We are desperately in need of tax reform. It is my purpose to evaluate the predominate plan on the political scene today and attempt to answer the question, “Is the flat rate tax reform plan a great solution or a grand delusion?”
SUMMARY OF THE FLAT TAX
Several flat tax plans have been proposed. Rep. Richard Armey (R-TX) and Sen. Richard Shelby (R-AL) have sponsored the “Freedom and Fairness Restoration Act” (FFRA) in Congress. Their plan is based on the ideas proposed by Robert Hall and Alvin Rabushka of Stanford University. Steve Forbes, the Editor-in-Chief of Forbes magazine and candidate for the Republican presidential nomination in the 1996 election, has also proposed a flat tax plan.
All of the major plans have several key factors in common. The primary part of each plan is the implementation of a single flat tax rate, for both individual income tax and business income tax. The rate suggested in the FFRA is 17%. The second ingredient that the plans share in common is the elimination of all deductions, credits and exemptions (except personal and child allowances). The third major facet of the major proposals is the elimination of the current double taxation imposed on savings income and investment income.
The proponents of these flat tax proposals agree conclusively that there will be two definitive results if their tax reform ideas are implemented. The first result is obvious and almost goes without saying, for both proponents and opponents agree that a flat rate tax will bring “simplicity” into an incomprehensibly complicated tax system. There is a consensus among proponents that a flat tax will also result in significant “economic growth,” although opponents generally disagree.
STRENGTHS OF THE FLAT TAX
The flat rate tax will be simple and easy primarily because it will replace the current seven million word tax code (ten times longer than the Bible—the Bible being only 773,000 words long). [1] Gone will be the days of complex and incomprehensible tax laws, complicated and frustrating tax forms, and time- and energy-consuming record keeping.
The flat rate tax will be efficient and economical primarily because it will be simple and easy. Over five billion hours [2] a year that it currently takes to keep appropriate records and fill out tax forms will be essentially saved (except for slight residual record keeping time). Over $200 billion that is presently expended trying to comply with the tax code [3] will be substantially rescued for more profitable uses. Approximately $100 billion worth of uneconomical investments made for tax purposes [4] will be salvaged for more productive endeavors.
The flat rate tax will increase fairness because it will establish a much greater degree of horizontal equity (equal treatment of people with equal income). In addition, it will restore an authentic, just version of vertical equity (people with higher income pay more taxes). [5] Everyone, regardless of income, will have the same personal allowances and child allowances, and will pay the same flat rate on their income. All businesses, regardless of size, will pay the same flat rate on their profits. Those with higher incomes will pay more than those with lower incomes, but they will do so at the same percentage tax rate. In some cases they will pay significantly more, simply because they have a much higher income. This is fair, for although their total tax bill is higher, their tax rate is the same. This model of “fairness” differs significantly from the modern “progressive” definition that demands not just the paying of higher taxes but requires the paying of higher tax rates. The dictionary defines fair as “just and honest; impartial; unprejudiced.” [6] Those who promote the “progressive” income tax as being “fair” are obligated to give new meanings to a variety of words in order to reinforce their ideologically motivated re-definition of “fairness.” By most definitions and standards of fairness the flat rate tax is fair.
The flat rate tax will eliminate preferential treatment of both individual and corporate special interests. This will result in two benefits with moral ramifications. It has been suggested that “tax reform is also the route to effective campaign finance reform—since making changes in the tax code is the main objective of special-interest groups. A flat tax . . . could end tax lobbying forever.” [7] The prospect of killing two monstrous birds with one stone is encouraging. There are an estimated 13,000 registered lobbyists and special interest groups in Washington D.C., half of which are there for “the precise purpose of manipulating the tax code to their own advantage.” [8] Unethical campaign financing is widespread and well documented. Political favors in exchange for political contributions for the sake of political expediency is likewise widespread (but not quite so well documented). Flat rate tax reform will do much to remove these two major unethical political practices.
For the above stated reasons, especially those relating to economic fairness and political morality, a flat rate tax would serve the interests of public justice and the righteous ordering of our political and economic institutions.
In addition, the flat rate tax would cultivate three major principles of Biblical Stewardship: Cultivation, Conservation and Compassion.
