiding discussion of costs, they are merely postponing reality.
For decades I’ve argued that spending is the driving force behind fiscal problems. Politicians often behave as though deficits arise because taxpayers aren’t sending enough money to Washington. In most cases, the opposite is true. Deficits arise because governments spend more than taxpayers are willing to finance.
This distinction matters because tax increases rarely solve long-term fiscal problems. If spending continues to grow, politicians eventually return demanding even more revenue. History shows that higher taxes often feed bigger government rather than restoring fiscal discipline.
That’s why I frequently support measures designed to limit spending growth. A spending cap, in my view, is often more important than any particular tax reform.
The ideal approach is straightforward. Government spending should grow more slowly than the private economy. If that happens consistently, the burden of government gradually declines relative to national income, and fiscal problems become easier to manage.
Tax reform remains important because poorly designed taxes can reduce growth and prosperity. But spending determines how much revenue government ultimately seeks to collect.
In short, if you’re concerned about taxes, you should pay even more attention to spending. The two issues are inseparable.
People and businesses can “vote with their feet.” How mobile are they in practice?
Dan Mitchell: They’re more mobile than many politicians would like to believe.
Moving is certainly costly. People have families, careers, languages, cultures, and personal ties that cannot be transferred overnight. Businesses often have physical assets and long-term investments that make relocation difficult.
But mobility does not have to be perfect to influence policy.
If even a small percentage of entrepreneurs, investors, skilled workers, or businesses relocate because of tax policy, governments notice. The people most capable of creating jobs and investment opportunities are often among the most internationally mobile.
We’ve seen numerous examples. High-tax jurisdictions frequently lose residents and capital to lower-tax competitors. Within the United States, states such as Florida and Texas have attracted people from states with heavier tax burdens. Internationally, countries compete aggressively for investment and talent.
This process is often described as tax competition, and I regard it as one of the healthiest constraints on government power. Tax competition creates incentives for policymakers to behave responsibly. Governments that impose excessive tax burdens risk losing the very people and businesses they depend upon for revenue.
Critics sometimes portray tax competition as a race to the bottom. I see it differently. Competition generally benefits consumers in markets, and it often benefits taxpayers in government as well.
Of course, taxes are not the only factor influencing location decisions. Quality of life, legal institutions, education, infrastructure, and cultural considerations also matter. But tax policy remains significant, particularly at the margin. When two locations are otherwise similar, tax differences can be decisive.
The broader lesson is that governments no longer operate in isolation. In a global economy, policymakers must recognize that capital, talent, and entrepreneurship increasingly have choices.
For decades, free trade seemed to be winning the argument. Today, tariffs are back in fashion. Is this a lasting shift or a passing political moment?
Dan Mitchell: I’ve spent much of my career defending free trade, so I find the resurgence of tariffs disappointing.
The economic case for free trade remains as strong today as it was when Adam Smith and David Ricardo first articulated it. Nations become wealthier when individuals and businesses are free to buy and sell across borders. Unfortunately, good economics does not always prevail in politics.
Tariffs have returned largely because they provide politicians with a simple narrative. It’s easier to blame foreign competition than to address domestic policy failures. When industries face challenges, politicians often promise protection rather than reform.
The problem is that tariffs function as taxes. They raise prices for consumers, increase costs for businesses, and invite retaliation from trading partners. While a small number of protected producers may benefit, the broader economy generally suffers.
What concerns me most is that protectionism often appeals to both the political left and the political right, albeit for different reasons. That creates an unusually durable coalition in favor of bad policy.
Still, I remain cautiously optimistic. Economic reality has a way of reasserting itself. When tariffs increase costs and reduce competitiveness, the consequences eventually become visible. Whether this is a temporary political cycle or a long-term shift remains uncertain. But the fundamental economics have not changed. Prosperity comes from production, innovation, specialization, and exchange — not from barriers to trade.
For that reason, I continue to believe that freer trade is one of the most important policies for promoting growth and rising living standards.
If only one meaningful tax reform were possible, what would matter most?
Dan Mitchell: Most people expect me to say a flat tax, or no income tax, but my answer is actually somewhat different. If only one reform were possible, I would choose a binding limit on government spending.
That may sound like a dodge, but I don’t think it is. Spending ultimately drives taxation. If government spending continues to grow rapidly, politicians will always seek additional revenue. Any tax reform can eventually be undermined by a government that refuses to control its expenditures.
A well-designed spending cap changes the incentives. It forces policymakers to prioritize, make tradeoffs, and focus on efficiency. It also creates an environment in which lower tax rates become sustainable.
If we’re talking strictly about tax reform, however, my choice would probably be reducing the tax bias against saving and investment. Long-run prosperity depends heavily on capital formation, and our tax systems often penalize exactly the activities that generate growth. That could be accomplished through any consumption-based tax such as a flat tax or national sales tax, or by incremental reforms that reduce double taxation of capital income. The key principle is to have neutrality as a goal. Government should not punish productive behavior through the tax code. Especially saving and investment, since capital is so important for higher wages and better living standards.
Ultimately, though, I return to spending. The best tax system in the world cannot compensate for a government that continually expands beyond its means. Sustainable prosperity requires both good tax policy and fiscal discipline.
Strong convictions are important, but so is intellectual humility. What evidence, developments, or experiences would cause you to reconsider some of your views on taxation and public finance?
Dan Mitchell: One of the biggest mistakes people make in policy debates is treating economics like theology. I have strong views, but I’ve never believed that any idea should be immune from evidence.
For decades, I’ve argued that lower marginal tax rates encourage economic growth, that double taxation of saving and investment is harmful, and that excessive government spending is the central fiscal challenge facing modern democracies. Those conclusions aren’t based on ideology alone. They’re based on theory, historical experience, and empirical evidence.
That said, I’m open to evidence that the benefits of good policy are not as great as I think they are. And I’m certainly open to evidence that bad fiscal policy can be offset by good policies in other areas.
For example, if countries with persistently high tax rates and large welfare states systematically outperformed countries with lower tax burdens and smaller governments over long periods of time, I would have to reevaluate my assumptions about the importance of fiscal policy, compared to, say, trade policy, regulatory policy, and monetary policy. Likewise, if there were convincing evidence that high marginal tax rates had little or no effect on entrepreneurship, investment, saving, or labor supply, that would probably lead me to focus more on ending double taxation and simplifying the tax code.
The same principle applies to spending. I often argue that government spending above a certain level tends to reduce growth. If researchers could demonstrate a reliable mechanism through which ever-larger governments didn’t cause economic damage, I would have to take that evidence seriously. Indeed, I might begin to base my arguments much more on morality and less on economics.
But intellectual humility cuts both ways. Critics should also be willing to reconsider their views when evidence contradicts them. Too often, people approach tax policy as though economic outcomes are irrelevant so long as their preferred moral objectives are achieved. I try to avoid that trap. Good policy requires both principles and evidence. If the evidence changes, responsible people should be willing to revisit their conclusions.
The goal should never be defending a political tribe. The goal should be understanding what actually promotes prosperity and freedom.
What is the biggest misconception about taxation held by both the left and the right?
Dan Mitchell: The biggest misconception shared by many people across the political spectrum is the belief that taxes are paid by abstract categories rather than by real human beings.
Politicians constantly talk about taxing “corporations,” “the rich,” “millionaires,” “foreign companies,” or some other convenient target. The implication is that government can impose taxes on a particular group without broader consequences. Economics doesn’t work that way.
Corporations don’t pay taxes. People do. The burden ultimately falls on workers through lower wages, consumers through higher prices, shareholders through lower returns, or some combination of all three.
Similarly, taxes on investment income don’t fall on pieces of paper. They affect incentives to save, invest, and allocate capital. Over time, those effects influence productivity and wages throughout the economy.
I often criticize politicians on the left for pretending that only the wealthy bear the cost of higher taxes. But I also criticize some people on the right for assuming tax policy is the only factor that matters for economic performance. Institutions, culture, regulation, monetary policy, and many other factors play important roles.
Another misconception is the idea that government somehow possesses its own resources. Every dollar government spends must first be taken from someone, borrowed from someone, or created through inflation that reduces purchasing power. That reality is easy to forget because taxation is often indirect and hidden. Yet it remains true.
The most productive conversations occur when people stop thinking about taxes as abstract numbers and start thinking about incentives, tradeoffs, and real human behavior. That’s where economics becomes most useful.
