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I have always believed tax simplification should be a national priority. Economists will tell you that our current federal tax code is inefficient, wasteful, and impedes economic growth. But with congressional Republicans making nice with K Street lobbyists as a priority under the direction of former House Majority Leader Tom DeLay in order to raise campaign funds and provide lucrative future careers for ex-congressional members and their staffs, the incentive to scrap a federal tax code where statutory complexity creates the need for lobbyists was not in the interests of enough Republican leaders in Congress to warrant serious legislative consideration.
The recent endorsement of Mayor Rudy Giuliani for president by Steve Forbes, and the Mayor’s subsequent endorsement of tax simplification if not the flat tax itself that Mr. Forbes has fought so valiantly for in the court of public opinion, should remind us of the importance of this issue. And perhaps not coincidentally, it is also our great and good fortune as students and fans of public policy that the Hoover Institution has announced that the seminal work by economics professors Robert Hall and Alvin Rabushka that originally erected the intellectual pillars for tax simplification, “The Flat Tax,” is about to be republished in a revised edition next week.
In studying this issue, I have concluded that a consumption (sales) tax is not politically feasible due to the sticker shock it would create among American consumers, though having a ready-made, retail store collection mechanism for our foundational tax system is attractive. Similary, a value added tax, assessed at the various stages of production, is reportedly too easy to raise by legislators and has the ultimate effect of a consumption tax because it is passed on in the form of higher prices until it reaches the ultimate purchaser of products. So the answer to the question of how to create tax simplification may well be the flat tax, though I am open to debating any and all forms of federal income tax simplification.
The question now becomes which Republican presidential candidates in 2008 will make federal income tax simplification a priority? Here is what I have found. Let’s see how these positions are debated and adjusted as the primary campaign proceeds.
Mayor Giuliani now supports tax simplification if not a flat tax, though in all fairness the Mayor called the Forbes push for a flat tax in 1996 a “mistake” and “disaster.” Speaker Gingrich seems to support tax reform that is more growth oriented, though his call for targeted tax deductions does not sound like tax simplification. Senator McCain supports a flat tax. At least in 1996, Governor Romney was against a flat tax, purchasing a series of newspaper ads attacking the idea by then presidential candidate Forbes, though currently the Governor has come out for tax simplification. Senator Brownback supports a flat tax. I cannot discern where former Senator Fred Thompson is currently on tax simplification, though previously he was a member of the Flat Tax Caucus as a Senator and spoke favorably of tax simplification during his tenure on Capitol Hill. Governor Huckabee supports a flat tax. Congressman Hunter supports tax simplification in general, though not necessarily a specific flat or consumption tax; the same goes for Governor Gilmore. Governor Thompson’s position on tax simplification is unclear, though he has a record of cutting taxes in Wisconsin. Congressman Paul favors tax cuts, though his position on tax simplification is unclear. Congressman Tancredo supports a flat tax.
March 30th, 2007 at 1:41 pm
The tax system is definitely screwed up.
If I had to name one thing that should be changed in the tax code it is the nominal taxation of capital gains. If you own $140,000 in an asset and it appreciates at 2% a year for 20 years you’d pay 10,000 in capital gains taxes to sell it. The bad thing is that your asset would be worth less than it was in 1987 because of inflation. Essentially the non-accounting for inflation creates a capital gains tax rate that sometimes is over 100%. This discourages investment. I’d make capital gains indexed to inflation.
I wish one of the candidate would address this issue.
March 30th, 2007 at 1:43 pm
The “flat tax” movement, spearheaded on the presidential level by Steve Forbes, is a marketing poly that purposly conflates two different things into one package. Your piece here makes constant reference to the two factors but also seems to conflate them constantly as well. They should be seen as separate, because they really are.
There is tax simplification, and then there is a “flat” or flatter tax rate structure.
The two are not, in any way, necessarily linked, although they obviously could be put together in a package.
Tax simplification is all about eliminating the hundreds of ways in which the government uses the tax code to encourage certain economic behaviors and discourage others. Many of these mechanisms have been embraced by conservatives as well as liberals - enterprise zones, for instance, as a means of encouraging business growth in depressed areas. Or tax breaks to producers of alternative fuels for automobiles. The list is endless. If you want to advocate the elimination of these mechanisms, you will need to address not only the negative consequences of having these mechanisms (a maddingly complex tax code), but also address the question of the effect on society if the government is no longer able to guide or assist economic activity in certain sectors. Would the lack of these fiscal mechanisms lead to a growth of more heavy handed intervention? Or would there simply be no mechanisms available for the people, acting collectivly, to encourage certain economic behavior? Is this really a good thing? The case would have to be made.
Tax rate flatness is an entirely seperate issue. The “flat tax”, although still slightly progressive (it really isnt one flat rate, but two rates - 0% for some money, then the “flat rate” for all income above a threshold), is taking the income tax structure in a regressive direction. It really is a massive shifting of the tax burden off of the high income earners onto the middle class.
All “falt tax” proposals promise overall neutrality - i.e. that by implementing the new regime, the overall level of revenues will not go up or down. So if the revenues to the government stay the same, and the highest marginal rates go down from 35% to 17% (or whatever the actual flat rate turns out to be), that means that high income earners are going to pay (a lot) less. And if the overall effect is neutral, that means that others (the middle class) will have to pay more.
Forbes was a master at the shell game. Sell the idea of tax simplification, but slip in the real “reform” - greatly lowering the tax rate for wealthy people like himself, at the expense of the middle class. I find it amazing that som many in the GOP (fortunatly not THAT many) found this appealing.
March 30th, 2007 at 1:52 pm
Sorry for the many instances of dexteral dyslexia in my comments. If someone could fix the damn textbox, so I could actually see what I am typing, maybe I would do a bit better.
Edit: Download Firefox. You will not be sorry.-KWN
March 30th, 2007 at 2:33 pm
Tano,
Get Firefox?
March 31st, 2007 at 3:50 am
Tano,
http://www.opera.com
Opera browser works just as well (if not better). It even has a ‘Fit to width’ option for web sites which are not 100% standards compliant.
PS Have any of the candidates come out for a Negative Income Flat Tax system?
March 31st, 2007 at 6:07 pm
What about the FAIR TAX. I will actually donate money to the Tier 1 candidate that supports that. Until then, I will just support the GOP with my vote.
April 3rd, 2007 at 9:10 pm
Correction needed to article where says that Duncan Hunter supports the Flat Tax. Not True.
Correction: Duncan Hunter said on Sean Hannity’ show that he supports the FAIR TAX.
April 3rd, 2007 at 9:12 pm
Duncan Hunter said on Sean Hannity’s show 04-02-07 that he supports the FAIR TAX.
April 3rd, 2007 at 10:17 pm
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February 16th, 2008 at 12:33 pm
[...] become an advocate of the FAIR Tax, which is not the same thing (see below). Tancredo and Ron Paul support it (he supports no tax). Rudy Giuliani’s position on the issue is not that clear, but I was [...]