Flat Tax Debate

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The Daily Reckoning PRESENTS: Tax season is upon us...and while most of us throw up our hands in frustration when we see nearly 50 percent of our income eaten up by the government, Steve Forbes takes the more proactive approach...

THE SPIRIT OF REFORM
by Steve Forbes

“The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”
                                                                     - John Maynard Keynes

America considers itself the land of new ideas, and in many respects it is. Yet the truth is that by the time we embrace them, so-called new ideas are usually anything but new. Most were hatched decades before being adopted. They had to travel a long and winding road, enduring repeated examination, debate - and rejection - before finally winning acceptance and bringing about real change.

The flat tax is no different. When I ran for president in 1996 and 2000, I proposed that today’s monster federal income tax code be scrapped and replaced by a single tax rate for individuals and businesses. The flat tax would do away with all but a few basic exemptions and deductions, eliminating the confusion and complexity of the current tax code and letting you fill out your return on a simple postcard or sheet of paper. A simple proposal, but one that promises, as you’ll see in succeeding chapters, to transform not only the tax system but the nation as well, revitalizing the economy and changing our lives dramatically for the better.

Back then, this was portrayed as a new and radical idea. In fact, the flat tax has been around for decades. Some view it as a descendent of the “tithe” which exacted 10 percent off the fruits of men’s labor in biblical times.

Flat Tax Debate: History

Our earliest system of income taxation was a flat tax. Lincoln enacted a 3 percent tax on income in 1861 to help finance the Civil War. The idea of graduated tax brackets was considered unfair and contrary to our traditions. Graduated brackets then came, but only briefly. The income tax itself was scrapped not long after the war.

By the mid-twentieth century, however, our view of taxation had changed. In the 1940s and 1950s, Americans had come to believe that, as a modern country, we needed to swallow the medicine of catastrophically high tax rates. Like castor oil, they were supposed to be good for us. In much the same way that Americans in the 1950s trusted that “Father Knows Best,” the title of the classic television show of that era, we felt the government knew best about how to tax us and deploy our money. But it doesn’t. The federal tax code has grown into a 9-million-word, multi-headed hydra of countless brackets, deductions, and exemptions.

Rates have come down significantly in the past 25 years. Yet when all of Washington’s exactions - not just the income tax, but also Social Security and Medicare taxes and numerous excise taxes - are added together with state and local taxes, we annually surrender as much as 50 percent or more of our income to Uncle Sam and his equally voracious state and local kin.

Every April fifteenth - and for entrepreneurs, every quarter - we keep saying we’ve had enough. Like Howard Beale in the classic movie “Network,” we want to throw open the window and shout at the top of our lungs that we’re mad as hell and not going to take it anymore. But we don’t. We may be incensed at tax time and consider the federal tax code an unfair, excessive burden. But most of us accept today’s system as a fact of life, as immutable as lousy weather.

Flat Tax Debate: World Reform

Until recently, few people have been bold enough to suggest that we don’t have to take it, that the system can be changed - and that real change can work. But, as this book will show, reform is not only possible: It is essential - and inevitable. The flat tax has already produced results around the world - from Russia to Hong Kong and elsewhere. It is part of a new worldwide wave of tax simplification that has implications for America’s competitive position in the world economy. The flat tax movement is finally being recognized by media organizations that had once been skeptical, including the Economist magazine, which devoted an April 2005 cover story to the growing worldwide support for the flat tax.

America’s relative lateness to the table is ironic when you consider that the first calls for a modern flat tax system in this country began in the 1960s when in their groundbreaking book, Capitalism and Freedom (1962), economists Milton and Rose Friedman proposed a “flat-rate tax.”

The prime movers behind the flat tax movement in America have been Robert Hall and Alvin Rabushka, economists at the Hoover Institution. Their highly influential book, The Flat Tax, first appeared in the early 1980s and provided the impetus for a series of legislative proposals, the first serious attempts at reform. Throughout the 1980s, the flat tax was periodically discussed. It emerged as a national issue for the first time when former California governor Jerry Brown, campaigning for the 1992 Democratic presidential nomination, called for a 13 percent flat tax on all personal and business income. His plan did away with the Social Security tax, retaining exemptions for mortgage interest, charitable contributions, and adding a new one - a deduction for rent.

Along with the flat tax, Brown proposed a Europe-like value added tax (VAT) of 13 percent. I loved Brown’s idea of the flat tax, but realized that his VAT would lead us down a perilous path toward European economic stagnation. Nonetheless, his flat tax idea was breathtaking and groundbreaking. Brown’s flat tax proposal rightly got him plenty of attention - making him a serious contender against frontrunner Bill Clinton. Even the New York Times was favorable to the idea of a flat tax back then. Brown was not the only Democrat to support what some see, incorrectly, as an exclusively Republican idea.

