Second Thoughts on the Flat Tax
Second Thoughts on the Flat Tax In a just-mailed fund-raising letter on behalf of the Republican National Committee, Steve Forbes concludes with characteristic enthusiasm that "History is on our...
...Democrats will say such a tax scheme is totally unfair...
...Fine, don't choose it...
...The tenth line of those cards is going to be those rich people's tax bills...
...These people, the very poor, are largely exempt from federal taxes now and would stay that way if Dick Armey has his wish...
...House Ways and Means Committee chairman Bill Archer thinks scrapping the tax code and starting from scratch should be his party's one and only rallying cry during the 1998 midterm congressional elections: a new, single-item "contract with America...
...that's what the elimination of "double taxation" means...
...Either way, the distributional effects of the Armey flat tax—its middle-class squeeze—would be avoided...
...Whoa, Nelly...
...Anti-tax activist Grover Norquist, usually a reliable bellwether of GOP insider sentiment, reports in the latest issue of Policy Review that some version of Dick Armey's "flat-tax" proposal "has now become a consensus issue within Republican ranks...
...David Tell, for the Editors...
...Most Republicans continue to describe the Armey flat tax and its cousin, the retail sales tax—both tax wage and salary income most heavily...
...Payroll taxes would still have to be paid—separately—under the Armey flat tax...
...And not just as a class...
...In other words, as a class, those Americans who bear the bulk of this burden (middle-income families in the, say, $30,000 to $80,000 income range) will have to pay proportionally higher taxes...
...Finally, there is the broad middle class of Americans, who earn 90 percent or more of their income in the form of simple labor compensation: wages and salaries...
...On page 9 of this issue of The Weekly Standard, we publish a letter from Dan Mitchell of the Heritage Foundation in which he announces that "serious tax-reform plans" must include "a single rate and the elimination of double taxation...
...These infirmities should be candidly acknowledged and dealt with, rather than rigidly ignored or denied...
...Then there are wealthy Americans who earn a significant share of their income from interest and profits on property...
...A brand-new tax code promises nearly everything Americans might want, Forbes believes—even a "return to traditional family values...
...State and local taxes, which are currently deductible for people filing itemized 1040 forms, would suddenly be considered taxable "income" by the federal government...
...one when it is earned, one when it is spent—in quasi-theological terms...
...Such paycheck dollars represent roughly two-thirds of annual national income and account for an already disproportionate three-fourths share of federal tax revenue...
...Is this the only acceptable alternative to punitively "progressive" marginal tax rates...
...Armey's postcard than they do now on the 1040 form...
...The GOP is positively giddy over its recent hearings on abuses at the IRS and certain where that success must lead...
...The problem is what and who it would tax, compared with the present system...
...It's obvious that America wants sweeping change," House majority leader Dick Armey says...
...But he would make it optional for taxpayers...
...If the flat tax is to be "revenue-neutral"—that is, if it is to raise the same amount of money as the current tax code does—then middle-class taxpayers, on average, will effectively pay larger sums on Rep...
...Billy Tauzin of Louisiana, the leading advocate for one kind of flat tax, a national retail sales tax, says "nothing short of total reform is even worthy of debate...
...And all this ought to happen sooner rather than later—lest Republicans march themselves straight off the cliff...
...There are Americans who receive most or all of their income in the form of government benefits...
...Quite the contrary...
...The side of wholesale, root-and-branch tax reform, not just "a minor tax cut or a few new loopholes...
...Any proposal that fails this test, he says, will not be considered "a legitimate effort...
...There are conservative economists who already see what's coming and worry over its effect...
...As would the biggest sacred cow of them all, mortgage-interest payments...
...We own this issue...
...That would blunt a powerful political argument against the whole idea...
...The employer share of payroll taxes would no longer be deductible, which would have some depressive effect on wages and hiring...
...Eventually, Democrats will figure it all out and unsheath their knives...
...It would double the personal exemption allowed by the existing tax code, and apply a17 percent rate only to income over the $35,000 threshold...
...Most Americans will think they're right...
...What would happen to those dollars in Dick Armey's flat-tax future...
...Forbes is not alone...
...If you've organized your financial life around the existing tax code, and prefer to stay within its confines, Moore would let you...
...Another word for this problem is, pardon the expression, "fairness...
...Don't like the new flat tax...
...Social Security and Medicare payroll taxes are higher than income taxes for most middle-class households...
...And the number on that line is going to be: zero...
...It is a postcard-sized tax return that would replace the bewildering array of current deduction and credit schedules with a uniform 17 percent rate applied to all earned income by businesses and individuals over about $35,000...
...Under the Armey proposal, taxes on such income would disappear...
...The Earned Income Tax Credit, which now provides some relief from those taxes, would be abolished...
...Fringe benefits like health-insurance premiums, now exempt, would be fully taxed...
...Such income would be taxed once and only once...
...Logic, schmogic say the flat-taxers: Look at the Armey proposal as written...
...Voila: a middle-class tax increase—a tax code that traces a bell curve of revenues, on which poor and rich Americans would occupy the lower-tax extremes, and ordinary Joes would find themselves sitting, unhappily, up top...
...Real alternatives should be offered and debated...
...Dick Armey's flat tax is an elegant thing...
...Jeffrey Bell and John Mueller propose to make the flat tax mandatory, but at a lower rate than Armey's and with a more generous payroll-tax credit and broader taxes on capital than Moore suggests...
...Because the particular tax schemes everyone seems so eager to line up behind appear to have serious political and substantive infirmities...
...The problem with the Armey flat tax isn't its simplicity or transparency—or even its "flatness," per se...
...Moore and Bell and Mueller wouldn't abolish double taxation, so they are apostates...
...Next year, if an Armey-model flat tax is the Republican platform, Democratic House and Senate candidates are going to hold up little "Dick Armey" postcards with the names of famous rich people printed on the top...
...But no one in the GOP who matters is yet paying these people much mind...
...Stephen Moore of the Cato Institute proposes to preserve the flatness of Armey's tax...
...Except that the devil is in the details, and even a postcard has details...
...Liberate wealth-creating investors through one of these tax reforms, and all boats will rise, they sing...
...This kind of talk is making us nervous...
...the "double taxation" of interest, dividends, and profits from the sale of capital assets would be abolished...
...Whose side...
...Moore also, importantly, would apply the flat tax to income from capital as well as wages and grant individuals a credit against their payroll tax debts...
...Second Thoughts on the Flat Tax In a just-mailed fund-raising letter on behalf of the Republican National Committee, Steve Forbes concludes with characteristic enthusiasm that "History is on our side...
...It would also go far to convince ordinary Americans that none of their neighbors was any longer getting away with something through the skullduggery of hired accountants...
...Lower- and middle-income Americans now pay their first dollar of taxes at wage rates significantly lower than that, so under the Armey flat tax they would all be better off...
...Well, logic suggests that if government benefits remain untaxed and taxes go down on income from capital, then the federal tax burden must fall even more heavily on wages and salaries than it does at present...
...The GOP had best take its flat tax back to the drawing board and open a serious debate about its particulars and consequences—before it's too late...
...This would make for a simpler and more transparent tax code, one likely to produce a "pro-growth" effect, as its proponents suggest...
...In fact, it's getting close to the point at which any expression of doubt about flat-taxery is judged heretical in the Republican party and its conservative think-tank satellites...
Vol. 3 • November 1997 • No. 9