The Cultivation Principle — proper management of time, energy, skills, and labor
The current progressive income tax system diminishes motivation to work hard and succeed, discourages ambitious initiative and productivity, and is a disincentive to make extra sacrifices of time and energy to achieve career promotions and higher living standards. A flat rate tax would have just the opposite effect on incentive and motivation to work and succeed.
The progressive income tax system also inhibits entrepreneurial ventures by minimizing the rewards that are a primary motivation for taking risks with capital. A flat rate tax, on the other hand, promises to allow the entrepreneur to keep all profits beyond the uniform flat rate, regardless of the degree of profitability. Entrepreneurial adventures will increase in direct proportion to the rising productivity and income (which in turn is the result of increased incentive to work hard and succeed). As incomes rise there will likely be a proportionate growth in savings and investments. There are two reasons to expect this result: 1) Individuals will have more discretionary income to manage–some of which will be spent, some given away and some saved and invested; and 2) The removal of double taxation on income generated from savings and investments will increase the motivation to use resources for cultivation and conservation purposes rather than consumption purposes. This growth in investment capital in conjunction with a probable lowering of interest rates will be a catalyst for entrepreneurial pursuits.
Investment cannot always be measured in economic terms, nor can the principle of cultivation always be measured in monetary terms and financial return. A considerable amount of cultivation of human capital occurs when resources are given away to religious and educational institutions. Likewise, human capital blossoms when money is “invested” (contributed) in the development of the arts and sciences. Wherever these “non-economic” facets of culture are nurtured and cultivated economic pursuits also tend to flourish.
The Conservation Principle — a frugal and prudent management of property
Both saving and investment involve a conservation of resources resulting in the preservation of old capital (in contrast to consumption). They also involve the cultivation of resources resulting in the creation of new capital. Although saving does not substantially increase wealth (interest rates often barely keeping pace with inflation), it does provide capital for entrepreneurial ventures and business research and development, both of which cultivate a growth of wealth. Much of what was said pertaining to the principle of cultivation above relates to the conservation principle as well, because cultivation requires both the conserving and expanding of resources.
The Compassion Principle — a charitable use of property for the benefit of others
The compassion principle has two major areas of application: 1) giving to provide for the physical necessities of life; and 2) giving to provide for the spiritual necessities of life. Many will benefit from a flat rate tax by having more discretionary income. Charitable giving will likely be divided between these two areas. Both are equally in the realm of compassionate giving. Physical need is more visible and therefore more heart wrenching and compelling, so it may seem on the surface to be the most important object of our giving. However, we must not minimize the eternal significance of meeting spiritual needs. So we must continue to diligently support missionary endeavors. This is also a compassionate stewardship of our resources.
WEAKNESSES OF THE FLAT TAX
There are two groups who oppose the flat tax and see severe problems in this particular plan for tax reform. One group thinks the flat tax goes too far because the proposed reforms will cause more problems than they solve. Another group claims the flat tax doesn’t go far enough because the reforms do not address our tax system’s most serious problems.
Too Far
M. Jeff Hamond, of the Progressive Policy Institute, is representative of those who are convinced the flat tax will cause more problems than it solves. He claims the flat tax will imperil both vertical and horizontal equity, will provide a windfall for the rich, will probably not stimulate saving and investment, will raise the deficit, and will harm working poor families. [9] He disclaims virtually everything the proponents maintain. One is confronted with the dilemma of who to believe and who to trust.
Not Far Enough
Pat Buchanan [10] and Walter Williams [11] are representative of those who are convinced that because the flat tax does not eliminate the income tax or the Internal Revenue Service, it does not take tax reform far enough. Opponents of the income tax usually argue that although the income tax is “constitutional” due to the 16th Amendment, it nevertheless conflicts with the letter and the spirit of the Constitution. The portions of the Constitution most often cited clarify the guidelines for appropriate taxation, [12] forbid confiscation of property without due process of law, [13] and prohibit involuntary servitude. [14]
Some who oppose the income tax do so on Biblical grounds. They insist that the income tax violates the 8th and 10th Commandments [15] and the Bible clearly warns against its institution. [16]
POLICY RECOMMENDATION
Is the flat rate tax reform plan, as a possible remedy for the many problems in our current tax system, a great solution or a grand delusion? I’m convinced that it is neither.
The flat rate tax plan recommends itself due to its considerable commendable attributes. Though it has some flaws, they are not unbearable. Although it is a good plan, it is not a great plan, nor is it, in my opinion, the best plan.