Few may recall now that no less a Democrat than former House Minority Leader Richard Gephardt once pushed a variation of the flat tax idea, a stance from which he later retreated. Other flat tax plans have been floated by Republicans, including former House Majority Leader Dick Armey (R-TX). I believe the stage is now set and that conditions are more conducive than ever to the introduction of a flat tax in this country. Our prior belief in a 1950s “government knows best” high-tax approach has been replaced by widespread recognition that a flat tax which combines stark simplicity with a tax cut, would generate more, not less, government revenue.

Flat Tax Debate: Effects of Tax Cuts

The salutary effects of tax reduction on the economy have been demonstrated. Starting with the Harding-Coolidge tax cuts in the 1920s and the Kennedy tax cuts in the early 1960s, we have seen how lower tax rates produce prosperity. (Amazing to think that the Democrats in the 1960s were the tax cutters and the Republicans thought such cuts were fiscally irresponsible, a total role reversal from today.) In the late 1970s, the Kemp-Roth tax cut proposal for an across-the-board 30 percent tax cut was adopted by Ronald Reagan when he became president and launched what became the then-longest economic boom in American history.

As our history chapter makes clear, Reagan’s dramatic reforms were undone by subsequent administrations. Today President Bush is attempting to revive meaningful tax reform with his call in 2001 for elimination of the death tax, and two years later, a similar call for doing away with the dividend tax. He also ushered in a cut in the capital gains tax and allowed more expensing of investments for business. Yes, there have been roadblocks. The president’s proposal for supersavings accounts was quickly dropped; the death tax expires in 2010 for just a year, to be reincarnated in 2011. And even the president’s 2005 panel on tax reform, which was formed as I wrote [my] book, The Flat Tax Revolution will base its recommendations on static analysis techniques believed by many experts to be highly inaccurate in predicting the impact of tax initiatives, especially tax cuts, on the economy.

And yet . . . the spirit of reform is in the air. The administration has proposed a host of free market initiatives - from taxes to tort reform to private Social Security accounts - that are causing us to reexamine how the government is structured and financed and how it provides services. At last many people are asking, just how much is the government entitled to take from what we earn? And how much is too much?

Meanwhile, ordinary citizens approach me at airports, TV studios, professional and social events, asking: Do you think that we will ever see a flat tax? There is a plaintive tone, a note of frustration in their voices. Small business people complain that, for all the smooth talk, the politicians don’t get it. All they care about, they say, is finding excuses to increase government spending and get as much money as they can without losing their jobs. They don’t understand that every dollar they take is one that we need to pay our people and stay in business. They don’t understand what we go through.

That’s why I wrote [my] book - to get beyond the sound bites, the political agendas that so often color day-to-day reporting and, instead, encourage a full and reasoned discussion of the issues during this critical period of national debate; to show in clear and compelling terms that the flat tax works. The evidence is there - in the historical facts, economic statistics, and the experiences of nations that have implemented a flat tax system.

Flat Tax Debate: On A Local Level

The need for a flat tax could not be greater at a time when tax reform overseas is helping to produce new global competitors - countries in Asia and Central and Eastern Europe whose low tax policies have spawned a gold rush of foreign investment. Even high-tax nations in Europe with their stagnant economies have awakened to the threat of these emerging dynamos. America needs to respond.

The flat tax is a reform of our federal income tax system. It does not affect, for example, state and local taxes. But, contrary to what some may fear, it will generate increased government revenue. And that powerful example will induce, I believe, similar reforms in state and local taxes.

Another fact that people seldom realize: the increased revenues and increased value of the nation’s assets that will result from the flat tax will certainly help us grapple with the fiscally challenged Social Security and Medicare programs. America has a great future. The flat tax will help us achieve it.

Regards,

Steve Forbes
for The Daily Reckoning

Editor's Note: The above essay has been adapted from Steve Forbes’ latest book, Flat Tax Revolution. To order your copy, click on the link below:

Flat Tax Revolution: Using a Postcard to Abolsih the IRS

Steve Forbes is president and chief executive officer of Forbes and editor-in-chief of Forbes magazine. Forbes is also chairman of the company's American Heritage division and publisher of American Heritage magazine. In both 1996 and 2000, Forbes campaigned for the Republican nomination of the presidency. Key to his platform were a flat tax, medical savings accounts, a new Social Security system for working Americans, school choice, term limits, and a strong national defense. Forbes continues to promote this agenda. He lives with his wife and family in New Jersey. 

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