Milton Friedman on Tax Reform

Libertarian Economist


1980: replace welfare with negative income tax

Today, people tend to associate universal basic income with technology utopians. But a form of UBI almost became law in the United States in 1970 and 1971, passing the House of Representatives twice before stalling the Senate. Versions of the idea have been championed by robust thinkers of every political persuasion for decades, including some of the most admired figures in American life. Here's a sampling:
Source: The War on Normal People, by Andrew Yang, p. p.166-8 , Apr 2, 2019

1995: 15% across-the-board tax cut to stimulate economy

In 1995, we helped Dole craft a supply-side economic message with input from some of the leading economic experts in the country, including Milton Friedman and Steve Forbes. The Dole proposal had as its centerpiece a 15% across-the-board tax cut for the American people. He argued that by letting people keep more of their own money, they could better stimulate the economy than the federal government could. Still, with the country seeming to be at peace & reasonably prosperous, Dole lagged behind Clinton.
Source: Known and Unknown, by Donald Rumsfeld, p.269 , Feb 8, 2011

VAT is most efficient way to raise government revenue

The VAT, or value-added tax, is essentially a sales tax that is added at every step in the production of retail goods. The VAT is popular with politicians, for the very reason that the people should shun it: It's capable of producing huge amounts of revenue while remaining virtually hidden from consumers.

When VAT rates are increased, it looks like another increment of inflation to the unaware consumer. Milton Friedman said it best: "That VAT is the most efficient way to raise revenue for the government. It is also the most effective way to increase the size of government."

It's central to the design of the FairTax that it is added only once: at the point of sale to the retail purchaser. It's an upfront charge, not a series of hidden costs. If you hear someone refer to the FairTax as a VAT, you can be sure you're listening to someone who hasn't done his homework. Or who, for whatever reason, it trying to torpedo the FairTax.

Source: The FairTax Book, by N.Boortz & Rep.J.Linder, p.153-154 , May 31, 2006

Lower taxes in recessions and raise taxes in booms

[In a recession], a decline in national income automatically reduces the tax revenue of the federal government shifts the budget in the direction of a deficit, and conversely during a boom. If it is desired to do more, taxes can be lowered during recessions and raised during expansion. Of course, politics might well enforce an asymmetry here too, making the declines politically more palatable than the rises.

Suppose each recession had seen a cut in taxes & suppose the political unpopularity of raising taxes in the succeeding expansion had led to resistance to newly proposed governmental expenditure programs and to curtailment of existing ones. We might now be in a position where federal expenditures would be absorbing a good deal less of a national income.

Political considerations aside, we simply do not know enough to be able to use deliberate changes in taxation or expenditures as a sensitive stabilizing mechanism. In the process of trying to do so, we almost surely make matters worse.

Source: Capitalism and Freedom, by Milton Friedman, p. 77-78 , Nov 15, 1962

Progressive taxation intended to insure against risk

Individuals choose occupation, investments, and the like partly in accordance with their taste for uncertainty. The girl who tries to become a movie actress rather than a civil servant is deliberately choosing to enter a lottery.

Insurance is a way of expressing a taste for certainty. Indeed, this is one way to interpret governmental measures to redistribute income through progressive taxes and the like. It can be argued that the market cannot produce the range of lotteries desired by the members of the community, and that progressive taxation is, as it were, a government enterprise to do so. I have no doubt that this view contains an element of truth. At the same time, it can hardly justify present taxations, if only because the taxes are imposed AFTER it is already largely known who have drawn the prizes and who the blanks in the lottery of life, and the taxes are voted mostly by those who think they have drawn the blanks.

Source: Capitalism and Freedom, by Milton Friedman, p.163 , Nov 15, 1962

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Page last updated: Apr 30, 2021