Many
people would like you to believe that flat tax is so named because it will
flatten your finances. That at the least is the intended conclusion. By
eliminating personal deductions like mortgagee interest payments, the study
claims, the flat tax would reduce housing values in this country by upwards of
10 percent. The study’s methodology is shaky at best, and the jury on housing
values is still o ut. Despite the forces allied against the flat tax, tax reform
has grown steadily because the current tax system is so unpopular and the
alternatives promise so much. But in addition to the possibility of lower
housing values, the flat tax poses several oth er serious problems too easily
dismissed by its advocates. Businesses may be the flat tax’s second biggest
obstacle. By reducing the cost of compliance with the tax laws and removing
uncertainties about the tax situation, the flat tax would eventually benefit
businesses. However, they would see their tax burde n rise by about two-thirds,
on average, from 31 percent of the total tax burden to around 50 percent. This
tax increase on businesses would result from the loss of deductions for state
and local taxes and for employee fringe benefits, among other things. Though
businesses will try to pass on these costs to consumers and employees-by raising
prices and trimming fringe benefits, for example-shifting the nations tax burden
to the business community will not produce successful tax reform. Next, the flat
tax initially would raise taxes on the middle class by 20 percent. On average, a
family with between $40,000 and $50,000 in adjusted gross income would see there
taxes rise about $700 to about $7.500. The flat tax also appears to have a major
fairness problem. For example consider two families. The Jones have a combined
salary of $50,000 in wages. Under the flat tax, a 20 percent rate would cost
this family $3,700. Now consider the Smiths, who in r etirement consume every
dollar of their $1 million in dividend income. Under the flat tax, the Smiths
owe no tax at all because capital income is excluded from the tax base. To be
sure, their dividend income was taxed at least once at the business level before
they received it. But the perception would persist that a high income family
would pay no tax. Will tax fairness be defined so that individuals consuming
significant amounts of capital income would pay little or no tax? Though
difficult issues, they are not impossible to resolve. Moreover, the system’s
advantage could well outweigh it’s drawbacks. The flat tax could prove a boon
for the economy by eliminating a passel of convoluted tax disincentives to
saving and inve sting. Economists will quibble over exact estimates, but there
can be no question that savings and investment will improve in both the short
and long run under a flat tax. Advocates are correct to insist that the flat tax
would be much simpler than the current tax system. The new system would tax only
the income derived from individual labor, after allowing for personal
exemptions. There would be no deductions. The fla t tax would tax businesses’
net cash income at the same rate that applies to individual income, while
eliminating all the apical tax provisions that penalize some businesses while
benefiting others. One big problem with the current system is that it costs from
$150 billion to $300 billion annually to operate. The flat tax, by contrast,
would cost about 1/5th as much once fully phased in. These cost savings are
equivalent to more than a $100 bil lion tax cut for the American people. No tax
system is perfect, and no tax reform proposal is without flaws. In the end, the
flat tax’s greatest strength is that it would remove the current tax system’s
depressing effect on the economy. This over time, could make up for all the
problems me ntioned above. But before it can pass the problems must be
addressed.
