The Flat Tax: Updated Revised Edition (HOOVER INST PRESS PUBLICATION)
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Last annotated on March 12, 2017
The tax code has become near incomprehensible except to specialists. Daniel Patrick Moynihan Chairman, Senate Finance Committee, August 11, 1994 I would repeal the entire Internal Revenue Code and start over. Shirley Peterson Former Commissioner, Internal Revenue Service, August 3, 1994 Tax laws are so complex that mechanical ruleshave caused some lawyers to lose sight of the fact that their stock-in-trade as lawyers should be sound judgment, not an ability to recall an obscure paragraph and manipulate its language to derive unintended tax benefits. Margaret Milner Richardson Commissioner, Internal Revenue Service, August 10, 1994 It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. Alexander Hamilton or James Madison, The Federalist, no. 62 Read more at location 38
The Declaration of Independence was in large measure a bill of particulars against British taxation.Read more at location 57
One, the federal income tax is not simple. Two, the federal income tax is too costly. Three, the federal income tax is not fair.Read more at location 332
This chapter makes three important points. First, the flat tax is fair on the basis of historical and commonsense notions of fairness. Second, the flat tax is fair based on who pays, especially when compared with the current U.S. federal income tax system. Third, the flat tax enjoys wide support from all sides of the political spectrum and the media. Read more at location 358
To discriminate among equal classes of taxpayers is arbitrary, capricious, and generally regarded as wrong.Read more at location 377
Economists use the term horizontal equity to mean that people under similar circumstances should bear equal tax burdens. As a general principle, a flat tax (also called a uniform, proportional, or single-rate tax) satisfies this norm. Even Harvard philosopher John Rawls, a fervent advocate of redistribution, concludes in his controversial book A Theory of justice that "a proportional expenditure tax may be ... the best tax scheme."Read more at location 383
In practice, the horizontal equity norm invariably includes a provision for exempting low-income families from income taxes. Today, this provision takes the form of a combination of personal exemptions and the standard deduction. Read more at location 387
the imposition of steeply graduated tax rates was seen by many as a desirable way to achieve greater equalityRead more at location 392
Those in charge of this intellectual and political transformation found a new norm of vertical equity with which to replace the former, established norm of horizontal equity. They called this new norm the ability to pay. Read more at location 394
is not rooted in the philology of, or in traditional approaches to, fairness.Read more at location 395
Vertical equity does not fare well in practice. Despite attempts to equalize after-tax incomes through steeply graduated tax rates, one Congress after another has riddled the tax code with hundreds of loopholes that permit some millionaires to pay no income taxes whatsoever and some high earners to pay low taxes. Good examples are tax-free municipal bonds and charitable contributions. Other loopholes permit the wealthy to exploit tax shelters that reduce large incomes to modest levels of taxable income.Read more at location 400
"there is no evidence that the income tax significantly redistributes income."Read more at location 402
every time tax rates are increased, Congress, in response to political pressures from organized interest groups, inserts new deductions and loopholes into the tax code to offset the effects of higher rates.Read more at location 403
Three episodes of major changes in tax legislation in the 1920s, 1960s, and 1980sRead more at location 574
effective way to increase progressivity and collect more taxes from the rich is to lower, not raise, marginal rates of taxation. Read more at location 575
under the ax of Secretary of the Treasury Andrew Mellon, who cut the top rate to 25 percent. Read more at location 578
Professors James Gwartney and Richard Stroup have analyzed tax receipts by income categories before and after the Mellon reductions.Read more at location 578
After the reductions, the highest income category paid substantially more in absolute tax dollars and nearly doubled its share of total federal revenues. The lowest income category paid almost 80 percent less in absolute dollars, and its share of the total burden fell from 23 to 5 percent (see table 2.1).Read more at location 579
To repeat, cutting the top rate from 77 percent to 25 percent produced a more progressive tax system. Read more at location 580
One big reason is that formerly high-bracket taxpayers shifted assets from tax-free bonds into productive outlets.Read more at location 582
Kennedy's legislation reduced all brackets, from a range of 20 to 91 percent to 14 to 70 percent.Read more at location 592
Using income data reported by the IRS, Lawrence B. Lindsay compared taxes paid by high-income taxpayers before and after the 1964 rate reductions. In 1965, the first year for which the new rates applied, high-income taxpayers declared more taxable income and paid more in taxes than they would have paid under the old law. The trend was especially pronounced in the highest bracket (see table 2.2). Read more at location 595
the highest brackets shifted money from consumption or tax-sheltered investments into more productive, taxable investments;Read more at location 597
The Tax Reform Act of 1986 further reduced the top rate of 50 percent to 28 percent.Read more at location 602
The share of total individual income taxes paid by the top 1 percent (by adjusted gross income category) rose from 17.9 percent in 1981 to 25.6 percent in 1990 (see table 2.3). The share paid by the top 5 percent rose from 35.4 percent to 44 percent and by the top 10 percent from 48.2 percent to 55.7 percent. The bottom 50 percent reduced its contribution from 7.4 percent in 1981 to 5.7 percent in 1990. Read more at location 603
when tax rates fall, upper-income households shift assets out of instruments that generate tax-exempt income, or from schemes that are designed to shelter income, into taxable economic activity.Read more at location 606
The 1990 budget accord raised the top personal tax rate from 28 percent to 31 percent. This marginal tax rate increase was part of President George Bush'sRead more at location 608
The IRS statistics for 1991, the first taxable year following the 1990 tax rate increase, reveal that the superrich, the top 1 percent of income distribution, and the ordinary rich, the top 5 percent, both paid smaller shares of total income taxes in 1991 than in 1990.Read more at location 611
When prices fall, they buy more of an item; when prices rise, they buy less. Read more at location 625
Democrats Bill Bradley and Richard Gephardt and Republicans Bob Kasten and Jack Kemp. Read more at location 649
former California Governor Jerry Brown. As a candidate for the Democratic Party's presidential nomination in 1992,Read more at location 665
Because its base is broad, the astonishingly low 19 percent tax rate raises the same revenue as does the current tax system.Read more at location 695
Our system rests on a basic administrative principle: income should be taxed exactly once as close as possible to its source.Read more at location 698
Whenever different forms of income are taxed at different rates or different taxpayers face different rates, the public figures out how to take advantage of the differential. The basic trick is to take deductions at the highest available rate and to report income at the lowest rate.Read more at location 702
principle-neither a federal sales tax nor a value-added tax is progressive.Read more at location 710
A flat rate, applied to all income above a generous personal allowance, provides progressivity without creating important differences in tax rates.Read more at location 712
high-income taxpayers who have the biggest incentive and the best opportunityRead more at location 714
the current system puts substantial taxes on the earnings from savings. On that account, the economy is biased toward too little saving and too much consumption.Read more at location 717
The overall effect of the existing incentives is spotty-there are excessive incentives for some saving-investment channels and inadequate incentives for others.Read more at location 720
All income is taxed, but the earnings from saved income are not taxed further.Read more at location 721
Total revenue from sales of goods and services less purchases of inputs from other firms less wages, salaries, and pensions paid to workers less purchases of plant and equipment Read more at location 737
These computations show that in 1993 the revenue from the corporate income tax, with a tax rate of 35 percent, was $118 billion. The revenue from our business tax at a rate of 19 percent would have been $362 billion, just over three times as much, even though the tax rate is not much more than half the current corporate rate.Read more at location 750
more than half of business income is from noncorporate businesses-professional partnerships, proprietorships, and the like.Read more at location 752
The other side of the coin, of course, is that our wage tax would yield less revenueRead more at location 761
The switch to the more reliable principle of taxing business income at the source,Read more at location 764
The base of the tax is defined narrowly and precisely as actual payments of wages, salaries, and pensions.Read more at location 773
Many features of current taxes would disappear, including charitable deductions, mortgage interest deductions, capital gains taxes, dividend taxes, and interest taxes.Read more at location 782
taxation of individual business income at the source is possible because we already know the tax rate of all of the owners of the business-it is the common flat rate paid by all taxpayers. If the tax system has graduated rates, taxation at the source becomes a problem.Read more at location 796
The business tax is a giant, comprehensive withholding tax on all types of income other than wages, salaries, and pensions.Read more at location 803
all income that people receive from business activity has already been taxed.Read more at location 805
tax system does not need to worry about what happens to interest, dividends, or capital gainsRead more at location 806
The tax would be assessed on all the income originating in a business but not on any income that originates in other businessesRead more at location 810
Many deductions allowed to businesses under current laws are eliminated in our plan, including interest payments and fringe benefits.Read more at location 826
We sweep away the whole complicated apparatus of depreciation deductions, but we replace it with something more favorable for capital formation, an immediate 100 percent first-year tax write-off of all investment spending.Read more at location 830
The cost of fringes is deductible by businesses, but workers are not taxed on the value of the fringes.Read more at location 833
As taxation has become heavier and heavier, fringes have become more and more important in the total package offered by employersRead more at location 834
The explosion of fringes is strictly an artifact of taxation and thus an economically inefficient way to pay workers.Read more at location 835
Were the tax system neutral, with equal taxes on fringes and cash, workers would rather take their income in cash and make their own decisions about health and life insurance, parking, exercise facilities, and all the other things they now get from their employers without much choice.Read more at location 836
When a company is having an outstanding year in sales and profits but is building new factories to handle rapid growth, it may well have a low or even negative taxable income.Read more at location 847
business tax treats investment in plant, equipment, and land as an expense,Read more at location 848
Moreover, balances carried forward will earn the market rate of interest (6 percent in 1995).Read more at location 851
