Many persons have asked what I think of proposals to replace our progressive rate income tax system with a so-called flat-rate income tax.
My answer to them is simple: "If you're rich you'll love it; if you're not rich, look out!"
A pure flat-rate income tax would eliminate all deductions and tax everyone at a single rate. For example, with a flat rate of 10 percent, a $20,000- a-year worker would pay $2,000 in federal income taxes, while a person with a $200,000-a-year income would pay $20,000. Our "progressive" system permits deductions and taxes individuals at rates ranging from 12 to 50 percent, depending on income. This system is based on the principle that those with large incomes should pay a higher percentage than those with low incomes.
Advocates of a flat-rate tax have correctly argued that our present system is complicated and in need of simplification. The question is whether it is justifiable to shift the tax burden from the rich to the middle- and low-income taxpayers in the name of simplicity.
In my view, simplification of the tax system and flat rates are completely separate issues. If it is desirable to close loopholes in order to reduce tax rates, that can be done without the massive shift in tax burden involved in a flat-rate tax. I am concerned that some proponents of a flat-rate system are using simplification as a convenient slogan to justify big tax cuts for the rich at the expense of middle-and lower-income taxpayers.2
Much of the support for a flat-rate tax is inspired by the belief that "fat cats" use loopholes to avoid paying their fair share of taxes under the present system. But what constitutes a loophole is in the eye of the beholder. I doubt that many middle-income homeowners consider their home mortgage interest deductions a "loophole." But how do the millions of taxpayers who do not own their homes view this deduction?
Other deductions--or loopholes--that would be eliminated by a flat-rate tax include charitable and church donations, consumer installment interest, state and local taxes, union dues, medical bills, moving expenses, alimony and educational expenses.
Employer-paid fringe benefits, such as health and life insurance, pension contributions, subsidized parking and educational expenses, would be subject to full taxation. Also subject to immediate taxation would be the gain a homeowner makes when he sells his home. At present, homeowners are permitted to defer tax payment on the sale of their homes if they purchase new ones of equal or higher value within a certain period.
Congress' Joint Committee on Taxation recently reported how an 11.8 percent flat-rate tax on adjusted gross income would affect taxpayers. Using adjusted gross income figures for 1984, the Joint Committee found that the amount of taxes paid by persons with incomes below $30,000 would increase by percentages ranging from 12.8 to an astronomical 1,259. However, taxes for those earning more than $30,000 a year would decrease by amounts ranging from 5 percent to 53.2 percent.
In studies on flat-rate taxes, the Congressional Research Service found that under present law, taxpayers with adjusted gross incomes below $30,000 a year pay 41 percent of the total of federal income taxes raised from individuals. However, if a flat-rate tax of 15.5 percent were imposed, that same group of moderate- and low-income taxpayers would end up paying 58.2 percent of all individual federal income taxes.
Sponsors of some of the flat-rate bills attempt to remedy the built-in inequities of this type of system by allowing some deductions, by increasing the personal exemption allowance, by exempting low-income persons from all taxes and by imposing several--rather than a single--tax rates. All that most of these modifications do is reduce the degree of unfairness in an inherently unfair system. I know that once one type of deduction in a flat-rate tax system is allowed, Congress would be unable to resist the pressure for numerous other deductions.
Justice and fairness require that those who make large amounts of money should pay a higher rate of tax on income than middle- and low-income families. It seems totally unfair to have a person earning $15,000 a year paying the same rate as someone making $1 million.
I strongly support reducing taxes and simplifying our income tax system, and have worked to do so for many years. Our efforts toward simplification made it possible last year for 40.7 percent of the taxpayers to file their income taxes on the so- called short form, which usually can be completed in less than an hour. Another sign of progress in our efforts at tax simplification is the fact that 79 percent of taxpayers in 1980 chose not to itemize their deductions. Further work toward simplification is needed, and I intend to continue to push for a simpler and fairer tax system.
I am not arguing that the concept of a flat-rate income tax should be ignored. In fact, I favor giving this idea a thorough study, as the Senate Finance Committee is scheduled to do this year.
Perhaps a way can be found to structure a flat- rate income tax system that will be fair to all. But until such a system is found, the flat-rate income tax will not have my support.