Why the flat tax is a nonstarter

Today is April 15th, the dreaded Tax Day, so it’s high time to think about what’s the best tax reform proposal for America.

The purpose of this blogpost is to explain why a flat income tax is no solution to the problem of the complexity of the current tax code.

Sen. Rand Paul has recently released his rehashed budget blueprint from last year which, of course, stands no chance of passing and which this year includes, unlike last year, a flat income tax as a component. Like last year, however, he proposes only 500 bn bucks in annual spending cuts.

He assumes that the economy will somehow miraculously rebound that it will produce the remaining 1 trillion bucks of annual revenue to balance the budget? It’s a fantasy. It won’t happen. Paul is merely repeating and rehashing the rosy budget blueprint that he introduced last year. It would never balance the budget. By contrast, the budget plans of the Republican Study Committee and the Heritage Foundation WOULD balance the budget, albeit in a decade.

His flat tax proposal is a nonstarter and shows why he is not serious about tax reform. The biggest problem with the income tax is not that it is progressive, and not even the fact that it contains many tax loopholes. The biggest problem is that it is an INCOME TAX – a tax that confiscates people’s hard-earned earnings. A tax that punishes productivity and savings instead of incentivizing them. An INCOME TAX always is, and always will be, a huge drag on the economy, whether it is flat or not.

Moreover, a flat income tax will also not solve other big problems with the INCOME TAX – the bloated, oppressive IRS; the intrusive IRS audits; the burden of filling out tax returns every year, and so forth. A flat tax is not a solution at all. It is a mere placebo.

Besides, the flat tax is such a joke that it wouldn’t stay flat for very long. It could be made progressive (i.e. new tax brackets could be added) by the next Congress. It would take only one or two Congresses to undo everything that the flat tax could give us.

Don’t believe me? Recall that the CURRENT abomination of a federal tax code started in 1913 as a flat income tax. Yet, by 1917, it was a progressive income tax whose highest rate was 77% – a rate not even the most fervent advocate of the federal income tax dreamed of in 1913.

The flat tax is not a solution, mere a placebo, and should not even be considered. Sadly, too many flat tax supporters, including Rand Paul, are wedded to their precious flat tax idol, so they are not willing to consider anything else. By far the most difficult aspect of converting people to the cause of real tax reform has been to get them to at least CONSIDER an option other than a federal income tax. Once that is done, however, it’s easy to do the rest of the “convincing” task.

Mitt Romney, for one, is open to a consumption tax, including the FairTax, and has praised many of the FT’s virtue. He is not stuck on stupid on the income tax and would like to move the US away from such taxation. That means that with Romney, half of the convincing is already down. All the work that remains is to convince Romney that the FairTax is the best plan to completely replace the federal income tax.

As my friend John Gaver rightly says, and has posted on the HF’s blog:

“I just posted this to the Heritage Blog and to their Facebook page

Let’s see. The current tax abomination began it’s life as a Flat INCOME Tax. So what’s to make us believe that a new Flat INCOME Tax will remain flat beyond the next session of Congress. One look at the names of those in Congress will convince even the most jaded observer that the rate won’t remain flat.One of the primary problems with our current abomination is that, being a tax on INCOME, it drags down the economy, by punishing productivity and savings. Making a tax on INCOME flat, will not make it any less of a drag on the economy or stimulate savings.Yet another serious problem with our current abomination is that it has layer upon layer of hidden taxes, of which most people are not aware. These hidden taxes come in the form of corporate taxes that are embedded in the cost of every new product. This of course drags the economy down even more and amounts to double taxation, since consumers would be buying already taxed products, with after-tax money. Making the Corporate INCOME Tax the same level as the Personal Income Tax will do nothing to eliminate the many layers of hidden taxes, which constitute double-taxation.The whole idea of a Flat INCOME Tax is nothing more or less than a placebo. It will NOT solve any problems, but only mask the existing problems for a little while longer.By contrast, the FairTax will be entirely transparent and will eliminate all double-taxation. It will stimulate the economy, by removing the drag on the economy that ALL INCOME taxes create. But beyond that, it will encourage savings. But above all, unlike INCOME taxes, since it would be entirely transparent, raising the rate of the FairTax would be political suicide.A Flat INCOME Tax of any kind is a non-starter, since flattening the rates would be analogous to re-arranging the deck chairs on the Titanic. The root problems would still exist. The FairTax is the only tax plan being discussed that would actually FIX the problems with our current tax system.

One thought on “Why the flat tax is a nonstarter”

  1. A flat tax? It sure does sound fair: Everyone pays the same tax rate. It takes just a little bit of thinking to figure out it does not work out so fairly in practice. I guess that’s what they are counting on. It is easy to say a flat tax is a good idea. Explaining how it is a scam takes many more words. Some of those words, including the Seinfeld haircut analogy can be found at this post: http://www.ragingwisdom.com/?p=473

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