Taxed Out

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Most of the government’s receipts come from taxes. Of these, the largest source of revenue is the personal income tax. And our progressive tax system results in Americans who earn the top 50% of income paying about 97% of income taxes. Add in compliance costs, the complexity, number, and length of the income tax forms, the redistribution of wealth by means of refundable tax credits, the abuses of the IRS, the use of the tax code for social engineering, and the intrusive nature of the whole rotten scheme – and you have a system ripe for reform.

The tax reform idea that has been around the longest is the flat tax. Under a flat tax, there are no tax brackets – every tax- payer’s income is theoretically taxed at the same rate – and there are generally no deductions. First proposed by Milton Friedman in 1962, the flat tax entered the mainstream through a 1981 Wall Street Journal article by Hoover Institution economists Robert Hall and Alvin Rabushka. This article was expanded into a book called simply “The Flat Tax” (1985). A second edition was published in 1995, and an “updated revised edition” in 2007. After the Republicans gained control of Congress in the election of 1994, House Majority Leader Dick Armey (R-TX) pushed the idea of a flat tax. The man most identified with it, however, is former Republican presidential candidate (1996 and 2000) and overseer of the Forbes publishing empire Steve Forbes. His 2005 book is called “Flat Tax Revolution.”

Forbes is once again in the news, touting the benefits of a flat tax. In an interview with Reason magazine he remarked that the Democrats in California are considering a flat tax because they’re beginning to realize that “a highly progressive system doesn’t produce the revenue they need for their progressive programs.”

Although I certainly believe that our tax code is too com- plicated, too progressive, and too intrusive, there are two problems I have with flat tax proposals, though not necessarily with the concept of a flat tax itself.

First and foremost, the last thing the U.S. government needs is more money. It wasn’t very long ago that the amount of the current deficit was the amount of the actual budget. Americans have to work past April 15 each year just to earn enough to pay their taxes. Clearly, Congress needs to cut spending drastically. Simplifying the income tax is a great idea, but not because it provides Congress with more money to spend.

Second, “flat taxes,” as proposed, are still progressive taxes, demanding a higher percentage from people with higher incomes. Although Forbes calls for a flat tax of 17%, and Hall and Rabushka favor a rate of 19%, neither proposal is a true flat tax like the Medicare tax. Under either flat tax plan, no one actually pays the stated rate, and not everyone pays the same percentage, because of such things as refundable tax credits and exemptions for lower income people. Wasn’t it Marx who stated that one of the conditions for a transition from a capitalist to a communist society was”a heavy progressive or graduated income tax”?

The problem with most tax reform plans is that they focus on simplifying the tax code, or on some arbitrary concept of fairness, rather than making the code less progressive. Even worse, they don’t even hint at lowering Americans’ overall tax burden.

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