November 26, 2002
The Flat Tax, Flat-Lined
: Republicans usually love tax reform. Now that they control Washington, why are they scared of it? (Robert Shapiro, November 26, 2002,
The flat income tax has long been the favored version of tax reform for conservatives. They would tax all individuals and corporations at the same rate and exempt any income that an individual saves or a business invests. In theory, this type of tax reform should promote saving, which in turn could produce more investment, productivity gains, and again, economic growth. It's no surprise that a few years ago, Dick Armey, Bob Dole, Jack Kemp, Steve Forbes, and other conservative luminaries all pushed versions of a flat tax.
Yet even with conservatives setting the national agenda, serious efforts from the right to overhaul the tax system have ended. Americans for Tax Reform and the Heritage Foundation, two leading conservative groups that used to agitate for overhauling the code, continue to rouse the troops over extending the Bush tax cuts and repealing the estate tax, but they are quiet about tax reform. Their most recent broadside on flat taxes dates back to March 1999. The appeal of flat taxes has virtually disappeared, and the reasons for that can be found in economics more than in politics.
One would hope that Mr. Shapiro is wrong about basic reform being dead, thou you'd assume Mr. Bush would wait until he's re-elected to attempt such a huge undertaking. There have been numerous stories recently saying that they're actually looking at a VAT to replace the entire income tax code.
Posted by Orrin Judd at November 26, 2002 8:29 PM
A flat tax (or maybe that VAT) would be one of the best reforms we could make. But it would also be a bit of a revolution, and people won't accept those very often.
It shouldn't be pushed unless the time is ripe, and there are no other big distractions, and there's a big stack of political-capital poker chips ready to be pushed to the center of the table.
I think reform isn't dead, just hibernating.
I'd like to see some smaller scale reforms, like: (a) eliminate the exemption for interest and state and municipal bonds, and the deduction for state taxes -- these subsidize big government; (b) increase the standard deduction to reduce the importance of itemizing, while cutting rates (a move toward a flat tax); (c) eliminating the AMT -- the biggest single simplification; (d) eliminating the double taxation of corporate dividends; (e) reforming social sec/medicare taxes to lower rates but coverage of fringe benefits -- this would push compensation toward salaries from fringe benefits; (f) either giving tax exemptions to medical savings accounts or ending the tax advantages of corporate-paid health insurance, to start rationalizing the health care system.
Most, if not all, of the "flat tax" proposals that I have seen have really been "flat tax rate" proposals - taxpayers pay the same %, but different real amounts.
I would like to see a true flat tax - take the budget, divide it by the number of adults, and give them each a bill. People wouldn't back new spending items because the impact would be clear from the start. Imagine the (lack of) support for a $200 billion spending program if it meant $1000 more in taxes on every adult. If we did it this way, the federal budget would shrink to 19th century levels in no time.
Just a pointer to Megan McCardle's
interesting proposal for tax reform (which would require the complete restructuring of the federal government).
I agree that real tax reform is not in the cards. Unfortunately, the myth of the graduated income tax is deeply ingrained in the psyche of a majority of Americans. People are so consumed by envy that they will not even consider the issue. Of course this situation is exactly what the Founders intended to prevent by the flat-tax provision of the original Constitution. C. Northcote Parkinson's The Law and the Profits<i/> covers this point very well.
I have a pretaxed nest egg that I accumulated prior to retirement.
If we replace the income tax with a VAT, I'll be taxed again when I spend it.
I will owe tax on withdrawals from my tax deferred IRA's, and then be taxed again as I spend it.
Please don't be surprised if seniors don't support either the flat tax nor the VAT.