Thursday, October 22, 2015

A ‘Liberal’ Makes the Case for a Flat Tax—Sort Of

That’s the title of a New Jersey Star-Ledger editorial earlier this year. The Star-Ledger is a “liberal”—i.e., Left-leaning—newspaper. It wouldn’t be the sort of place you’d find an argument for a simple flat income tax. And although the Star-Ledger didn’t actually call for a flat tax, that, in effect, is what it did in its complaint about our “underfunded” Internal Revenue Service.

The Star-Ledger complains about the agency’s incompetence, including of its chairwoman Lois Lerner, its terrible “customer” service, and the “laughable bureaucracy” that “harassed political groups, . . . overspent on conferences, and . . . never updated their 1970s technology when times were flush.” Worst of all, in the Star-Ledger’s view, is that lack of operating funds might result in under-taxing Americans:

The IRS, however, is responsible for collecting the revenue, and now that it has been neutered, there's a risk that some of the $3 trillion they expected to collect this year might go unaccounted for. Right now, the tax gap is roughly $385 billion, and it's likely to grow in direct disproportion to the agency contracting. Your government at work, though not really.

All of this could be fixed, according to the Star-Ledger, if only Congress would increase the IRS’s budget well above its current $11 billion price tag.

That’s not what I got out of this editorial’s litany of IRS incompetence and abuse.

I left these comments:

I’m going to save this editorial. It’s a convincing argument for a simple flat tax.

Steve Forbes laid out a nice plan in his book "Flat Tax Revolution." In brief, there would be one rate of 17% with no deductions after a single generous personal exemption for every taxpayer and every dependent. In Forbes’s plan, the hypothetical "family of 4" would pay no income tax on about the first $46,000 of income, and then 17% on every additional dollar of income. Some simple calculations reveal that a family of four with annual earnings of . . .

  • $50,000 would pay $680.00 on an effective tax rate of 1.4%
  • $100,000 would pay $9180.00 or 9.2%
  • $150,000 would pay $17,680 or 11.8%
  • $300,000 would pay $43,180 or 14.4%
  • $1,000,000 would pay $162,180 or 16.2%.

In other words, the millionaire pays 238 times as much as the lower income family in dollar terms, and 11 times as much in percentage terms.

We could debate the rate and the size of the personal exemption. Personally, I think 17% is too high. And the new tax structure should be revenue neutral, not an excuse to sneak in a tax increase (which should be greatly reduced, along with spending).

But there’s no doubt about what a flat tax would accomplish:

  • It's progressive; the more you make the more you pay in both dollar and percentage terms.
  • It's fair; every dollar of taxable income is treated the same--i.e., no income discrimination.
  • It's pro-growth; economic success is not penalized by higher rates.
  • It would reduce both the incentive and opportunity to cheat on taxes.
  • We could eliminate the IRS as we know it, saving billions in government spending and tens of billions in private citizens’ tax preparation fees.

We could, in short, take a bad institution—the income tax—and make it a lot less bad. Who could have a problem with that?

One more thing. I wouldn’t call using tax authority to harass political groups “laughable.” Such harassment is a fundamental threat to a free society. There’s nothing laughable about that.


Read the Star-Ledger editorial yourself. You, too, might get the sense, not that more funding is needed, but that, “Hey, why save this hideous institution at all?”

Related Reading:

In N.J., a Flat Tax, Not a “Millionaires Tax,” is the Fairer Solution

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