Introduction: Dan Mitchell is a Senior Fellow at the Cato Institute, is one of the nation's experts on the flat tax and has been the leading international voice in the fight to preserve tax competition, financial privacy, and fiscal sovereignty. Dan's work has been published in numerous publications, including the Wall Street Journal, New York Times, Washington Times, Washington Post, National Review, Forbes, USA Today. He is a frequent commentator on TV, having appeared on all the major networks. In addition to his Cato Institute responsibilities, Dan co-founded the Center for Freedom and Prosperity, an organization formed to protect international tax competition. Prior to joining The Cato Institute in 2007, Dan served as a Senior Fellow at the Heritage Foundation. Dan also served as an economist for Senator Bob Packwood of Oregon and spent more than three years beginning every day by co-hosting a television show.

Daily Bell: Give us some background. How did you get interested in markets and free-market thinking?

Dan Mitchell: For reasons I don't understand, I was drawn to Ronald Reagan's message when he challenged Gerald Ford for the 1976 Republican nomination. I was a senior in high school, didn't have any track record of caring about politics and wasn't a regular consumer of news, so I don't know how it happened.

But it did, and I followed the campaign up through the convention. And when I went to college, I remained interested, started reading National Review and Human Events. At first, I assumed it was logical to be a political science major but the more I read and studied, the more I realized that I should be in economics.

The rest is history.

Daily Bell: You're quite a University of Georgia fan. Any notable moments – that you can share – while earning your Bachelor's and Master's degrees there?

Dan Mitchell: John Belushi famously said in "Animal House," "seven years of college down the drain." I wasn't the most attentive and diligent of students, but I like to think my seven years in Athens were time well spent. I went from being a pimply-faced immature slob to … well, I don't know what I became, but I did manage to learn some economics and also gained useful experience by running the local chapter of Young Americans for Freedom (sort of that era's Students for Liberty) and setting up Students for Reagan. Lots of notable moments, some of which can't be repeated. Among the highlights that can be shared was getting to meet Reagan several times on campaign swings through Georgia. I even got to be on his advance staff for an event in Atlanta.

I also owe a lot to the Demosthenian Literary Society, which was our campus debate organization. Participating in Demosthenian, as we called it, forced me to speak in public and learn to be at least semi-organized in my thoughts.

Daily Bell: When you began your university studies were you a Keynesian? When did you run into the Austrians?

Dan Mitchell: I was never a Keynesian, though I did have to learn the ISLM model. During my college years, Milton Friedman was a god for those of us who favored free markets. It wasn't until grad school that I began to pay enough attention to realize that there were different strains of free-market thought. But I don't recall ever hearing Hayek, Mises, Rothbard, or any other Austrian mentioned in a class. I definitely was never assigned any of their writings, at least in the classes I took.

Daily Bell: You took a Ph.D. in Economics from George Mason. Give us a sense of what that was like.

Dan Mitchell: GMU was a great place because it had the Austrians, the Public Choice folks, and also scholars like Walter Williams. Lots of intellectual ferment and discussion. A place where ideas really mattered. I can't think of a better place for someone like me who was interested in the economics of public policy.

Daily Bell: Any memories or comments about working for Senator Bob Packwood? Wasn't it frustrating working in the Senate? Economics don't seem to apply there.

Dan Mitchell: It was a very helpful experience to be "on the inside." I learned a lot about the good and bad points of lawmakers, as well as what motivates them. As a libertarian, the entire political process is frustrating, whether you're on the inside or outside.

Daily Bell: Is this where you became interested in tax policy?

Dan Mitchell: Just as I don't know why I became interested in public policy because of the Reagan campaign, I also can't explain why I've always been focused on fiscal policy. Those were the issues I cared about in college and grad school, and those were the issues I worked on in my first job for Citizens for a Sound Economy. I continued working on those issues in the Senate, though for inexplicable reasons I also was responsible for foreign policy and defense issues.

Daily Bell: You moved to Heritage and began advocating for income tax reform. Was this an evolution in your thought – or for Heritage?

