Is the Flat Tax Making a Comeback?

Is the Flat Tax Making a Comeback?

With the US Presidential race picking up steam, candidates on both sides of the spectrum have been pushing their platforms hoping to win their party’s bid for the November 2016 elections.

Among a myriad of policies discussed and heatedly debated, taxation has made a noteworthy appearance. Of particular interest, Republican candidates have resuscitated the long-forgotten flat tax, a system in which one single rate is applied to all tax brackets.

The idea of a flat tax was last seriously pursued in a US Presidential election in 1996 when Steve Forbes ran behind a promise to establish a 17 percent universal tax rate. Nothing came of it as Forbes dropped out of the race following poor showings at the Iowa and New Hampshire primaries.

But now, with a new crop of Republican candidates, the fallout from the 2008 bailouts and the electorate’s mistrust in most-things financial, the flat tax rate, or at least discussions surrounding it, is attempting a comeback.

With that said, what are the pros and cons of the flat tax?

Flat Tax Rate – Simple, Fair & Good for Business

Pros of a Flat Tax Rate – Simple, Fair & Good for Business!

Simplicity: Applying one single tax rate to the entire population makes it a whole lot easier for individuals to file their yearly taxes and for the government to monitor and collect tax revenue. Some proponents of the flat tax have gone so far as to say that tax authorities such as the US’s Internal Revenue Service (IRS) would be deemed obsolete with the implementation of this sort of taxation system.

In a piece penned for Time Magazine, Amity Shlaes, who chairs the Board of the Calvin Coolidge Presidential Foundation, writes that “simplicity defines the flat tax, so tampering with a flat tax represents a major political undertaking. Therefore, a flat schedule is likelier than a progressive schedule to sustain its form. To many, that stability matters more than whether the rate is 10% or 17%.”

Perceived Fairness: The general public perceives the flat tax to be a fairer system since the same rate is applied to all incomes, regardless of how high or low they are.

The Houston Chronicle’s Small Business section provides a good example of this perceived fairness: “For example, a taxpayer who makes $5,000 pays the same tax rate as someone who earns $500,000. The taxpayer making $500,000 pays more taxes simply because the income is greater; however, this taxpayer pays an equal percent to the $5,000 taxpayer. This tax system does not discriminate based on income level; everyone pays the same percent of income.”

Promotes Investment & Savings: Since the flat tax only applies to wages and does not affect savings, dividends, capital gains and other types of income unrelated to a person’s salary, proponents of this system suggest that it will encourage people to save and invest their money on a more regular basis.

Former Governor of Texas, Rick Perry, agrees with this notion.

Back in 2011, in a US News & World Report debate on the pros and cons of the flat tax, Perry writes that this taxation system “unleashes economic growth. It not only gives families more money to spend, it provides employers strong incentives to grow and create millions of jobs.”

Flat Tax Rate – Uneven Impact

Cons of a Flat Tax Rate – Uneven Impact, Unfair & Bound for Deficit!

Disproportionate Impact: Even though the same tax is applied to all, its impact varies greatly between those who make a lot versus those who make very little.

Kelly Phillips Erb, author of the Tax Girl blog on Forbes, illustrates this lack of proportionality: “For example, let’s assume a tax rate of 10%. For a household making $1,000,000, that 10% would represent $100,000 in tax. For a household making $10,000, that 10% would represent $1,000 in tax. The baseline cost of living does not change as income changes: with respect to a gallon of milk or gas, for example, the cost of that milk or gas doesn’t cost less for the poor than for the wealthy. If basic expenses like food and fuel are relatively inelastic, while a flat tax may be proportionate, the effect of the tax may be disproportionate. If you mix in other circumstances (caring for a disabled child or several minor children), the effect is even more dramatic.”

Unfair: Critics claim that a flat tax’s focus on wages poses greater harm to the middle class, which relies on its monthly salary to survive. On the other hand, wealthy investors who live off of their investments, savings, dividends, etc., would at the end of the day be proportionally less affected by the flat tax.

Research performed by Steve Wamhoff, the Legislative Director of Citizens for Tax Justice, confirms this unfairness looking at a 2010 case: “My organization analyzed the last halfway serious flat tax bill in Congress, which was proposed by former Sen. Arlen Specter of Pennsylvania, in 2010. We concluded his 20 percent flat tax plan would cut taxes for the richest 1 percent of taxpayers by over $200,000 on average, cut taxes for the next richest 4 percent by $5,800 on average, and raise taxes for everyone else by thousands of dollars each.”
In the end, says Dean Baker, author of The End of Loser Liberalism: Making Markets Progressive, summarizes, “a flat tax means the rich pay less. And if the rich pay less and we raise the same amount of money, then someone else has to pay more. And the someone in this story is the middle class. It really is that simple.”

Flat Tax Rate - Bound for Deficit

Diminished Government Revenue: Critics say a flat tax will significantly diminish the government’s income making it difficult—not to say impossible—to pay its bills.

In a recent CNBC piece, John W. Schoen, an Economics Reporter, says that, in the case of the current push by Republican candidates in support of a flat tax, “they wouldn't bring in nearly enough money to pay the government's bills, swelling the national debt with huge budget deficits that most of the GOP candidates have pledged to eliminate.”

In a much more critical stance, the Editorial Board for The New York Times says, “all of these candidates deny fiscal reality. In the next 10 years, revenues will need to increase by 40 percent simply to keep federal spending even, per capita, with inflation and population growth. Additional revenues will be needed to pay for health care for the elderly, transportation systems and other obligations, as well as for newer challenges, including climate change.”

At the end of the day, maybe what’s needed after all is a little balance.

Rick Ungar, a liberal senior political consultant for Forbes, summarizes this balance nicely: “I do like the idea of a modified flat tax system that exempts those who barely manage to care for their families on their salaries and preserves the home mortgage deduction which benefits millions of Americans who exist well outside of the top one percent. But it only makes sense to institute this major change to our taxing policy if we can legislatively guarantee that any further perversions to a system built on a flat tax do not overtake the system as they have to our current method of taxing.”

Question markQuestion: Flat or progressive tax? Or a hybrid tax system?


 

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