One of the purposes behind this blog is to occasionally explore what policies a modern-day Whig would support. What differentiates a Whig from our successor party, the Republicans, is belief in the proper role of the government. A Whig, we believe, should support a more limited government than the big government, deficit-running, "compassionate conservative" Republicans.
One of the issues THE WHIG believes in is the Flat Tax. Our current tax system would never be passed in its current form, it distorts the economy, is overly complex and encourages political corruption.
A good place to start on the Flat Tax is here. A book about the Flat Tax is published by the Hoover Institution. I have read their book, and it makes a thorough and convincing argument in favor of the Flat Tax.
The book, The Flat Tax sets forth the flat-tax plan developed by Robert Hall and Alvin Rabushka, senior fellows at the Hoover Institution, who believe it is the most fair, efficient, simple, and workable plan on the table.
From the book:
Under the proposed flat tax, all income would be taxed once and only once, at a uniform low rate of 19 percent. The plan is fair to ordinary Americans because it would permit a tax-free allowance of $25,500 for a family of four. The family would pay a tax of 19 percent on its earningsabove that allowance. Millions of U.S. residents would no longer pay any income taxes. All wage earners would pay less tax under the flat tax than under the current system.
The flat tax would eliminate the distortions of the present tax treatment of business. It would replace a hodgepodge of depreciation schedules with an effective investment incentive, a first-year write-off. It would reduce the current corporate tax of 35 percent to 19 percent. It would eliminate double taxation of business income by ending taxation of dividends and capital gains.
The flat tax adheres to the principle of a consumption tax: people are taxed on what they take out of the economy, not on what they put in. The flat tax is not an academic abstraction. We have
designed tax forms, rewritten the Internal RevenueCode, and worked out all the practical details.
The flat tax has withstood the scrutiny of leading experts on taxationand has been endorsed enthusiastically by many of them. Both the New York Times and the Wall Street Journal have endorsed our flat tax. Both Republicans and Democrats have introduced it as bills in previous sessions of Congress.
Here are some additional arguments in favor of the Flat Tax, from the Heritage Foundation:
A Single Flat Rate. All flat tax proposals have a single rate, usually less than 20 percent. The low, flat rate solves the problem of high marginal tax rates by reducing penalties against productive behavior, such as work, risk taking, and entrepreneurship.
Elimination of Special Preferences. Flat tax proposals would eliminate provisions of the tax code that bestow preferential tax treatment on certain behaviors and activities. Getting rid of deductions, credits, exemptions, and other loopholes also helps solve the problem of complexity, allowing taxpayers to file their tax returns on a postcard-sized form.
If enacted, a flat tax would yield major benefits to the nation, including:
Faster Economic Growth. A flat tax would spur increased work, saving, and investment. By increasing incentives to engage in productive economic behavior, it would also boost the economy’s long-term growth rate. Even if a flat tax boosted long-term growth by only 0.5 percent, the income of the average family of four after 10 years would be as much as $5,000 higher than it would be under current tax laws.
Instant Wealth Creation. According to Harvard economist Dale Jorgenson, tax reform would boost national wealth by nearly $5 trillion. It would do this in part because all income-producing assets would rise in value since the flat tax would increase the after-tax stream of income that they generate.
Simplicity. Complexity is a hidden tax amounting to more than $100 billion. This is the cost of tax preparation, lawyers, accountants, and other resources used to comply with the Internal Revenue Code. The Internal Revenue Service even admits that the current tax code requires taxpayers to devote 6.6 billion hours each year to their tax returns. Yet even this commitment of time is no guarantee of accuracy. The code is so complex that even tax experts and the IRS often make mistakes. All taxpayers, from General Motors to a hamburger-flipping teenager, would be able to fill out their tax return on a postcard-sized form, and compliance costs would drop by tens of billions of dollars.
Fairness. A flat tax would treat people equally. A wealthy taxpayer with 1,000 times the taxable income of another taxpayer would pay 1,000 times more in taxes. No longer would the tax code penalize success and discriminate against citizens on the basis of income. Tax burdens would no longer depend on the number of lawyers, lobbyists, and accountants on the payroll.
An End to Micromanaging and Political Favoritism. A flat tax gets rid of all deductions, loopholes, credits, and exemptions. Politicians would lose all ability to pick winners and losers, reward friends and punish enemies, and use the tax code to impose their values on the economy. Not only does this end a major source of political corruption, but it is also pro-growth since companies would no longer squander resources lobbying politicians or making foolish investments just to obtain favorable tax treatment.
Increased Civil Liberties. Under current law, people charged with murder are presumed innocent and thus have more rights than taxpayers dealing with the Internal Revenue Service. By contrast, a flat tax would eliminate almost all sources of conflict between taxpayers and the government. Moreover, infringements on freedom and privacy would fall dramatically since the government would no longer need to know the intimate details of each taxpayer’s financial assets.
Global Competitiveness. In a remarkable development, former communist nations are leading a global tax reform revolution. Estonia was the first to adopt a flat tax, implementing a 26 percent rate in 1994, just a few years after the collapse of the Soviet Union. The other two Baltic republics of the former Soviet Union enacted flat taxes in the mid-1990s, with Latvia choosing a 25 percent rate and Lithuania picking 33 percent. Along with other free-market reforms, the flat tax significantly improved economic growth, and the “Baltic Tigers” became role models for the region.
Learning from its neighbors, Russia stunned the world by adopting a 13 percent flat tax, which went into effect in 2001. The Russian flat tax quickly yielded positive results: The economy prospered, and revenues poured into government coffers since tax evasion and avoidance became much less profitable. The flat tax then spread to Serbia, which in 2003 chose a 14 percent rate. Slovakia hopped on the bandwagon the following year with a 19 percent flat tax, as did Ukraine, which chose a 13 percent tax rate. Romania joined the flat tax revolution with a 16 percent tax rate, and Georgia adopted a 12 percent flat tax rate, which has the honor, at least temporarily, of being the lowest rate in the world.
The flat tax revolution has been so successful that Estonia is lowering its rate to keep pace with other nations. The Estonian flat tax is now down to 20 percent, and Lithuania is in the process of lowering its 33 percent flat tax to a more reasonable 24 percent. Poland’s government just announced that it will implement an 18 percent flat tax, and lawmakers in Croatia, Bulgaria, and Hungary are also considering tax reform. Last but not least, the opposition parties in the Czech Republic have promised to implement 15 percent flat tax regimes.
In a global economy, it is increasingly easy for jobs and capital to escape high-tax nations and migrate to low-tax nations. This means that the reward for good tax policy is greater than ever before, but it also means that the penalties for bad policy are greater than ever before. This is why so many nations are lowering tax rates and reforming their tax systems.
A flat tax will make America a magnet for investment and job creation.