I think the National Sales Tax (NST) has many of the same strengths that the Flat Rate Tax has, with more besides. Some of the additional strengths are its strongest, including: 1) everyone pays, 2) we pay when we consume—not when we earn, save, or invest, 3) we tax that portion of the population that traditionally avoids “income tax”—the cash, barter, transient and underground economies, including tourists, tax evaders, illegal aliens, and organized crime, 4) our competition with foreign products is positively impacted both in domestic and foreign markets, and 5) our trade deficit decreases. [17] Those who warn against a national sales tax usually expound on the serious danger of instituting a national sales tax without having a corresponding repeal of the 16th Amendment and the dis-establishment of the Internal Revenue Service. If these two components did not accompany the NST the nation will risk having both an income tax and a sales tax, with our latter situation being worse than our former. The most convincing arguments against the NST are 1) it would hurt the poor, working poor and the elderly, and 2) businesses would find the temptation to cheat irresistible.
Political prudence and expediency suggests that we pursue, not the best tax reform plan available, but the best plan that provides a realistic hope of some significant tax reform (i.e. the plan that has the best chance of receiving public support, being passed by Congress and signed into law by the President). There is one simple reason why the NST has little or no chance of progressing through the legislative process. Politicians realize that although the amount of money collected from the people will be the same through either of the two major tax reform plans, the manner in which it is taken will be quite different. The sales tax would be an out-in-the-open, in-your-face kind of tax that will make the taxpayer feel the weight of big government and the pain of excessive taxation every time they purchase something. Those in power will not allow that to happen.
So, if we do indeed want to have genuine, meaningful tax reform, we had better hitch our wagon to a plan that has a future beyond Congressional finance committees. A flat rate tax is a good step and significant step toward re-establishing our rights as citizens of the United States.
- Steve Forbes, The Moral Case For The Flat Tax, available at http:/www.ahgo.org/flat_tax/moral_case.html
- Daniel J. Mitchell, The Flat Tax: The Final Step, quoting Arthur D. Little, Inc., Development of Methodology for Estimating the Taxpayer Paperwork Burden a study conducted for the Internal Revenue Service, 1988, available at http://www.townhall.com/heritage/taxcut/chapt8.html
- Sen. Richard Shelby (R-Ala.), “Tax Relief That Can Be Counted,” Washington Times, 29 July 1997.
- Malcolm S. Forbes Jr., “Happy Days Will Be here Again,” Forbes, 18 July 1994, 23.
- David R. Henderson, “Why Flatter Taxes Are Fairer,” Fortune, 9 September 1996, 57.
- Webster’s New World College Dictionary, 3d ed., 1996.
- James K. Glassman, “Don’t Reform the IRS: Reform the Tax System,” Conservative Chronicle, October 8, 1997, 11.
- Forbes, The Moral Case For The Flat Tax
- M. Jeff Hamond, The Failings of the Flat Tax, available at http://www.dlcppi.org/flat.htm
- Pat Buchanan, “National Sales Tax Would Benefit Everyone,” Conservative Chronicle, July 23, 1997, 14.
- Walter Williams, “How vs. How Much We’re Taxed,” Conservative Chronicle, October 22, 1997, 16.
- Article I, Section 2, Paragraph 3: “Representatives and direct taxes shall be apportioned among the several States… according to their respective numbers…” and Article I, Section 8, Paragraph 1: “The Congress shall have power to lay and collect taxes, imposts and excises, to pay the debts, and provide for the common defence and general welfare of the United States; but all duties, imposts, and excises shall be uniform throughout the United States:”
- Constitutional Amendment 4: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated…” Amendment 5: “…nor be deprived of life, liberty or property without due process of law…”
- Constitutional Amendment 13: “Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction…”
- Exodus 20: 15—”You shall not steal.” And Exodus 20:17—You shall not covet your neighbor’s house. You shall not covet… anything that belongs to your neighbor.”
- Genesis 47:13-26 (Joseph imposes a flat income tax upon the Egyptians) and I Samuel 8:4-22 (God warns Israel about the negative consequences of having a king like other nations. A flat tax on private property is one of the specific impending consequences.)
- Buchanan, “National Sales Tax Would Benefit Everyone,” 14.