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.
Reducing the tax rates is probably one of the most studied of all economic policy tools. Every time taxes have been reduced significant on both personal and corporate incomes (e.g., the Kennedy and Reagan tax cuts), economic growth has exploded. Internationally, look at the fastest growing economy in the world right now. It's not China or India, it's the one with the 1) lowest personal income tax rates, 2) the lowest corporate tax rates, and 3) the one that has the lowest ratio of government spending to GDP. The country: Chile. True, companies can move to avoid taxes...why do you think so many US companies are building plants abroad? However, the reverse is also true: Lower corporate and personal income taxes in the US and you would see foreign companies flood the US with new jobs. The Dems, however, don't want this, as it would make the 51% less dependent on their largess.
There are very few people in Congress I trust. They got us where we are and I do not believe they will correct anything — they want the money they get for “fixing” the Code.
The rich pay more because they will be buying more stuff.
which is not a flat tax argument, but a Fair Tax argument and the two are vastly different. One is a consumption tax, the other is an income tax. The Fair Tax scares me because it also includes a "prebate", which amounts to a payment to low income people. Now we're right back where we were: Politicians can play with the prebate and buy votes. Not good. Forget the Fair Tax and stick with a flat tax on income, not consumption.
Why? I have no problem with the Federal gov't providing "social overhead capital" (e.g., a standing military, a legal system, public roads, etc.) and the funds necessary to run those actions by the federal gov't. This could not be funded by tariffs. What I object to is the invasive nature of the federal gov't that isn't even remotely part of the Constitution, no matter how convoluted your thinking might be (e.g., EPA, SBA, Sally Mae, etc.)
A few years ago I heard a (UK) Conservative Party candidate for office telling the voters how much better his party would run the National Health Service than the Liberal Party had done. That is not the mindset we need with our tax system. As much as I respect JimmyP, we need to have the most simple, most flat tax that we can fund essential government functions with.
The Tax System serves TWO purposes: the fist is to fund the essential (and not the frivolous) government services. The second is to make the cost of government visible to every citizen, even citizens who are disabled or otherwise are net recipients of tax monies.
Out tax system is a giant FAIL that is imposed on us for the power it gives Washington more than the money it collects. After all, government has given itself the power to print and borrow all the money it needs. Why have taxes when you have the printing press? But that is an outrage for a different thread.
That gets adjusted for inflation.
The current tax code is over 77,000 pages and requires a fork lift (or two) to move a hard copy. No single individual actually knows the contents of entire code. Even IRS personnel can’t correctly fill out a tax return every time.
A monstrosity like that can’t be mended. It needs to be ended. The flat tax, or better yet, the Fair Tax is what we need.
Whatever plan eliminates the IRS....I good with.
The Fair Tax!
17% with that deduction is little high IMHO.
You may be right, but it's a starting point for debate. Perhaps a deduction that starts at $11,500 for individuals and is scaled to family size would work (e.g., an additional deduction of, say, $3500, for each additional family member up to a max of 10 people), but then you start injecting a progressive tax structure because of the deductions. Still, it would be a hell of a lot less complex than the current system.
Agreed. Was just a little shocked when my napkin math showed me paying more, not less. :-)
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.”And the useful idiot tries a phony comparison:
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.Flat tax rate, high personal exemption ($30K sounds about right), elimination of most federal excise taxes with implementation of a fixed, low, federal sales tax (retail), and a single excise tax on both imports and exports of petroleum products, PLUS gutting of the EPA's czarlike powers, as well as total, unconditional repeal of Obamacare, getting control over our borders, and expulsion of all illegals, would fix, flatten, and simplify. Over time employment would rise, the trade deficit would fall, the federal deficit would fall, petroleum imports would decline, domestic petroleum production would rise, terrorism would decline (OPEC finances and controls most of it), Islamicization would decline (same reason), and the creeping federal intrusion into our lives would decline.
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