Problems with the Flat Tax (was "Re: Forbes Camp.")

The Baileys (
Fri, 19 Mar 1999 19:14:52 -0500

Michael Lorrey wrote:

>Those critics at the time failed to do two things:
>a) they expected to keep all existing loopholes (most would be closed under
>Forbes' plan)

This is incorrect. The CBO estimates use pure gross income numbers. They do not incorporate any existing Internal Revenue Code provisions. Actually, the Forbes plan includes huge "loopholes" for the ultra-wealthy in that it exempts dividends and capital gains from taxation. Such a loophole would dwarf all existing loopholes of the existing tax system.

>b) they refused to utilize dynamic scoring (which we can see by today's
>unexpected surplus is in fact the proper way to calculate tax revenues.)

"Dynamic scoring" is the new word for supply side economics (aka Reaganomics). While I agree that the effects of tax changes should be determined on a dynamic economic landscape, it is too easy to manipulate this method to make the tax outcome be whatever you want. Additionally, the effects of tax cuts are not understood well enough to start quoting figures. Historically, significant tax cuts have been followed by years of growing deficits and average to below average economic growth. The years following Reagan's effective tax rate reduction are a perfect example. Even if you remove the spending increases beyond the average for the prior 20 years, the result is still ballooning deficits. Furthermore, GOP pundits forcasted 5-6% GNP growth if the tax cuts of the early 80s were adopted. This never occurred.

>When these two factors ARE taken into account, the 17% flat tax is in fact
>revenue neutral.

No is isn't. There has yet to be any detailed analysis that shows a 17% flat tax (or any other proposed rate) will not result in huge deficits. Forbes, the Kemp Commission and other conservative think tanks have produced vague, "scrawled on a napkin" calculations that yield a revenue neutral result, but when questioned on the details they dodge the issue.

>The top marginal tax rate may be set at that level, but the only people who
>it are those who do not follow the advice of their tax accountant. former
>George Bush, for example, and his wife filed a tax return in either 90 or
>which showed that their income was nearly a million dollars, yet their
final tax
>bill came to only 14% of their income.

I think you need to take a closer look at Bush's 1991 tax return. His extremely low effective tax rate is because he had a huge charitable contribution deduction that year. In 1991, Bush had approximately $1,300,000 in gross income. His itemized deductions were $670,000. $550,000 of that were charitable contributions. By giving away 40%+ of his income he reduced his taxable income considerably resulting in only $200,000 in taxes owed. You've picked an anomalous case to claim the wealthy will pay more in taxes under the 17% flat tax system. As you might guess, the average high income earner doesn't give away 40% of his income every year. At income levels above $1,000,000, the average taxpayer only gives away 2% of their income. President Clinton, in 1997, earned $570,000. He had charitable contributions of $270,000 (roughly 48% of his income) and still paid $92,000 in taxes (an effective rate of 15%).

Instead of handpicking a case that supports an argument, lets look at the effective tax rate for the average ultra wealthy taxpayers. In 1995, according to the Internal Revenue Service, the average effective tax rate for the top 1% of all taxpayers in terms of gross income was 38.9%. Top 5% was 30.6%. Top 20% was 26%. The top 40% excluding the top 5% was 19.9%. The middle 60% (the middle class) was 18.9%. The lowest quintile was 0%. The overall effective tax rate for all taxpayers was 15.9%. Clearly, the ultra wealthy will receive a HUGE tax windfall as a result of the implementation of the flat tax system. Lets not forget that all these effective tax rates include taxes on capital gains and dividends (70% of which inure to the top 5% of all taxpayers) which will not be taxed at all!

What will happen if a flat tax is implemented? The same thing that happened when Reaganomics was implemented in the early 80s. The rich will receive the lions share of tax cuts generated by the flat tax regime. Government revenues will go down. The GOP will not have the political will to support the drastic spending cuts required to preserve the budget surplus or even minimal deficits. The federal government will resume the its huge borrowings on the capital markets. Guess who will have cash in hand to loan to the federal government? All these ultra-wealthy taxpayers who've received these huge tax cuts. Thats the infamy of it all. The rich will take the money they would have been paying under the old system and then loan it to the government and earn interest on that money.

Forbes, Archer, and the rest of flat tax/national sales tax camp are clearly wrong. A comprehensive and objective review of the available data can yield no other conclusion.

Doug Bailey

Look at Bush's 1990 return, that year he had $456,000 in income and paid $101,000 in taxes, an effective tax rate of approximately 23%.

>Your claim about the tax benefits going to the top 3% are true only if you
>existing tax loopholes, and expect (paradoxically) that everyone is now
>the maximum percentage for their tax bracket, as if they were not using and
>loopholes. Obviously this is cooking the books.
>> The flat tax promotes the myth that a simpler tax code must incorporate a
>> single tax rate regime. This is absolutely wrong. Forbes, Archer and
>> GOP disciples are attempting to capitalize on the average American's
>> ignorance of the complexities of the tax system. The complexity in the
>> current tax system is not the progressive tax rate (there are 4 or 5 tax
>> rates which are very easy to follow). The complexity in the current tax
>> system is determining what is "taxable income".
>The problem with a 'progressive' system is that it is easy to hide
loopholes for
>the rich in there, but not so easy with a flat system. The rich get 90% of
>tax loopholes.
>> We can keep the progressive
>> tax concept (i.e., higher income earners pay a larger portion of their
>> earnings than lower earners) while simplifying the tax code. But why
>> Forbes and others want to do that when they can captalize on the public's
>> distaste for the current tax system by deceiving them into supporting a
>> tax cut for Forbes and the rest of his wealthy buddies.
>How about because, as the stock market indicates, when people are allowed
>keep their money, rather than it being confiscated, the economy grows
>thus increasing tax revinues. Its called dynamic scoring.
>Mike Lorrey