Dan Mitchell: My work at Heritage was mostly driven by external events. In my first year, back in 1990, I spent a lot of time criticizing the first President Bush for breaking his "read my lips, no new taxes" promise. And I then spent a lot of time showing how the plan facilitated more spending over the following couple of years.

Dick Armey's the one who deserves credit for getting me into tax reform. When he became House Majority Leader after the 1994 GOP landslide and began to push the flat tax, that made it a real issue and I spent a lot of time writing and speaking on that issue. I've continued to work on the issue ever since, though I'm sad to say that we've had a lot more success pushing tax reform in the former Soviet Bloc than in the corridors of power in Washington.

Daily Bell: Why did you choose to leave Heritage and join the Cato Institute as a Senior Fellow in 2007?

Dan Mitchell: I've always been libertarian in my philosophical orientation, though I'm perfectly happy to work with – and for – conservatives since they're supposed to be in favor of small government. My time at Heritage was very valuable. That's where I first got involved in the "tax competition" issue. I also learned a lot about working with people on Capitol Hill and the rest of the public policy community. But the Cato Institute is where I always belonged, so the switch was probably just a matter of time.

Daily Bell: Now you deal with the flat tax and international tax competition. Give us a sense of your thinking on these issues.

Dan Mitchell: The simplest way to describe my work is that I seek to limit the size, scope and power of government. That means trying to lower – or at least restrain – both taxes and spending. Fundamental tax reform is one way of curtailing government intervention, just as shutting down useless departments also reduces harmful interference in the allocation of labor and capital.

But I also understand that politicians don't have much incentive to do the right thing and that's why I'm a big fan of international tax competition. Simply stated, politicians are less likely to over-tax if they know the geese with the golden eggs can fly to a jurisdiction with better tax law.

And if we can restrain their taxing, maybe we can limit their spending.

Daily Bell: Tell us about the Center for Freedom and Prosperity, the organization you co-founded to protect international tax competition.

Dan Mitchell: I first got involved with the issue of tax competition because an international bureaucracy in Paris, the Organization for Economic Cooperation and Development, launched an attack on so-called tax havens. I began to write about this statist effort to undermine tax competition and create an "OPEC for politicians," but I quickly realized that we needed some sort of clearinghouse/coordinator on the issue. So I convinced a buddy from college to leave another public policy group and we set up the Center. Ed Feulner, my boss at the time at Heritage, was helpful with some early funding.

Daily Bell: Please give us brief summations of a couple of your books, including what led you to write them: Flat Tax: Freedom, Fairness, Jobs, and Growth (1996) and Tax Revolution: The Rise of Tax Competition and the Battle to Defend It (2008), which you co-authored with Chris Edwards.

Dan Mitchell: The 1996 flat tax book is more accurately characterized as a pamphlet. It was designed for mass distribution to Heritage Foundation supporters and potential supporters. My real book project during my time at Heritage was putting together the 1999 book called The IRS v. the People : Time for Real Tax Reform, though somehow Jack Kemp and Ken Blackwell were listed as the editors, not me. Ah, the price of being a worker bee.

The 2008 tax competition book is another substantive body of work. It explains the who, what, where, when, why, and how of the issue.

Daily Bell: Your blog, International Liberty − Restraining Government in America and Around the World, discusses economic sanity (and insanity) issues affecting sustainable freedom and prosperity. But spell out your main themes and preoccupations, please, as regards the blog. Are your blog entries an extension, so to speak, of your books or do you address other topics there, as well?

Dan Mitchell: Since I post twice daily, I cover a wide range of issues. The focus clearly is fiscal policy, but there are 291 categories and 1,359 tags, so I've ventured far and wide in the nearly four years of writing the blog.

I set up International Liberty because our online media guy at Cato said it's what all the cool kids are doing. So I didn't want to feel left out and ostracized and started blogging. I'm glad I did. I'm now averaging 10,000 views per day and the feedback I get from Hill staffers, journalists and others has me convinced that blogging is an effective way of reaching key audiences.

Daily Bell: You've made videos for the Center for Freedom and Prosperity on topics such as flat tax, tax havens and Keynesian economics. Give us some insights on these subjects. First, Keynesianism – why does it persist?

Dan Mitchell: Keynesian economics will always have durability because it tells politicians that their vices are really virtues. What more could a politician want than to be told they should spend money?

This is the source of great frustration to me since the real-world track record of Keynesianism is rather dismal. It didn't work for Hoover and Roosevelt in the 1930s, it didn't work for Japan in the 1990s, it didn't work for Bush in 2008 and it didn't work for Obama in 2009.

Daily Bell: Why don't we have tax reform?

Dan Mitchell: There are two obstacles to tax reform. The visible obstacle is class-warfare ideology. Many folks on the left believe with religious fervor that the tax system should impose very high tax burdens on more successful taxpayers. That not only means discriminatory tax rates, but also pervasive double taxation of income that is saved and invested. If class warfare is their religion, "distribution tables" are their bible.

The behind-the-scenes obstacle to tax reform can be found in the 72,000 pages of IRS code and regulation. It would be an exaggeration to say that there's a special interest represented on every page but there's no question that thousands of interest groups, as well as assorted lobbyists, bureaucrats and politicians, benefit from today's complicated system.

Daily Bell: Is Obamacare a tax?

Dan Mitchell: There are lots of explicit taxes in Obamacare, but I imagine the question is more about the "fines" that are to be imposed on people and businesses that don't comply with the mandate. I'm not a wordsmith, English professor, or a scholar of etymology, so I can't answer the question. But I can say that the explicit taxes are a harmful form of government coercion and the "fines" are a harmful form of government coercion.

Daily Bell: What is your take on the IRS? Is it a healthy organization or ultimately a threat to US prosperity and independence?

Dan Mitchell: Big government is a threat to our prosperity and the current tax system exacerbates the damage by collecting revenue in a needlessly damaging fashion. The army of bureaucrats at the IRS certainly compound the damage but I mostly blame politicians. Even good people wouldn't be able to fairly administer the nightmarish tax code we have.

Daily Bell: How did the income tax evolve?

Dan Mitchell: It started with a top tax rate of 7 percent and 400 pages. From that mutant acorn a malignant oak tree grew. A clumsy analogy, but you get the point. It became a monstrosity because of 100 years of special interest legislation, mixed with class warfare demagoguery.

Daily Bell: Was it ever fully ratified? There is a lot of controversy about the income tax. Where do you stand on the tax protestors who claim to see various loopholes?

Dan Mitchell: My first boss, Rich Fink at Citizens for a Sound Economy, gave me some wise advice when someone first brought this issue to my attention. He said it didn't matter if the income tax wasn't properly ratified of if some people thought the language meant it only applied to certain limited forms of income. The reality is that politicians will enforce it because they want the money so they can buy votes. And even if by some miracle a judge ruled against the income tax, the politicians would move at light speed to re-impose it or re-define it so they could continue collecting revenue.

Daily Bell: Give us a scenario of an ideal tax.

Dan Mitchell: The most important thing to understand is that there's a link between taxes and spending. If the burden of spending is low, it's difficult to have a bad tax system. But if the burden of spending is high, it's impossible to have a good tax system.

Actually, there's no such thing as a good tax system. But you can minimize the harm and unfairness of a tax system by having small government, thus allowing low tax rates.

Daily Bell: There are those who say that with central banking money, an income tax is unnecessary. Why DO you need an income tax if you can print as much money as you want?

Dan Mitchell: There are four ways to finance government and all of them are bad. The authorities can simply confiscate your income and/or possessions in an arbitrary fashion. We all agree that's not good.

The authorities can tax away your income and/or assets. I spend a lot of my time explaining why that's not good.

They can also borrow money, but we know from nations in Europe that there comes a point when investors may not trust that you will pay them back.

Last but not least, the authorities can finance government by printing money, but Argentina and Zimbabwe are just two of many examples of why that's a bad thing.

The moral of the story is that we need to fight to reduce government spending. That way we can reduce these four bad ways that governments use to acquire funds.

