Monday, July 29, 2013
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.