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James Pethokoukis: Fix, Donít Flatten, the Tax Code
National Review ^ | 05/28/2013 | James Pethokoukis

Posted on 05/28/2013 8:09:44 AM PDT by SeekAndFind

If the sluggish U.S. economy wasn’t reason enough for tax reform, the ongoing IRS scandal demonstrates how a devilishly complex tax code enables government mischief.

But the flat tax — a longtime policy goal for many on the right — isn’t the realistic answer to either problem.

Flat-tax advocates see headlines about an out-of-control IRS as a chance to put the idea back on the public-policy radar in way it hasn’t been since the 1990s.

“This is why you need a flat tax,” Wall Street Journal economics writer Stephen Moore told Fox News recently. “If you get rid of two-thirds to three-quarters of the deductions and exemptions and carve-outs of the tax system, you’re not going to need all these IRS agents . . . snooping into your financial records.” Publisher and former Republican presidential candidate Steve Forbes, who made the tax proposal famous in his 1992 presidential-primary bid, said, “The power of the IRS derives from the complexity of the tax code. . . . With a simple flat tax you have single rate, deductions for adults and children, and that’s it. . . . Simplicity is the best enemy of the abuse of power.” For one, a simpler tax system doesn’t mean a more pro-growth one. Look at President Barack Obama and congressional Democrats, who would like to eliminate and limit deductions in order to raise effective tax rates, especially by closing “loopholes” for unpopular industries. Simplicity, by itself, doesn’t necessarily provide a path to smaller and less intrusive government. But by eliminating almost all tax exemptions and installing a single rate, flat taxers argue, America would have a code both less susceptible to corruption and more amenable to economic growth.

It’s an elegant, compelling model that might work splendidly if you were creating a tax code ex nihilo. Flat-tax fever swept across Eastern and Central Europe after the end of the Cold War, when finally independent nations were rebuilding their own economies, and the model has been quite successful, for the most part.

America, however, is in a much different place. Millions of individuals and businesses have made long-term plans based on expectations that the tax code will remain more or less the same. Half the nation, thanks to all those deductions and credits, pays no income tax. And, perhaps most important, an aging population means that the cost of health-care entitlements will grow rapidly, even if health-care inflation slows.

That all means it’s unlikely the U.S. can keep spending down at historical levels of 20 percent to 21 percent of GDP while also maintaining a floor for defense spending at 4 percent of output. The best a group of AEI scholars could manage was limiting spending to 23 percent of GDP by 2035 — and even that left the debt-to-GDP ratio a third higher than the average between World War II and the Great Recession.

And whenever flat-tax theory has been translated into real-world proposals for the U.S., the results have been problematic. Flat-tax proposals by Newt Gingrich and Rick Perry during the 2012 Republican presidential campaign slashed federal tax revenues by nearly $500 billion to $1 trillion a year, which should give pause to even the most fervent supporters of dynamic scoring. Making such plans revenue-neutral, when top rates would fall on wealthy Americans, would mean raising taxes on someone else — such as millions of middle-to-low income Americans. The Heritage Foundation would replace income, payroll, and excise taxes with a 28 percent flat tax. It claims the plan would leave the distribution of the tax burden unchanged, but the proposal would also raise revenue of just 18.5 percent of GDP.

Then there’s the uncomfortable political reality that the flat-tax concept has never been popular with voters. A 2011 Wall Street Journal survey found that not even a majority of GOP voters favored the idea. A poll by the Hill the same year found 58 percent of Americans favored a graduated income-tax system, about the same as the Journal poll.

One solution is to take the essentially flat consumption tax devised by economists Robert Hall and Alvin Rabushka and give it a progressive rate structure. Or we could combine a consumption tax with a flat income tax on wealthier Americans, as suggested by Yale’s Michael Graetz. Both ideas are also flexible enough give needed tax relief to parents. (Call it a “human-capital gains” tax cut.)

The flat tax embodies pro-growth, supply-side principles that are great starting points for tax reform, but it shouldn’t be the destination.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.


