Flat Tax Reform by Karl William Parrott and Michael Ebiderine

                                                  Flat Tax Reform 

The flat tax system or “marginal rate tax” would benefit not only American’s  as individuals, but also the United States economy as a whole. 

Our current progressive tax system cripples our nation’s economy by limiting production and sending businesses fleeing to countries with more favorable tax law. Under current economic circumstances, I find it comical that such a proven method of economic encouragement is overlooked time and again. A single flat rate tax is the simple, fair, and constitutional answer our nation has been looking for.

Presently, our tax system inhibits economic growth potential by reducing savings, investments, production, and weakening the nation’s global as well as domestic competitiveness. Increased production levels and economic growth are reasons enough in themselves for adoption of a flat rate tax system in the U.S.

During John F. Kennedy’s election he made a promise to the public that if he were elected president he would close the nation’s GDP gap – the difference between actual GDP and potential GDP – which was about fifty billion dollars at the time(Lewis). Kennedy was relying on a plan to cut taxes in order to boost the nation’s economy set forth by one of his top economic advisors by the name of Walter Keller. Keller believed that the economy was not in an expansionary fiscal deficit but in fact a contractionary fiscal deficit. This term became known as “fiscal drag”. In other words, the governments spending and taxing laws were weighing the economy down and limiting production. At the time the nation’s tax rate on incomes of $100,000 was at 90%. Do you think Sandy Koufax was happy keeping only ten percent of his money (Mitchell)? Anyways, soon after Kennedy introduced his tax cut bill in early 1963, his bill was tabled with little hope of ever being passed. In late 1963 John F. Kennedy was assassinated. As a memorial to the late president, congress passed every bill that was currently in congress with Kennedy’s signature on it. Kennedy’s proposal became known as the “Kennedy Tax Cut of 64”. Eighteen months after the bill was passed, the unemployment rate was down, the GDP gap was closed, tax receipts were up, and the government’s budget went from a deficit to a surplus (Lewis). This is a great example of what a flat tax, which would cut taxes, could do for our economy. 

Currently saving and investment are discouraged by capital gains taxes and double taxation. Each of these plays a key role in our nation’s level of economic output. Production itself is penalized in some cases where people cap their yearly production in fear of entering higher tax brackets. With a flat rate tax all of these anti-productive restriction’s  would be eliminated.

Today’s tax system was not set up to be fair or equal. It was set up to maximize federal tax revenue. During the coarse of U.S. history, volatile marginal tax rates were the by-product of the nation’s debts induced by war and economic hardships. It was during the Civil War in 1861 that congress implemented the first federal income tax to help pay for the war. However, this tax was only applicable to the rich, requiring incomes of eight hundred dollars a year to be taxed at a rate of three percent. Incomes of ten thousand or more would be taxed at a slightly higher rate of five percent. This was the first glimpse of our nations unjust progressive tax system. 

Marginal tax rates continued to rise at breakneck speeds until they reached an all time high in 1945 during the great depression when incomes of $200,000 were taxed at an alarming rate of 94% (Mitchell, Cato). Eventually, over the next twenty years, top marginal tax rates subsided to around thirty five percent where they currently rest today (Perez).

Opponents of the progressive tax system would argue is this fair? Is this just? And the answer is most definitely not. Our Current tax system discriminates on how you get your income, where you get it, and how you use it. The beliefs that the wealthy should pay more would still be upheld if a flat tax rate were to be adopted. Twenty percent of  $100,000 is substantially more than twenty percent of $20,000. Requiring individuals to pay different tax rates based on their level of income is discriminative and contradicts the principle of equal right governed in the constitution. The complexity of our current tax code – which contains over 893 different forms – permits unfair and preferential treatment to the wealthy. Individuals with political connections and access to tax professionals are able to manipulate the maze of deductions and exemptions to their advantage. A flat tax would eliminate all deductions and exemptions. Thus eliminating special preferences and making the process of filing your taxes simple and straightforward. A flat rate proposal would call for only two separate postcard-sized forms (Mitchell). One for reporting labor income and the other for capital income. Many skeptics of the flat tax believe that this would eliminate many tax related jobs. However, this could not be further from the truth. We still would need the IRS to collect and process the taxes. Tax attorneys and accountants only get a fraction of their business from the actual filing process, as tax season is only a few months out of the year. And Americans are always going to hire people to do their work for them no matter how mundane the task may be.

Countries all over Europe have already experienced tremendous success with a flat tax system. Countries like Estonia, Russia, Slovakia, and Georgia have seen unemployment rates drop and steady economic growth (Mitchell, Cato). According to IRIS blog, countries with flat tax systems in place average economic growth rates of eight percent annually. This number doubles most industrialized nation’s economic growth rates. Generally countries with lower flat tax rates have experienced higher growth rates (Barak). Critics argue that this is strictly due to the fact that most of the countries that have adopted a flat tax are poorer nations that are recovering from communist oppression (Garrison). This might be true but I would argues that this factor has just given these poorer nations more incentive to boldly try new methods as they have less to lose. The U.S. is a rich country and even if the economy isn’t doing as well as we would like it to or are use to, we can afford to operate below full production.

So if a flat tax system is beneficial in almost every way, why isn’t it already in use? Well that’s a good question with a lot of even better answers. Government bureaucrats rely heavily on tax dollars to fund and fulfill campaign promises they make. Sure a flat tax would most likely boost our economy and in turn the governments total tax receipts but the results wouldn’t be felt instantaneously. It could be years before results are seen in the form of tax dollars. Most politicians are more concerned about getting re-elected and putting food on the table than they are about our future economic health.  Staying in office means appealing to the majority and their wishes. Besides, there is only one politician who gets the credit for a better economy. The average household income in the U.S. is around $45,000. Which means that the majority of the public – which is taxed between fifteen and twenty five percent – would be virtually unaffected by the proposed flat tax rates which would likely be between fifteen and twenty five percent as well (Papier, Jason, and Johnson). So what would a flat tax system mean to the average working American? Relatively little. Maybe a smaller headache and a little less paperwork. But most Americans are willing to pay more in taxes than they really owe if it means avoiding complicated paperwork.

It’s only natural human instinct to wish the worst for people with things (money) that you don’t have. Why give the rich a break? After all, they didn’t have to work hard for their money; they were probably just given it or got lucky right? People sometimes fail to realize that when we punish the rich we are actually punishing the poor as well. Imposing higher taxes on the rich only causes them to pass the burden down to the working class in the form of job and wage cuts. With other countries lowering their tax rates, businesses and jobs are relocating to foreign countries with more lucrative tax laws. Over the past few decades politicians and influential members of the public sector have started to recognize this problem and are making efforts to keep the U.S. competitive with a flat tax reform and bring back much needed jobs to the U.S. Steve Forbes is one of our nation’s biggest advocates of a flat tax system and has written several books on flat tax reform and what it could do for our economy (Papier, Jason, and Johnson). President George W. Bush requested the President’s Advisory panel on Tax Reform to come up with options for implementing a fundamental tax reform. Policymakers on Capitol Hill are working on different ways to reform our current tax code, and the Treasury Department has compiled enormous amounts of research on the flat tax and other methods of fundamental tax reform (Mitchell).

Our existing progressive tax system is an unjust, complex, bureaucratic crutch that does nothing but cripple our great nation. A flat tax wouldn’t solve all of our problems but it would set us in the right direction and prevent the government’s unlawful infringement upon our civil liberties. