Again with the flat tax?!
As the fumes of a presidential election begin to permeate the land, we should not be the slightest bit surprised to yet again be hearing about the alleged pristine beauty of the flat tax. This time, candidates Sen. Ted Cruz (R-Tex.) and Sen. Rand Paul (R-Ky.) are touting the tax (in the last round, Rick Perry and Herman Cain ran on flat taxes).
The idea always sounds appealing — at least I thought it did…read on — because everyone, present company included, hates the complexity in the tax code, and its proponents sell the flat tax as the perfect antidote.
Unfortunately, it’s far from perfect and in any real-world incarnation would be a lot worse than the current code on at least two key dimensions: fairness and fiscal. It’s a highly regressive tax that would mean the loss of gobs of revenue.
Moreover, its simplicity is a ruse. The thing that complicates the tax code is not the number of rates. It’s the myriad ways in which we define different types of income. It’s all the preferences, deductions and credits.
Now, you might argue that a flat tax will get rid of those, but all that tells me is that a) you don’t know the tax lobby, and b) you’re one of the few people who’s not running for president. I deduce “b” from the fact that I find it extremely hard to envision a viable candidate who tells people that she’s going to get rid of the mortgage interest deduction. Or, if she’s a Republican (or a Wall Street-oriented Democrat), that she’s going to get rid of tax preferences for capital gains, dividends, and the interest-based financing that’s the mother’s milk of private equity investors.
Economist Alan Blinder makes this point — that complexity is driven by how we define income, not by the number of rates — intuitively: “…consider the fact that the corporate income tax is virtually flat once a corporation passes a paltry $75,000 in taxable income. Is it simple?”
The regressivity of the flat tax is another big problem. Our current federal income tax code is progressive (rates rise with income), and every distributional analysis I’ve ever seen of a flat tax shows a transfer of the tax burden from the wealthy to the middle class. According to the Tax Policy Center’s score of the Perry tax plan, the tax bill of families with incomes between $30,000 and 40,000 would go up by about $450, while that of millionaires would fall by about half a million bucks.
It would also lower revenue by between $500 billion and $1 trillion per year.
Still, I always thought the public liked the sound of the flat tax, so I was surprised and heartened to see the results of this poll for WalletHub showing that less than a quarter of respondents liked the idea (h/t: Patricia Cohen). In fact, and I quite like the way they got at this (see chart above), they find majority support for progressive taxation. As I read them, figures B through D above reveal that respondents favor a gradual, progressive system that does not exempt the poor.
So, what we have with the flat tax is a regressive, revenue-losing proposition that’s unpopular with a public that prefers progressivity in the tax code.
To be clear, there are theoretical attributes that attract some economists to the flat tax, as it incentivizes savings and is thought to engender less distortionary behavior than the current code. But those efficiencies depend on a broad base (i.e., closing all the loopholes noted above) and a high enough rate to maintain revenue neutrality (to the extent that the flat tax works like a consumption tax, its efficiencies also depend on taxing existing wealth, or “old capital,” as any income generated by old wealth is taxed as it is consumed). I strong disbelieve that any of those conditions would be maintained, especially in a presidential race.
Since this debate gets dragged out of the closet with depressing regularity, I tried to spruce things up a bit with a poem, composed for a segment on the topic on the MSNBC show “Up with Steve Kornacki”:
If a calendar year can be divided by four
A flat tax will come knocking at your door
You want my opinion, it’s a total snoozer
Highly regressive and a revenue loser.
The middle class views the flat tax with great consternation
For their tax bill would go up across this great nation
No question our tax code is fraught with complexity
But a flat tax won’t fix that, neither here nor in Schenectady.
OK, sorry about the bit at the end, but you try to find a rhyme for complexity (“convexity,” maybe, but good luck with that).