TOPICS: Constitution/Conservatism; Culture/Society; Government; News/Current Events
KEYWORDS: alvinrabushka; flattax; incometax; jamespethokoukis; michaelgraetz; newtgingrich; rickperry; roberthall; stephenmoore; steveforbes; taxcode; taxes
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1 posted on 05/28/2013 8:09:44 AM PDT by SeekAndFind
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To: SeekAndFind

fix?? that seems to be what is attempted every year, and more and more rules, regs and other b.s. is added....

TOO BAD if folks planned on the tax code remaining more or less the same...

start it over.....


2 posted on 05/28/2013 8:15:14 AM PDT by raygunfan
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To: SeekAndFind

A sales tax AND an income tax? No way!


3 posted on 05/28/2013 8:17:24 AM PDT by ConjunctionJunction
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To: SeekAndFind
The Tax Code has been fixed so many times by our politicians/lawyers (is there a difference) that it is impossible to manage. Russia has a flat tax and their economy is booming in comparison to ours.
4 posted on 05/28/2013 8:20:39 AM PDT by fella ("As it was before Noah, so shall it be again,")
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To: SeekAndFind

You can’t fix STUPID!


5 posted on 05/28/2013 8:22:06 AM PDT by PoloSec ( Believe the Gospel: how that Christ died for our sins, was buried and rose again)
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To: SeekAndFind

Fixing taxes is like taking drugs from Rock Stars.


6 posted on 05/28/2013 8:23:18 AM PDT by bmwcyle (People who do not study history are destine to believe really ignorant statements.)
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To: SeekAndFind

Large corporations and businesses like the tax code just fine the way it is. You get the what you lobby for.


7 posted on 05/28/2013 8:23:41 AM PDT by Theoria
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To: SeekAndFind

You can fix the tax code by nothing short of reducing it to one page. 9% no deductions no exemptions on all earned income. Tax business the same or no tax on business at all. If you couple that with 95% reduction in regulation of business prosperity will explode for everyone. Unfortunately the government will also get much more in revenue. Perhaps we need to make that an initial 9% with a 5% reduction in the rate annually. Make it an Amendment so Congress can’t fiddle with it.


8 posted on 05/28/2013 8:24:53 AM PDT by arthurus (Read Hazlitt's Economics In One Lesson ONLINE http://steshaw.org/econohttp://www.fee.org/library/det)
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To: SeekAndFind

The way to “correct” the tax code would be to change it such that the IRS could not be used as a tool to violate the rights of the citizenry.


9 posted on 05/28/2013 8:29:19 AM PDT by Pecos (If more sane people carried guns, fewer crazies would get off a second shot.)
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To: SeekAndFind

Flat tax doesn’t get rid of the IRS.


10 posted on 05/28/2013 8:31:22 AM PDT by Ray76 (Do you reject Obama? And all his works? And all his empty promises?)
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To: SeekAndFind
Making such plans revenue-neutral, when top rates would fall on wealthy Americans, would mean raising taxes on someone else — such as millions of middle-to-low income Americans.

He's saying this like it's a bad thing. Right now, the top 10% of income earners in the US carry almost 70% of the federal income tax load. The lowest 51% pay nothing. To me, if you don't have anything in the game, you don't get to play. This means 51% of the population shouldn't have the right to vote in federal elections. Raising rates on those 51% doesn't bother me in the least. I think a flat tax of 17% (Friedman's rate) with a $20K personal deduction would work. Saying you can't make this kind of change because businesses have made their plans based on the current tax code is a specious argument at best. Businesses adjust to changing tax codes all the time. With the flat tax, you could file your return on a postcard. As it is now, try calling the IRS to answer a complex tax question...five calls, five different answers. They don't even know the answers. Nope...it's time to scrap the current tax code and I think a flat tax is the best alternative.

