Reigniting the Flat Tax debate: Why is this solution repeatedly ignored?

Reigniting the Flat Tax debate: Why is this solution repeatedly ignored?

WASHINGTON, June 23, 2014 — Recently, Rep. Dave Camp, R-Mich., the chairman of the House Ways and Means Committee, proposed a sweeping overhaul of the nation’s tax code. His plan would cut the overall corporate tax rate by creating a new bank tax and a surtax on the very wealthy, among many other changes.

Two days after he proposed his plan, Camp traveled to Park City, Utah for a fund-raiser attended by lobbyists from some of the nation’s largest corporations, all with enormous stakes in any changes to the tax code.

READ ALSO: Dear Donald Rumsfeld: US Tax Code is an arbitrary, unpredictable and cruel nightmare

According to The New York Times, this meeting turned into “the unofficial kickoff of a push to make sure Mr. Camp’s tax plan dies … lobbying in Washington, and the millions of dollars in fees that lobbyists collect, are often about stopping action and preserving the status quo. Whenever Congress considers major changes to the tax code, lobbyists buy insurance on both sides of the fight.”

The very lobbyists who had been supporting Camp’s three-year effort to draft this legislation, given that its stated purpose was to lower corporate tax rates and simplify the tax code, are now working to make sure the package never becomes law. In this, the lobbyists appear already to have won since Camp has essentially conceded defeat, announcing that he will not seek re-election this year.

Our current tax code is a key component of crony capitalism, as much as government subsidies to agribusiness and bail-outs of Wall Street and General Motors. Traditionally, conservatives, not necessarily Republican members of Congress, have been in the forefront of promoting tax reform.

Columnist George Will points out that, “In addition to minimizing growth-suppressing economic distortions, tax simplification would reform politics by shrinking opportunities for transactions between private factions and the political class. This class confers favors as much with the tax code as with appropriations.”

Large corporations, it seems, are happy with the complicated tax code we have, and which its lobbyists have worked so hard to enact. Just as Camp announced his retirement from Congress, officials of Caterpillar testified before the Senate Permanent Committee on Investigations, explaining why, since 1999, the company had been channeling its most profitable operations through a subsidiary in Switzerland, where it negotiated a tax rate just a fraction of the American rate. More than $2 trillion in profits were kept offshore, and not taxed. It was all, Caterpillar officials testified, perfectly legal.

Sen. John McCain, R-Ariz., asked why the IRS had not brought a case against Caterpillar, and whether it still could. “I don’t have a lot of confidence in the IRS, and now I have even less,” he said.

Our tax code is the best one money can buy. There was a time, not too long ago, when there was widespread support for a flat tax. Somehow, this idea is hardly mentioned at all anymore.

In 1995, House Majority Leader Richard Armey, R-Texas, proposed a plan which would tax all income at a flat rate of 17 percent. Taxpayers would simply add up their wages, salaries and pensions, subtract personal and dependant deductions, and pay 17 percent of the remainder. With a personal deduction of $26,200 for a married couple and $5,300 per child, a family of four earning $36,800 would pay nothing. (All of these figures, of course, would be adjusted for inflation.)

Some critics argued that such a plan would be “regressive,” with lower income families paying a larger share of their income. This, however, would not be the case. A family of four earning $50,000 would pay 4 percent of its earnings, while a similar family earning $200,000 would pay 14 percent. The high personal deductions make certain that the flat tax is progressive.

The idea of a flat tax always had bipartisan supporters. During the 1992 presidential campaign, Democratic candidate Jerry Brown presented a plan for a flat tax. One of the prime promoters of a flat tax in the early 1980s was Leon Panetta, soon to become President Clinton’s chief of staff, then a liberal Democratic member of Congress.

READ ALSO: Is taxation just a gateway drug to our spending addiction?

Panetta sponsored a bill that would have required most Americans, regardless of income, to pay an income tax of 19 per cent with no deductions.

“If we don’t do something to simplify the tax system,” Panetta said at the time, “we’re going to end up with a national police force of internal revenue agents.”

At the same time, House Minority Leader Richard Gephardt, D-Mo., developed a proposal for a modified flat tax of 10 or 11 percent to replace the graduated income tax system.

The Washington Post reported, “Gephardt’s plan strongly resembles an approach advocated by House Majority Leader Richard Armey.”

While there was disagreement about the details of a flat tax approach, there appeared to be a growing consensus that the current system of taxation is costly, unfair, and harmful to economic progress and must be changed.

Discussing our tax rules, Norman Ture, president of the Institute for Research On the Economics of Taxation, declared, “The federal individual and corporate income taxes satisfy no understandable test of fairness. They are enormously complex, entailing huge costs of compliance, administration and enforcement.

They substantially increase the costs of saving and investment for individuals and business, impede the efficient operation of the market system, and impose barriers to effective competition by U.S. businesses in the world marketplace. They cause the nation to have lower levels of output and income than it would enjoy if taxes distorted economic activity less.”

