Sunday, May 8, 2016

The Tax Cut Catastrophists--3: Clarifying the Effects of a Flat Tax on Low Incomes

In reply to my comments in support of a flat tax—which I posted under the New Jersey Star-Ledger editorial Trump, Cruz and Rubio tax plans are indecent proposals—correspondent Baffled objected that low income folks would be hit particularly hard by a flat tax because it would eat into spending on their basic necessities, which wouldn’t be the case with wealthier people. So I posted this clarification:

For the record, I favor a flat tax with a healthy personal exemption, but no other deductions.

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 and the tax rate. But the gist is that 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 [justly] 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.
  • By eliminating the IRS, we would eliminate a chance of backdoor government censorship.

We could, in short, take a bad institution—the income tax—and make it a lot less bad.


Some correspondents objected that this flat tax plan would eliminate the deductions for state income and local property taxes, resulting in income being taxed twice. This is true. But adding these deductions would likely raise the federal tax rate, resulting in residents in states with no income tax and/or lower property taxes facing higher federal taxes, in effect subsidizing higher tax states. Plus, allowing state tax deductions from the federal returns opens the door to demands from other groups for their favorite write-offs, defeating one virtue of the flat tax. On the other hand, a federal flat tax could be an impetus for high tax states to reign in their overspending, and cut taxes.

That said, I guess we could debate the propriety of allowing state and local tax deductions. In any event, the main purpose of a flat tax is fairness—or, to be more precise, less unfairness, since I believe a general tax on income is a tax on individuals’ livelihoods that empowers politicians to determine what to do with it, making it fundamentally immoral. That aside, there should be a single rate for all taxable income so that all income is treated the same without discrimination. (As to the mortgage interest deduction, that should be done away with. It’s bad economic policy.)

Related Reading:

Toward Less-Unfair Corporate Taxes

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