11 posted on 05/28/2013 8:36:06 AM PDT by econjack (Some people are as dumb as soup.)
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To: SeekAndFind
The problem with our current tax code is that, when companies can buy congressmen and senators, and the code itself is 71,000 pages long, little industry specific loopholes can be slipped in with no one the wiser, except the accountants who take advantage of them.

Little things like the accelerated depreciation allotment for various industries, like NASCAR tracks, and corporate jet values. These add up, and explain why a flat tax is so despised by the actual lobbyest controlled government of our country.

My suggestion? Any public employee, from dog catcher to senator, who accepts a bribe dies, screaming, for the first offense. (You wouldn't have to do it too many times for even Democrats to get the point...)

12 posted on 05/28/2013 8:36:14 AM PDT by jonascord (Hurrah for the Bonnie Blue Flag that bears a Single Star!)
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To: Ray76

There still needs to be a tax collection entity, but the flat tax would massively change it’s scope and purpose. It would need to verify revenue and income sources, and that’s it.


13 posted on 05/28/2013 8:36:54 AM PDT by ilgipper (The lesson for the GOP is simple - don't let the opposition define you)
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To: raygunfan

The author NEVER once attempts to define what “fix” means. He probably wants to bring back the 92% maximum income tax rate.


14 posted on 05/28/2013 8:40:26 AM PDT by Blood of Tyrants (Inside every liberal and WOD defender is a totalitarian screaming to get out.)
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To: Theoria
Large corporations and businesses like the tax code just fine the way it is. You get the what you lobby for.

Exactly. It just kills me to hear Obozo say: "The rich fat cats are taking advantages of loopholes in the tax code to get richer." And the bulk of the electorate is so stupid they nod their heads in agreement. Wake up, you idiots! Who do you think wrote those loopholes into the tax code in the first place? Your elected representative did it so they can get your hard-earned money and give it away to some deadbeat in Cleveland who wants a free cell phone. "Splain that to me, Lucy."

15 posted on 05/28/2013 8:45:25 AM PDT by econjack (Some people are as dumb as soup.)
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To: econjack
The economic impact of reducing the tax code and rates hasn't been probably studied, nor do the implications of having everyone pay taxes and having a skin in the game. The results would be incredible

As if low income and the middle class hasn't been paying taxes. They are! But with debt. That will have to be paid at some point. A large company and such can simply move to another country. Debt does not trouble them at all. Pile it onto the citizen.

16 posted on 05/28/2013 8:54:25 AM PDT by Theoria
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To: SeekAndFind

We need a flat tax that gets rid of every deduction for everything.

Put in a basic deduction for the first X amount for poverty level, and everyone pays the same flat rate for anything over that amount.

Married, single, wages, pension, interst earnings, capital gains, all taxed the same flat rate.


17 posted on 05/28/2013 8:56:24 AM PDT by Beagle8U (Free Republic -- One stop shopping ....... It's the Conservative Super WalMart for news .)
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Repeal and replace the 16th amendment.

Put the actual % of flat tax in the amendment so it will require another amendment to the constitution to increase it. Everything is taxed, everyone pays the same amount, no exceptions or exemptions. The rich pay more because they will be buying more stuff. Even drug lords have to buy food and clothes, so you get at the massive underground economy.

The taxing of income, savings, profits is also made illegal. Just products and services (not transactions).


18 posted on 05/28/2013 9:00:14 AM PDT by USCG SimTech (Honored to serve since '71)
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To: arthurus

A Flat tax with a Cap of 5% on all forms of income.... PERIOD!


19 posted on 05/28/2013 9:01:39 AM PDT by GraceG
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To: Beagle8U

Put in a basic deduction for the first X amount for poverty level, and everyone pays the same flat rate for anything over that amount.

Make that deduction based of the GDP as well using a formula. So right now it would basically be forinstance:

The first 25,000 of income if not taxed be they Bill Gates or the school teacher..

Personally I think all federal taxes should be illegal and the federal government should be funded by Tariffs only.


20 posted on 05/28/2013 9:04:35 AM PDT by GraceG
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