Estimates show that taxpayers spend more than 5 million man-hours filling out more than 250 different tax forms, resulting in a dead weight loss to the economy of more than $600 billion a year. The tax system is so complex that while 50 years ago only 10 to 15 percent of the population sought professional help to complete their tax forms, that number is now an overwhelming majority.

Even the IRS cannot understand the tax code. An internal IRS survey showed that people trained and employed by the IRS computed the wrong tax 72 percent of the time when handling relatively simple tax problems.

The IRS Code contains thousands of pages of tax regulations. It enumerates rules, exceptions to the rules, and exceptions to the exceptions. The eight volumes of the Internal Revenue Code, in a recent year, filled more than 5,000 pages and weighed more than 12 pounds.

An early detailed proposal for a flat tax can be seen in the book “The Flat Tax,” published in 1985. The authors, Robert F. Hall and Alvin Rabushka, Senior Fellows at the Hoover Institution, point out that one of the major problems with the current system of taxation is that it penalizes success and hard work and rewards placing money in nonproductive “tax shelters” rather than in job creating enterprises.

They write, “when individuals and business arrange their financial affairs on the basis of tax advantages, instead of the production of more income, the economy as a whole suffers. Sheltering income has become a major industry, consuming an ever-larger share of the nation’s top talent.”

The current system, they argue, is also “unfair to wage earners, who cannot easily cheat when their incomes come solely from wages and salaries on which taxes are directly witheld.” In addition, “By graduating rates it provides an incentive to hide income rather than produce it. A tax is efficient if it brings minimal price distortions. An efficient system of taxation would collect money without seriously influencing individual decisions on how much to work and to save and where to invest. It would not discourage people who put in longer hours to earn more income. It would not reward borrowing and penalize savings. It would not tax savings twice, once when the money is earned and again when the money earns a return. An efficient system would not be riddled with exemptions, deductions and credits that direct money to investments with lower tax liabilities instead of to investments that increase real output at the highest rates of return.”

With a flat tax, returns would be filed on a form the size of a postcard. The flat tax would abandon use of the tax code for purposes of social engineering, to stimulate some kinds of activities and discourage others.

In this connection, Rep. Armey declared, “The great virtue of this system is that it is neutral. It does not seek to guide the economic decisions of free Americans. Someone once said that beyond setting the tax rate, everything else in tax policy is really social policy, and that’s exactly right. Today’s arcane tax code is as much an exercise in social engineering and economic planning as it is a method for efficiently raising tax revenue. Through a bewildering array of deductions, exemptions and credits, the politicians who wrote the code tell us, among other things, that investing in a municipal sewer system is better than investing in the next Microsoft. I reject the idea that tax writers are competent to make these decisions…free Americans can certainly decide where to put their own money far more wisely than can members of Congress. A government does not have the right to use the tax system to massively influence the economic decisions of its citizens.”

Under a flat tax, said Nobel Prize winning economist Milton Friedman, “the economy would be better off, because tax considerations would play a smaller role in the allocation of resources. The only losers would be lawyers, accountants, civil servants and legislators, who would have to turn to more productive activities than filling in tax forms, devising tax loopholes, and trying to close them.”

Now, in 2014, no one ever mentions the flat tax. Even modest efforts at tax reform, such as that proposed by Rep. Camp, are dead on arrival. Too many in our society have a vested interest in the current system. They, and their highly paid lobbyists, will vigorously fight every effort at reform. The debate over the flat tax was high on the national agenda twenty years ago.

Anyone interested in a tax system which is fair and transparent should re-think the flat tax. It is time for a real debate to begin.

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Allan C. Brownfeld
Received B.A. from the College of William and Mary, J.D. from the Marshall-Wythe School of Law of the College of William and Mary, and M.A. from the University of Maryland. Served as a member of the faculties of St. Stephen's Episcopal School, Alexandria, Virginia and the University College of the University of Maryland. The recipient of a Wall Street Journal Foundation Award, he has written for such newspapers as The Houston Press, The Washington Evening Star, The Richmond Times Dispatch, and The Cincinnati Enquirer. His column appeared for many years in Roll Call, the newspaper of Capitol Hill. His articles have appeared in The Yale Review, The Texas Quarterly, Orbis, Modern Age, The Michigan Quarterly, The Commonweal and The Christian Century. His essays have been reprinted in a number of text books for university courses in Government and Politics. For many years, his column appeared several times a week in papers such as The Washington Times, The Phoenix Gazette and the Orange County Register. He served as a member of the staff of the U.S. Senate Internal Security Subcommittee, as Assistant to the research director of the House Republican Conference and as a consultant to members of the U.S. Congress and to the Vice President. He is the author of five books and currently serves as Contributing Editor of The St. Croix Review, Associate Editor of The Lincoln Review and editor of Issues.