Let's Talk Flat Tax

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It's time to restart the dialogue on the flat tax. It's a policy that has cycled in and out of the national discourse since the 1990s, when the flat tax gathered some momentum across party lines. Jerry Brown, the former Governor of California and supply-side advocate, supported the flat tax in his unsuccessful 1992 campaign for the Democratic Presidential nomination. Jack Kemp, the late Congressman from Buffalo and co-author of the 1981 Economic Recovery Tax Act, recommended a flat tax when Newt Gingrich appointed him as head of a Congressional Tax Reform Commission.

In 1996 Steve Forbes and Senator Phil Gramm campaigned for a flat tax during their crusades for the Republican nomination, a proposal that garnered so much attention it formed a crucial part of Bob Dole's platform with Kemp, his pick for vice president. In that very same year House Majority Leader Dick Armey published a book entitled The Flat Tax: A Citizen's Guide to the Facts on What It Will Do for You, Your Country, and Your Pocketbook.

The flat tax made a comeback during the 2008 presidential campaign when Senator Sam Brownback championed the tax structure before he dropped out of the race. 'Flat Tax Fred' Thompson also endorsed the policy in his otherwise disastrous campaign. And, of course, Libertarian Ron Paul, who enjoyed a strong showing from the Goldwaterite wing of the Republican Party, supported the cause, though he only pushes for "a real flat tax... like zero."

Unfortunately, as of late, calls from Republicans--and especially Democrats--for a flat tax appear to have gone, well, flat.

So what happened? There is the odd whimper from the Republican old guard, but very little from conservatives in Congress. Kemp was an avid advocate of slashing taxes until his untimely death earlier this year. Paul Ryan (R-WI), often described as Kemp's protege and heir, does support radical tax reform, although his efforts are only a semblance of his master's work. And Forbes still supports a flat tax in print and from the TV studio every Sunday. But that's about it.

We need to re-inflate the flat tax proposal. On Monday, the National Review's Joe Loconte called on the Republican Party to place a greater focus on social justice and demonstrate a real "commitment to the poor." The Heritage Foundation, evoking the memory of Jack Kemp, has made a move in this direction with their social justice initiative. The flat tax should form one of the central tenets of any prospective GOP platform on social justice.

How is the flat tax a paradigm of social justice, you may ask? Isn't forcing the nurse to pay the same level of income tax as the investment banker immoral? This line of argument has been used ad nauseam by the England's Labour Party and some Democrats. Just a few years ago, when he was still Chancellor of the Exchequer, Gordon Brown remarked, "What is their new big idea? A flat tax. An idea that they say is sweeping the world, well sweeping Estonia, well a wing of the neo-conservatives in Estonia... The millionaire to pay exactly the same tax rate as the young nurse, the home help, the worker on the minimum wage. The price tag--£50bn of cuts in public services."

But the facts would state otherwise.

History has shown that when taxes are simplified, the rich pay more and the government reaps more in revenues. Take the George W. Bush tax cuts, for example. Taxes paid by millionaires increased by some 107 percent in a little more than two years from $132 billion to $273 billion. While his father, George H. W. Bush, learned higher taxes do not reap more revenues. But this applies to the population at large--not just the wealthy. On the bottom end of the earnings scale, current proposals from Mr. Supply Side, Art Laffer, support a 12.1 percent flat tax, but only on those individuals who earn more than $10,000 per annum.

Moreover, the wealthy will still pay other taxes such as capital gains, dividends, and from the additional consumption that comes with having more money. It will also help eliminate the ducking and weaving of high earners who can afford to pay accountants to seek out tax loopholes. This is, of course, a luxury the poor cannot afford.

So, close the loopholes, they say! Make it more difficult for those men in silk top hats who smoke fat cigars to squirrel away earnings offshore and avoid paying their societal membership dues. This may well be viable, but accountants and lobbyists are paid to save their clients money. When one loophole closes, another magically opens.

Why not close the loopholes completely by implementing an easy, transparent, flat rate of taxation with only a handful of deductions for, say, charitable donations? If we want the wealthy to pay more in taxes, cut their taxes to lower the incentive to seek out shelters for their money. Although the tax rate may be the same, the inequity in earnings and taxable income (capital gains, dividends) mean the rich will still incur a much higher overall level of taxation.

High rates of taxation do not just discourage taxpayers from declaring income--this rule applies to business as well. With a flat payroll and corporation tax, there is more incentive for businesses to create jobs. America could become one large enterprise zone. The only jobs lost would be over at the IRS.

We constantly hear about how the world is changing, and how "America has to change with it." This, of course, is true. Countries around the globe are becoming more and more competitive by slashing corporation taxes or introducing a flat tax. The United States has the choice of competing, or not competing at all--and the corporation tax as uncompetitive as America's is anything but socially responsible. Businesses and the wealth-creating individuals who run them are mobile entities--not ATMs that will continue to spit out cash. If the conditions are not right, they can leave the country or wind down their business altogether. They need reassurance from the government that its long term strategy is one of growth-friendly policies and job creation.

And what better way to do that than through the transparency afforded by a flat tax?

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