After decades of writing and speaking about tax policy, what is the one question you wish interviewers would ask more often, and what is your answer to it?
Dan Mitchell: The question I wish people asked more often is: “What is the right size of government?” Notice that this question comes before debates about tax rates, deficits, loopholes, or redistribution. Most fiscal discussions start with revenue. Politicians think about how much money they want and then debate how to collect it. I think that’s backwards. The first question should be what government ought to do. Once we decide the appropriate scope of government, we can discuss how to finance it.
Too often, people assume that government spending is inherently beneficial and then focus entirely on revenue collection. But every government program has costs as well as benefits. Resources directed by politicians are resources that cannot be directed by individuals, families, entrepreneurs, charities, and private institutions.
That doesn’t mean government has no role. A civilized society needs courts, police, national defense, and other core functions. The challenge is determining where government activity creates value and where it merely displaces private initiative.
I frequently point to spending restraint because I believe it addresses the root issue. If spending grows faster than the private economy, governments eventually face fiscal crises regardless of how taxes are structured. Conversely, if spending grows slowly and responsibly, many fiscal problems become manageable.
So if I could encourage one change in public discourse, it would be shifting attention away from “Who should pay more?” and toward “What should government actually be doing?” That conversation is far more important than most tax debates.
Which books would you recommend for readers interested in taxation, public finance, economic growth, and fiscal policy?
Dan Mitchell: If someone wanted to build a solid foundation in these subjects, I would recommend a mix of economics, public choice theory, and political philosophy.
A good place to start is Economics in One Lesson by Henry Hazlitt. It remains one of the clearest introductions to economic thinking ever written. Hazlitt teaches readers to look beyond immediate effects and consider long-term consequences.
I would also recommend Free to Choose by Milton Friedman. Friedman had a remarkable ability to explain complex economic ideas in language ordinary citizens could understand. Similarly, you can’t go wrong if you make Basic Economics by Thomas Sowell a go-to source.
For public finance and government growth, readers should explore the work of James Buchanan, particularly his contributions to public choice economics. Public choice helps explain why governments often behave differently than idealized textbook models predict.
On economic growth, the writings of Adam Smith remain essential, especially The Wealth of Nations. More than two centuries later, many of Smith’s insights remain remarkably relevant.
For those interested specifically in liberty and limited government, I would strongly recommend The Road to Serfdom by Friedrich Hayek. Hayek’s warnings about centralized power deserve continued attention.
You don’t need to agree with every conclusion these authors reach. In fact, you shouldn’t. The goal is to learn how to think critically about incentives, institutions, and the relationship between economic freedom and human flourishing.
P.S. Global Tax Revolution and The Greatest Ponzi Scheme should be on everyone’s list.
We’ve discussed taxes, government, and public policy. But freedom isn’t found only in constitutions, legislation, or political institutions. How do you find freedom in an unfree world?
Dan Mitchell: Freedom certainly depends on institutions, laws, and constitutional protections. I’ve spent much of my career arguing for policies that expand economic liberty because I believe those institutions matter enormously.
But freedom is not merely a political condition. It is also a way of living.
One of the lessons I’ve learned over the years is that no society is perfectly free. Every generation faces constraints, frustrations, and political disappointments. If your happiness depends entirely on the next election or the next policy reform, you’re likely to spend a great deal of time unhappy.
For me, freedom begins with personal responsibility. It means taking ownership of your choices rather than waiting for politicians to solve problems. It means building relationships, pursuing meaningful work, and creating value for others.
Economic freedom is important because it expands opportunities for people to shape their own lives. But those opportunities are meaningful only if individuals actually use them.
I also find freedom in intellectual independence. One of the dangers of modern politics is the pressure to conform to tribes and ideological camps. Genuine freedom requires the willingness to think for yourself, follow evidence where it leads, and occasionally disappoint your allies.
Finally, I find freedom in optimism. History is filled with setbacks, but it is also filled with remarkable progress. Human beings are extraordinarily creative and resilient. Given enough room to innovate, cooperate, and exchange ideas, they accomplish remarkable things. That’s why I remain hopeful.
The struggle for liberty never ends, but neither does the capacity of free people to improve the world around them.