Daily Bell: Are you worried about income tax enforcement around the world and how that is going to affect US relationships with other countries?

Dan Mitchell: I'm worried about preserving tax competition, fiscal sovereignty and financial privacy. Unfortunately, the United States has what is probably the world's worst system of worldwide taxation, which means that our government asserts the right to tax labor income, capital income and business income earned in other nations. And we also demand that other governments, as well as non-American entities, act as deputy tax enforcement agents for the IRS. This is causing ill will around the world but I also fear that other greedy governments will decide this is something they should emulate.

Daily Bell: Why is the US being so aggressive?

Dan Mitchell: We have very bad law and the IRS is (unfortunately) the most powerful tax enforcement agency in the world. And it is backed up by the rest of the US government, which is the 800-pound gorilla of the global economy. Might makes right, even with right is wrong.

Daily Bell: Is going after bank accounts around the world going to work?

Dan Mitchell: It will work in the narrow sense that Americans are finding it harder to conduct business abroad. And it will partially work in that tax enforcement may become more effective.

But it probably won't work in that people can simply choose to work less, save less, invest less and engage in legal tax avoidance. The simple reality is that high tax rates will never raise as much revenue as politicians want.

Daily Bell: Are taxes going to keep going up?

Dan Mitchell: Given the unfortunate combination of demographics and poorly designed entitlement programs, it's likely that the burden of government spending will continue to climb. This means that there will be more and more pressure for higher taxes, perhaps ultimately leading to the worst possible outcome – a value-added tax added on top of the current income tax.

Daily Bell: Will we ever see a change in this system?

Dan Mitchell: We have to get control of government spending if we want to fix the tax system.

If we reform entitlements, as proposed in the Ryan budget, and also devolve other parts of the federal government to the private sector or the states, then we'll have an opportunity to ameliorate some of the tax code's worst features.

And if we can achieve libertarian Nirvana by shrinking the federal government back to 3 percent of GDP, maybe we can go back to the time when we didn't even have an income tax.

Daily Bell: Will those working at the IRS agitate for a change themselves? How about Congress?

Dan Mitchell: There are more bureaucrats at the IRS than at the CIA and FBI combined. Like other bureaucrats, they generally get paid more than their market value so it's unlikely that they would want to fix the system. And the politicians, particularly the ones on the tax-writing committees, have little incentive to change a system that gives them enormous power to control their economy and raise campaign cash.

Daily Bell: What is the problem with changing the system? Why does the IMF advocate tax collections so aggressively when it is proven that over-taxation retards growth?

Dan Mitchell: The IMF is a reflection of the Treasury Departments and Finance Ministries of the world's main nations. As such, it reflects the mentality of tax collectors.

Daily Bell: Is there any ideal tax structure or threshold?

Dan Mitchell: As I mentioned above, an ideal tax structure can only exist with a limited government.

In the 1800s, most Western nations did not have income taxes. And they had public sectors consuming, on average, only about 10 percent of economic output. That period, between the Napoleonic wars and World War I, was the golden century, with the Western world going from agricultural poverty to middle class prosperity.

Sadly, there is no jurisdiction today with a good tax system, though places such as Hong Kong, Singapore, Liechtenstein and the Cayman Islands would be contestants for the least worst.

Daily Bell: Where is tax policy headed from here? Is there more awareness of tax policy because of the Internet?

Dan Mitchell: The real fiscal issue in today's world is the collapse of the welfare state. And things will probably get worse rather than better in the future since populations are aging. Moreover, productive people have greater ability to escape, or at least to shift their money, to jurisdictions with more stable policy. This will lead to further pressure on the failing welfare state. This suggests tax policy will get worse.

Daily Bell: What are you working on now?

Dan Mitchell: Everything. Short-term issues such as sequestration, debt limit, budget resolution. Medium-term issues such as the OECD's new attack against tax competition, the so-called BEPS plan to create a global definition of corporate income. And long-term issues such as tax reform and the size of government.

Daily Bell: Any trends or literature you would like to recommend?

Dan Mitchell: Read International Liberty every day.

Daily Bell: Thanks for your time.