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Flat taxes and flat taxes

GB Geo-Blog

Flat taxes and flat taxes

As the election year approaches in the US, proposals for a flat tax re-surface. Several of the Republican candidates have set out their versions of a flat tax. And as soon as one proposal is offered, the critics jump up. The critics tend to be supporters of the Democrats, and their criticisms focus on the same two issues: complexity and inequality.

Robert Frank, an economics professor at the Johnson Graduate School of Management at Cornell, highlighted these two issues in his column in this past Sunday New York Times. He argued: “The contention that a flat tax would be simpler because it involves only a single rate is flatly wrong. The complexity of the current system has nothing to do with its multiple income brackets. The hard part in figuring out your tax bill is to compute your adjusted gross income…The much more serious concern is that a flat tax would reinforce the trends toward greater income inequality.”

He and other critics deliberately miss the point on complexity vs. simplicity. I suspect that the critics share the same concern as the proponents about the existing tax system; namely, that it is unnecessarily complex. The principal argument in favor of a flat tax is that a real flat tax system would greatly simplify the current system.

All income, regardless of its source, would be tallied to determine a taxpayer’s gross income. Realized and unrealized capital gains on all assets, excluding perhaps a family’s primary residence, would be included. I would favor excluding all realized and unrealized capital losses in the calculation of gross income. Why should we subsidize gambling? Exclusion would make gambling more risky. Business income in the case of unincorporated sole proprietorships and partnerships would be based entirely on operating cash flows.

The only deduction allowed would be a fixed amount either per individual or per family. All other existing deductions would be terminated. To satisfy the concerns of those who worry that a flat tax would not be progressive, multiple rates could be part of the system.

A real flat tax likely would be much more progressive than the current system and would greatly reduce the costs for taxpayers in preparing and filing their returns. Obviously, many vested interests who benefit from the current complexity would descend in hordes on Washington to oppose any such move.

Leadership requires standing up to special interests and supporting measures that are more efficient and produce more winners than losers. Unfortunately, there is no such leadership in Washington at this time or even on the horizon.

Thus, the real issue is not the straw man constructed to oppose simplification and progressiveness, but the flaw in the electoral system that prevents real leaders from being elected.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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