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In Defense of the Flat Tax

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The flat tax is getting a lot of attention—and a lot of criticism—as an increasing number of Republican presidential candidates embrace the idea in some form or another. Sen. Rand Paul (R-KY) 89%, Donald Trump, Ben Carson, and Sen. Ted Cruz (R-TX) 100% have all proposed their own variations on the idea, with an emphasis on simplicity that seems like common sense to most people.

Right now, the staggering complexity of the 75,000 page tax code is baffling to anyone without years of formal training in tax law, and even the experts are frequently stumped. Every year, Americans spend $37 billion and 3.24 billion hours simply complying with tax laws. Imagine if those resources could be freed up for more productive use!

This is part of the intuitive appeal of a flat tax. Eliminate loopholes and deductions, and charge everybody the same, predictable rate, and what has historically been a months-long nightmare for many taxpayers could become as simple as mailing a postcard.

Another key argument in favor of a flat tax is putting an end to social engineering, and restore the code to its original purpose of collecting revenue. Right now, we have government trying to influence a wide variety of behavior through the wholly inappropriate means of the tax code. Taxes try to “nudge” individuals and businesses alike into doing things the government thinks we ought to do, and deter us from things of which the government disapproves. It was never supposed to be this way. Apart from the ethical issues surrounding official sanction or censure of otherwise legal activities using taxes, the result of this policy has been a hopeless tangle of spaghetti-like exemptions, rebates, and surcharges that is next to impossible to navigate.

Taxes should be used for one thing and one thing only, funding the government, which brings us to one of the most persistent criticisms of the flat tax model: how to pay for it. Using the static model familiar to most tax analysts, the assumption is that if you cut taxes by 10 percent, you will get 10 percent less revenue. Under this type of analysis, a flat tax would result in a huge loss of revenue. In the real world, however, people respond to incentives and alter their behavior based on the taxes they will expect to pay. If a flat tax makes it easier to start a business or invest in new technologies, the revenue loss will be offset, at least partially. Indeed, in many cases tax cuts can actually result in more revenue, an insight most famously demonstrated to by economist Art Laffer.

We can see this by looking at history. In 1964, President Lyndon Johnson signed into law a major tax cut proposed by John F. Kennedy before his death. The Revenue Act of 1964 cut individual income tax rates by approximately 20 percentage points. Corporate tax rates were also reduced by a more modest figure. Under a static analysis, you would expect to see dramatically reduced revenues, but in fact we see the opposite.

The following chart was created from data from the Office of Management and Budget, and shows inflation-adjusted revenue in billions of dollars from five years before the tax cut until five years after. What we see is that the average annual growth in revenue from 1960 to 1964 was 5.4 percent. After the tax cut, from 1965 to 1969, that average was 7.3 percent. Of course, we can’t say that the tax cut directly caused the increase—a large number of factors influence revenue, including population growth, natural disasters, and any external event that affects people’s lives—but what we can say is that there was certainly no precipitous drop in revenue collection.

The Kennedy tax cut was no anomaly. The same thing happened under Reagan and the Tax Reform Act of 1986, which again cut tax rates significantly, and simplified the code by consolidating 15 separate rates into four. The package was supposed to be revenue neutral, but again, the rate of growth in tax revenues increased. Before the cuts, revenue growth was 0.7 percent annually, and after it was 2.9 percent.

Both logic and historical data indicate that you can simplify the tax code while cutting rates without bankrupting the country. The incredible force of economic growth that occurs when taxes are simple and predictable can be more valuable than trying to squeeze people for more of their dollars. The fact that so many presidential candidates are seriously talking about a flat tax should give us hope that America may soon return to an era of robust growth, and broad economic prosperity.

The post In Defense of the Flat Tax appeared first on RedState.


Source: http://www.redstate.com/diary/freedomworks/2015/12/08/defense-flat-tax/


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    • Joe OHara

      There is an alternative to the flat tax as well as the convoluted income tax we are currently saddled with: a much simpler, more logical consumption tax.

      Considering the simple definition of a “flat tax” – a single rate with no deductions – many proposals being bandied about by 2016 Presidential Hopefuls are not truly “flat”.

      The 10% “tithe” proposed by one Hopeful is, but, without significant spending cuts, 10% won’t generate sufficient tax revenues to be effective. That hopeful has since received a partial economic-reawakening and upped his proposal to 15%. Unfortunately, 15% will not be effective either.

      The consensus is that a true flat-tax rate would have to be in the range of 21-25% to be effective.

      And, a true flat tax would result in a substantial tax increase for the low and middle classes. For example, a couple with combined earnings of $50,000 now pay about $2,500. Assuming a 15% flat tax, that couple would pay $7,500 … three times more.

      And, not only will a true flat tax of 15% result in a substantial tax increase for the middle class, it will provide a large tax decrease for many in the upper class. For example, individuals with an Adjusted Gross Income (AGI) of $500,000, pay on average $128,000. Using a true flat tax of 15%, the tax burden would be only $75,000 … about 40% less.

      In addition, their are about 46 million people in the USA who are classified as poor: some are legitimately poor, but many are illegitimate since they only pretend too be “poor”.

      A true flat tax of 15% penalizes the legitimately poor, such as the disabled. For example, a family of four (two adults, two children) with a household income of $24,000 – which is just below the poverty level, will be forced to pay $3,600 in tax. The poor – because of credits built into the existing system – currently pay no income tax.

      The illegitimately “poor” – those who work off-the-books, for example – will keep right on working-off-the-books under a 15% flat-tax system. But they will pay only on the earnings they report – if, in fact, they report any earnings.

      FAIRtax prevents these from happening and treats the legitimately poor with a lot more dignity. Protecting the legitimately poor is the American way; it’s the right thing to do.

      The pretend “flat tax” plans being proposed by some Hopefuls – those that do have deductions – would result in a plan similar to the IRS plan we are currently burdened with and, as most Americans agree, must be eliminated.

      With a consumption tax you don’t pay based on what you earn as in the IRS plan we are currently burdened with. You keep all you earn and instead are levied on what you spend … and you are in complete control of how much that is.

      With a FAIRtax, you also receive a monthly refund of the taxes you have already paid in connection with the purchase of essential items.

      Another big advantage of FAIRtax is that it eliminates the intrusive IRS. There are many other major advantages too. FAIRtax.org clearly explains what they are.

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