Flattening the Progressive Tax

...for a flat rate of 19 percent, less an exemption of $1,000 per individual and spouse, and $200 per dependent A simple rule obtains here For any given level of revenue raised, lower rates and lower exemptions mean a more regressive levy A recent Congressional Budget Office (CBO) paper by Joseph J Minank examined four flat tax schemes, with rates ranging from 11 8 per cent to 18 5 percent, and varying per capita exemptions and treatments of capital gains The least regressive one would reduce the liability of the highest income tax payers hose earning over $50,000 per year by one-fourth For the lower-rate, lower-exemption proposals, this lightening of the load on the deserving rich rises to more than 50 per cent of their current tax burden Under the 18 5 per cent plan, there is a trickle of relief for the poor and the working poor—about $22 for taxpayers earning $5,000- $10,000 per year, but those between $10,000-$50,000, or about 68 per cent of U S taxpayers, would have their taxes go up The more regressive options shift the weight even further toward the lower end of the scale, to the point where it is all increases for everyone earning less than $30,000, and all cuts for everyone earning more Flat taxers proclaim that the labyrinth administered by the IRS can be made efficient by eliminating the stepped-up brackets of a progressive system, plus most exemptions and deductions As a matter of economics, they are wrong All income or consumption-based tax systems introduce "distortions" and affect economic choices, and the flat rate is no exception Moreover, therearesocial benefits to progressive taxation as well as to some parts of today's welter of exemptions and deductions Where the free market ofthe 19thand early 20thcentury was plagued by boom and bust cycles far worse than the 1982 recession, the progressive income tax has proved to be a means of automatic countercyclical stabilization that has contributed to steady economic growth from the time of FDR through the late 1970s, a record beyond the reach of the earlier arrangement In fact, it may be no coincidence that the malaise of '82 has coincided with the most intense attack on progressive income taxation since the 1920s The fiscal stability of the flat approach also depends on some highly dubious notions about the underground economy Advocates of the most regressive rates claim that drastic cuts for the rich will be offset by revenues coming from James K Galbraith and Greg Davidson work for the Joint Economic Committee, United States Congress, which is not responsible for their views here a sudden wave of tax compliance If you thought Laffensm sounded zany, hang on to your hat Some flat taxers insist their system will seem so fair to participants in the underground economy that there will be a rush to file the new, post-card size tax returns with the new, postage stamp-size taxes The argument, of course, rests on the assertion that high rates are responsible for most noncompliance This is not true A report prepared last March by the Joint Committee on Taxation for the Senate Finance Committee points out that the underground economy is predominantly composed of cash transactions among low-income workers, and the real underworld of gambling, prostitution and drug traffic Of the nonfilers engaged in legal occupations, more than half earn less than $5,000 a year The CBO study showed that these people would have a larger liability under a flat rate than they do now, and the hike is certainly not going to encourage their compliance As for the criminal nonfilers, it is ridiculous to think they will change their ways to conform with the flat taxers' "basic honesty syndrome " Much of the case for a flat rate echoes the hollow rhetoric of supply-side economics Once again we are told that reducing the taxes of the rich will solve our economic woes, including the problem of inadequate tax revenue If anything has been learned from the supply-side experiment, though, it is that lowered taxes for one group mean higher taxes for another You can't diminish the amount everyone pays and come up with more revenue The 50 per cent cuts for the rich in the most regressive legislative offerings must place a heavier burden on the backs of the poor and the middle income groups Another supply-side hypothesis recurring with the flat taxers is that reduced marginal tax rates lead to higher work effort and greater productivity To begin with, most workers do not have the flexibility in their work schedule to take advantage of minor variations in the marginal rates of their Federal income tax Even if they did, it is still a tossup among economists whether lower marginal tax rates are reflected in people choosing to work more for the higher wage, or less because they are earning more and prefer leisure to additional toil The only thing we are sure of is that reduced marginal rates lead to smaller revenues and bigger Federal deficits Not every designer of new tax systems is a reactionary Some are genuinely seeking to close loopholes, relieve the poor of unjust and regressive rates, and greatly simplify matters They merely see the flat tax as a bandwagon to which sensible horses might be hitched Changing the treatment of capital gains and the size of the basic exemption, for example, is a simple way to link progressive redistribution to a flat rate By providing a large exemption so that people do not begin paying taxes until income reaches a fairly high level, and treating capital gains as ordinary income, you will come close to progressive redistribution within the framework of a flat system The trouble is that you can't come close enough Exemptions sufficiently generous to assure that the poor are paying less than they do today start to cut into the thick portion of the income distribution, costing a lot of revenue and requiring sharply higher tax rates for those just above the exemption level And treating capital gains as ordinary income, albeit desirable, hits the very, very rich alone without securing the revenue necessary to permit a significantly lower rate for everyone else In sum, it is impossible under a flat system to avoid raising the taxes of the lower middle and middle classes for the benefit of the rich and the near-rich Only one contender in the current crop adequately addresses redistribution, the Comprehensive Individual Income tax put forward by Senator Bill Bradley (D-N J ) and Representative Richard A Gephardt (D-Mo ) Strictly speaking, this is not a flat tax proposal, despite its authors' propensity to take advantage of the trend Rather, it is, in Walter Heller's phrase, a "bumpy tax ' It superimposes a progressive surcharge of up to 14 per cent on a 14 per cent basic tax rate, and dispenses with most, but not all, of the present exemptions and special deductions The result is a constructive simplification that mimics the existing tax burden while boosting rates slightly at the top of the income scale One major drawback of Bradley-Gephardt lies less in its own design than in what is likely to happen to it on the road to enactment Given the current Administration and Congress, it would probably be subject to a steady accretion of loopholes and an equally steady planing down of the already much flattened rate structure The final bill might not be too far from the worst of all worlds a flat-rate wages tax There is a more basic flaw in Bradley-Gephardt It seems to implicitly assume that the 1982 distribution of taxation, which was skewed radically in favor of the rich by the "Economic Recovery Tax Act" of 1981, should be accepted as a just basis for future simplification and reform schemes It isn't just and it shouldn't be accepted We need something better than Kemp-Roth The simple, traditional standard of progressivity seems to have gotten lost, and that is a shame...

...Washington-USA FLATTENING THE PROGRESSIVE TAX BY JAMES K GALBRAITH and GREG DAVIDSON If Congress ever makes a banner for tax reform, it will carry the motto "Simplicity, Efficiency and Fairness " Once created, this marvelous flag will be at the center of a terrible struggle Friends of the present Administration who consider progressive taxation to be unjust or, as Presidential Counselor Edwin Meese put it, "immoral," will try to snatch the standard and carry it at the head of their own forces A propagandized, confused and put-upon public, watching the struggle from afar, will be left with the difficult task of attempting to separate the white knights from the Trojan Horses Only a year or so ago, the idea of repealing the country's progressive income tax system was considered hopelessly far-fetched even by antediluvians on the Right, and bills to that effect were widely ignored Now, politicians of all stripes, from respectable conservatives to at least moderate liberals, have surfaced with "reforms" to ride an alleged wave of discontent with the progressive concept The worst of these would replace the present structure outright with a single flat rate on all income There are many such proposals in the legislative hopper, from Congressman RonPaul's(R -Tex ) offering of a 10 per cent rate on all income with no exemptions, to the call by Congressman Leon E Panetta (D -Cal...