We are approaching the season of fundamental tax reform. The lobbyists for corporations and publicly funded organizations feel it, and their efforts to insulate themselves from reform were clearly reflected in the thousand pages of minute changes that masqueraded last year as the Taxpayer’s Relief Act of 1997. The president senses the growing call for fundamental tax reform and is exploring the possibility of securing a place in history as a “tax reformer.” The political leadership in Congress recognizes the rising support for sweeping tax reform in polls and town meetings.
All tax reformers believe a vigorous public debate over the merits of the individual plans is inevitable. There can be little doubt that the prevailing proposal will owe much to the public’s wholly reasonable desire to eliminate the harmful effects of the current tax code on families and their extended communities. And, if simplicity, fairness, and protection of families against high taxes and future tax increases are the public’s criteria for successful reform, then the single-rate flat tax will replace our current broken and corrupt system of taxation.
The flat tax corrects the wide array of problems families face when complying with current tax law. It’s simple: Taxpayers add up the amount they make from wages and salaries, subtract a flat family deduction for each adult and child (about $10,000 for adults and $5,000 for children), and pay 17 percent on the remaining amount. These calculations easily fit on a tax return the size of a postcard. While the flat tax may temporarily irritate the thousands of tax lawyers and accountants currently employed by the complexity of the existing code, average-income families will immediately save those costs associated with their annual tax preparation. With a family deduction of $30,000 for a family of four, under a flat tax millions of families will owe no tax at all. Perhaps as many as thirty-one million low-income taxpayers will see their tax liabilities disappear altogether. Even given these economies, the flat tax at 17 percent will raise revenues comparable to the current system.
The flat tax is fair. Taxpayers making ten times more income than other taxpayers will pay about ten times more tax. In fact, studies show that high-income taxpayers always pay more tax when tax rates fall. For example, lower tax rates in the ’20s and ’80s persuaded high income households to spend less time and money trying to reduce the effects of confiscatory tax rates and resulted in more tax receipts from these taxpayers. The flat tax also is fair in giving all tax-payers the same family deductions regardless of income. The flat tax eliminates the current practice of phasing out personal and itemized deductions as income rises.
The flat tax ends the policy of multiple taxation. Current tax policy undermines the ability of families to save by taxing interest on saving accounts, dividends from investments, and capital gains from decisions to reinvest money in more productive venues. Families that save a portion of their after-tax income currently pay additional income taxes on interest from these savings above a minimal amount. If they take some of those savings and buy stocks or taxable bonds, they pay more income taxes. Rolling that same amount of money over into another investment results in yet more income taxes from capital gains. And, if their investment plans succeed to the extent that funds are left over for transfer to children at death, the government taxes that same income again at rates up to fifty-five percent. No wonder savings rates in the United States are so low! The flat tax eliminates all of these layers of double, triple, and quadruple taxation, thus providing families every opportunity for saving, thereby improving their financial well-being.
The end of multiple taxation, the sharp drop in compliance costs, and the fairness of the flat tax all contribute to what many economists believe will be the flat tax’s greatest payoff for families: a significantly healthier economy. The likelihood that families and businesses will spend substantially less on keeping expensive tax records and on tax lawyers and accountants will mean that valuable resources will be released for more productive activity. The fairness of the flat tax means that vast amounts of tax avoidance behavior will disappear: No longer will businesses, large and small, find themselves chasing tax credits and deductions in order to survive high business taxes. When the tax code plays less of a role in economic decision making, those decisions strongly tend to be toward more productive applications and investments. More productive investments, of course, directly help families by supporting the growth of higher wages and the creation of better jobs.
These economic benefits from simplicity and fairness are extended by the flat tax’s principle of taxing income only once and at its source. By removing multiple layers of taxation that primarily affect savings and investment, the flat tax contributes to significantly lower interest rates and less expensive capital. Lower interest rates, of course, mean lower borrowing costs for family housing, medical care, and education. Less expensive capital means more new businesses, like the high-tech computer firms that blossomed all over the United States following the dramatic tax rate reductions of the ’80s. Many economists believe that the flat tax will lead to such an explosion of new businesses that the additional tax revenue from economic growth will be enough by itself to balance the federal budget and meet future revenue needs.
With greater economic growth comes increased financial security for families. More jobs at higher pay means that today’s children will face less uncertain economic prospects than they are currently likely to confront. Parents know the importance of achieving a stronger economy for their children, and they sense that current tax policy is one factor holding back the potential level of economic activity. For their part, politicians of all stripes are responding to the growing unease among families prompted by the burdens of current tax policy. The flat tax addresses these concerns and provides our political leaders with a fundamental reform that already enjoys widespread public support. As the season of fundamental tax reform approaches, expect the fortunes of the flat tax to rise.