November 15, 2004


Flat tax makes sense (Daily Telegraph 15/11/2004)

Radical tax reform plans are two-a-penny in Washington, but perhaps the most attractive one was put together in the late 1990s, by the publisher and presidential wannabe Steve Forbes. He advocated the scrapping of all income tax bands, breaks and allowances, and replacing them with a single federal income tax rate of 17 per cent, with only one allowance: no tax to pay until you have earned more than $36,000. Mr Bush has said his reforms will be "revenue neutral", which would mean a tax rate of nearer 20 per cent. But, whatever the rate, it would shrink the tax return to the size of a postcard.

The advantage of a flat tax is that the massive reduction in compliance costs and the abolition of allowances make the system very efficient. Evasion is also much more difficult. And this means that the rate can be set relatively low. A flat tax also improves incentives, because hard workers know they won't be punished by a higher rate, as happens in current ``progressive'' income tax systems.

Inevitably, such a radical reform would face stiff opposition from those eager to cling on to their pet loopholes.

The measure of any reform is the squealing it sets off among the special interests.

Posted by Orrin Judd at November 15, 2004 8:12 PM

As conservative as I am, I've never understood taking the absurd position that income from dividend, capital gains, rent, & other so-called "passive" income shouldn't be taxed.

It shouldn't be taxed twice, and it shouldn't be taxed at a higher rate, but if it's income, it should be taxed.

Why should a rich man who manages investments that earn him $70K/yr pay no tax while a middle manager earning $70K/yr pays 17 or 20 %.

No wonder it never sold with the public. Now, one solution is to index capital gains for inflation and tax them at the same rate as income.

None of this stuff should be as hard as we make it.

Posted by: BB at November 15, 2004 9:08 PM

My only complaint with the flat tax is that it doesn't capture the underground ecomomy. My current tax rate is around 16% on $90k with my only major deductions being a maxed 401k and around $9k in mortgage interest. I am assuming the 401k deduction would be allowed, but the mortgage interest would not. If this is the case it would not affect me much and would be much more efficient.

Posted by: Pat H at November 15, 2004 10:31 PM


In theory some people would come out of the underground if taxes were more reasonable and simpler.

Posted by: oj at November 15, 2004 10:43 PM


He was taxed when he earned it, now he's being taxed for making more by investing the same. It is double taxation. Whether good or bad in your view is a political question, not one of fact.

Posted by: oj at November 15, 2004 10:45 PM

Mr. Judd;

That's not quite right.


The dividend guy pays his taxes via the corporate tax. Suppose you gross $100K and keep $70K. Now consider another guy who owns a business that nets $100K and pays $30K in corporate tax, leaving $70K for the owner. Shouldn't he get to keep all of that $70K? Why should he pay another $21K just to transfer to money to his bank account?

Posted by: Annoying Old Guy at November 15, 2004 11:01 PM

"Shouldn't he get to keep all of that $70K?"

Isn't the guy already saving money by paying corporate rather than income tax?

You don't feel like paying tax on dividends then seek out companies which don't issue them and let them enhance your wealth via capital growth.

Posted by: M Ali Choudhury at November 15, 2004 11:22 PM


The dividend guy earned the money to buy the stock and his earnings were taxed, no?

Posted by: oj at November 15, 2004 11:29 PM

When I think underground economy I think drugs and "under the table labor" including the illegal alien workers. Illegal drug sales exceed $60 billion annually (see The number of people who make a living or supplement their paychecks with drug sales must be in the hundreds of thousands. Also, a lot of landscaping, construction and house/building maintenance is done on a cash basis. I don't think switching to a flat tax will capture much if any of this unreported income.

Posted by: Pat H at November 15, 2004 11:50 PM

M Ali:

In the US, across the entire stock market, dividends have historically been a far more dependable means of return on investment than hoping for capital gains has been.

Of course, if one is an excellent stock picker, that may not apply, but a tax policy that assumes that everyone is good at choosing growth stocks is not grounded in reality.

Posted by: Michael Herdegen at November 16, 2004 12:03 AM

OJ & all,

If I save $20K, and buy a hot dog stand, I have to pay taxes on the earnings of that hot dog stand.

If I sell the hot dog stand at a profit, I have to pay taxes on the profit from the sale.

There is no effective difference between buying a hot dog stand & buying a share of stock that earns dividends.

I have no problem getting rid of the corporate income tax so that "income" from corporations isn't taxed twice.

If it is taxed at the corporate level, then I agree that it shouldn't be taxed at the individual level. (though this certainly complicates things)

Some simplfying principles.

1. Income should only be taxed once. (the left gets around that re: dividends by splitting entities- corp + individual)

2. Corps only pass their taxes on to shareholders & buyers - abolish corp income tax

3. The use of previously taxed money used to invest/purchase income producing assets (property, bonds, stocks, hot dog stands) shouldn't shield that income from taxation.
If it is income - tax it (or get rid of the income tax).

4. Index all capital gains for inflation. This "rewards" long term investing by sheltering "gains", while applying income tax to short term speculation/gains.

Indexing alone would be a HUGE boon to investing.

OJ always points out that the libertarians lose "electorally" by promoting a system that voters have rejected. By arguing that income from capital is "superior" (this is implied by arguing that it shouldn't be taxed) than labor is a losing argument - the flat tax will be impaled upon this paradox.

If it is income - tax it (or abolish the income tax) Index all capital gains for inflation.

Posted by: BB at November 16, 2004 12:30 AM

Changing just the name of the estate tax to the death tax got rif of it. Tell people you want to end double taxation and you'll win.

Posted by: oj at November 16, 2004 12:37 AM

Just have a national retail sales tax and scrap the current nightmare entirely. End income, corporate, estate and capital gains taxes. Everyone can see how much he pays in taxes when he goes to the Kwickie Mart and buys a slurpee. No need for an IRS, no need for most CPAs, no need for a tax shelter industry which creates a subsidy for otherwise uneconomic investment, no army of K Street scumbags looting the Treasury for goodies at the expense of the taxpayer, no random audits, no piles of rotting paper from checkbooks and pay periods past.

Posted by: Bart at November 16, 2004 5:23 AM

Bart, the argument against a sales tax only is that it encourages the underground economy by making a huge discount available "for cash" --- essentially saving the large sales tax.

Posted by: Randall Voth at November 16, 2004 7:07 AM

It's much easier to police than an income tax where so many people work 'off the books.'

How many service providers are there who would play games knowing that the full resources of the US Treasury's tax watchdogs would be focused on them? The money they earn has to go somewhere.

Posted by: Bart at November 16, 2004 10:21 AM
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