Published in The Enterprise, 3-30-98

The “Flat” Tax Proposal: Unfair, Deceptive, and Fiscally Irresponsible

by Rocky Anderson

So what’s wrong with a “flat tax” system that would tax everyone at the same rate, without all the complications of the present tax code? After all, it sounds simple and fair.

It is simple. After all, it would abolish almost all tax deductions (including deductions for charitable contributions and for mortgage interest), credits, and exclusions in both personal and corporate income taxes. But the proposed tax is not “flat”. And it is not fair.

The Grand Tetons would be “flat” if we decided not to take into account any of their peaks. So, too, the so-called “flat tax” would be “flat” if, as “flat” tax advocates propose, we took into account only earned income (that is, income primarily earned from one’s labors) and ignored investment income (such as interest and dividends), capital gains and inheritances.

Anyone seriously advocating a “flat” tax must explain why a woman who cleans Steve Forbes’s house should pay 20% of her income in taxes, while Forbes would pay no tax whatsoever on his millions in income from trading in stocks and bonds, sale of real estate, and interest paid on investments. Why should the cleaning woman be burdened with far more than her share of the cost of roads, law enforcement, military defense, deposit insurance, and the many other things our government provides, while Forbes gets a free ride because he doesn’t perform labor for his income? (A February 1998 analysis by Citizens for Tax Justice found that, under his “flat” tax plan, Steve Forbes personally would save a total of $1.9 billion over the remainder of his life.)

One of the seeming attractions of a “flat” tax is that loopholes will be eliminated, making certain the rich will pay as much in taxes as the average taxpayer. However, the fact is that, generally, the wealthy already pay more in taxes than others. According to the Joint Committee on Taxation, those who are among the top 1% in income in this country pay over 27% of their earnings to the IRS, compared to the 5% in taxes paid by those earning the median income. Notwithstanding those averages, it is true that enormous loopholes allow some of the wealthiest to avoid taxes. To solve that problem, Congress could simply close the loopholes – after cleaning up our campaign finance system, which has allowed campaign contributors to buy the loopholes in the first place.

Under the “flat” tax proposals now being touted, corporations would no longer deduct fringe benefits like health care. And workers would be taxed on them. So what can we expect? Either less health care coverage for employees, or a reduction in wages over the long-term. A bad deal for working men and women – but that would be only the beginning.

Under Steve Forbes’s “flat” tax plan, a family earning $1 million a year would have saved $168,836 in taxes – a reduction of 68%. According to the “flat” tax advocates, everyone will receive a tax break.

“Just wait a minute,” you say. How can we balance the budget, begin paying down our horrendous accumulated debt, and reduce taxes for everyone?

We can’t, of course. Instead, the “flat” tax would throw future federal budgets out of balance, increase our nation’s accumulated debt (as well as the interest payments on that debt), and increase the tax burden for the middle class. According to a 1996 analysis, the “flat” tax plan of House Majority Leader Dick Armey (R-Texas) would have reduced federal revenues by $38 billion. In his recent constituent mailing, Rep. Merrill Cook asserts that the “flat” tax proposal he advocates would cut federal revenues by “about $30 billion.” Citizens for Tax Justice estimates the Armey 20% “flat” tax proposal would add about $49 billion to the annual federal budget deficit, with the loss in revenues increasing to $156 billion annually at the 17% rate contemplated to commence three years after the “flat” tax is implemented. Anyone advocating such a plan cannot seriously be interested in long-term tax relief, which will be possible only if we maintain a budget surplus, pay down our accumulated debt, and significantly reduce the colossal interest burdens our nation now carries.

And what about the added burden upon the middle class arising from the huge tax breaks to the wealthiest under the “flat” tax plans? The gurus of the “flat” tax, Robert Hall and Alvin Rabushka, who developed a revenue neutral “flat” tax proposal, noted that “it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people.” A recent analysis of Armey’s “flat” tax plan by the Treasury Department found that under the proposed 20 percent tax rate, taxes would increase by an average of about $1,000 or more for families with income under $200,000. Families with incomes over $200,000 would enjoy an average of 50% tax cuts.

We would expect no less from Dick Armey, an extremist who has advocated an end to minimum-wage laws, abolition of the earned-income tax credit for the working poor, the elimination of environmental regulations, and an end to Medicare and employer-paid health insurance. However, this country cannot afford – and should not tolerate – a return to the voodoo economics of the trickle-downers, who would shift the tax burden further from the wealthiest few to the middle class and drive up our nation’s annual deficits, accumulated debt, and wasteful interest obligations.

Certainly our tax code is far too complex, replete with loopholes and, in many respects, unfair. However, further burdening the middle class and creating one huge loophole, such as the exemption of all unearned income from taxation, is not a solution. We can create a simpler, more equitable, and less onerous tax system, and be fiscally responsible at the same time, by cutting out unwarranted loopholes, maintaining progressivity in tax rates, and re-writing the tax code so the average taxpayer can read, understand and apply it.