The time is now for flat tax

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When Steve Forbes campaigned for the presidency, on a platform featuring the flat tax, most people were unimpressed.

In Eisenhower’s parlance, Forbes was not presidential timber, and too many interest groups had a stake in the existing tax system to make hope of change realistic.

Now the situation is different. Under Reagan we learned that the incentives to encourage economic growth result in greater income inequality.

Obama demonstrated that progressive taxes designed to bring about greater equality inhibit growth, although here there were other factors at work, chronic uncertainty and regulation run wild among them.

The flat tax — with a $20,000 standard deduction and a rate of 20 percent, for example — is the ideal solution to this dilemma. The rich pay a greater fraction of their income in taxes than the poor: It is progressive.

Yet the disincentive effects of other progressive taxes are not there. Venturesome individuals considering a risky investment, or employees given the opportunity to work overtime, need not fear the government will demand a greater share of their income.

They cannot move into higher tax brackets, there are no higher brackets, only one flat rate.

Now the Internal Revenue Service is wildly unpopular. Those who advocate eliminating it altogether go too far, for civil servants will still be needed to check that reported income bears some relationship to actual income. But when there are no exemptions, an army of inspectors to determine whether claims for tax exemption are valid is unnecessary.

The need for growth and job creation, the desire to reduce income inequality, the universal desire for a simpler tax system and the unpopularity of the IRS, all come together to produce a perfect storm whose winds can blow the flat tax from interesting theoretical construct to practical policy prescription.

Gordon Philpot

Walla Walla

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Comments

PearlY says...

I was a Forbes delegate in 2000, but his flat tax proposal has always seemed to me a non-starter.

First, politicians would lose between a third and a half of their powers of extraction/extortion over lobbyists and interest groups. There aren't enough of them who will give that up.

Second, politicians would lose the ability to trick people into believing that their spending programs can all be done with "other people's money." They're SURE not going to give that up.

Third, politicians would lose the ability to "carrot and stick" people through the tax code to do what they want them to do, whether it's buying houses instead of renting, going to college instead of getting a job, or building windmills instead of something useful. They're really REALLY not going to give that up.

Fourth, a great deal of the long-term capital market would dry up. If I bought an investment 40 years ago (say a commercial building, or building a factory) for $100,000 and I can sell it today for $650,000, after inflation and a 20% flat tax, I've only broken even. And nobody foregoes the use of money for 40 years to break even. If I'm taxed on that income at the same rate as I'm taxed on the interest I earned last year I'm simply not going to invest long-term, when even making money means I lose money. (Current maximum capital gains tax rates are 28%, which is lower than on other income, but still depressing the capital markets severely.)

Posted 29 July 2013, 8:59 p.m. Suggest removal

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