Equality Tax: a flat tax for everything
Various groups are pushing a "Cleanse the Code" tax reform effort, with Senators Wyden and Craig leading the charge. Everybody agrees that the tax code needs reform, though their specific reforms often differ. (a recent Cleanse the Code conference call was blogged by Captain's Quarters and Outside the Beltway)
What makes this round of tax reform interesting is that Senator Wyden begins the whole thing with an overture (pdf) to a flat tax. It's not really a flat tax, but it's an interesting start.
There are non-trival objections to Wyden's proposal, though. For instance, he wants a "single, flat corporate tax rate of 35%". Naturally, this appeals to the anti-business Democratic base, but it should not. As recent research indicates, "domestic labor bears slightly more than 70 percent of the burden of the corporate income tax."
- Domestic labor = primarily lower and middle class workers.
Burden = lower wages, higher prices, fewer jobs.
Do Democrats really want to burden the lower and middle class workers with a tremendously inefficient corporate tax? Allegedly, no. If Wyden were to drop the corporate tax completely, most of that money should be recoupable through a flat tax on labor and capital income, and--since the profits would, presumably, be withdrawn and invested or spent--through faster monetary velocity.
Wyden's proposal to reduce individual tax brackets "from six to three" is also a step in the right direction, but it seems to me that Wyden could remain consistent with the Flat Tax goal of equal and non-distortive treatment without abandoning his goal of progressivity by further reducing tax brackets to a single flat tax on both labor and capital, and building in sufficient exemptions for basic needs that the effective tax rate would be both non-discriminatory and progressive. I've written about this kind of flat tax before here.
The common (generally Democratic) objection is that a few people are able to find loopholes and non-taxable uses for their money (e.g., philanthropy). There is a solution, though. A well-constructed Flat Tax could broaden the tax base, eliminate loopholes altogether, minimize tax distortions and remain effectively progressive. That would seem to address the primary objections of both Republicans and Democrats to most tax reforms. I've outlined exactly such a flat tax in the past.This kind of flat tax could reduce the allocative inefficiencies and the unequal treatment of our current tax code, while -- if indexed to spending -- reminding voters that spending = taxation.Combining the Hall-Rabushka flat tax with Dale Jorgenson's Efficient Taxation of Income ideas, we could have a simpler, less distortionary system of taxation that would minimize inefficiency, inextricably link spending and taxation to prevent unsustainable spending or tax cuts, and virtually eliminate the present objections of Republicans and Democrats.
Most importantly, as Milton Friedman has pointed out, it would make it more difficult for both parties to demagogue on tax issues it would help to "end this business of changing the whole tax system every few years" because of monied interests who "pay [politicians] to put loopholes in" and "pay [politicians] to take them out." As a bonus, both parties would have more trouble demagoguing on tax and spending issues.
It's hard to think of an objection that Republicans (efficiency, restraint, unfair marginal rates) or Democrats (progressivity, class warfare) are likely to make that could not be rectified within the basic structure of such a flat tax.
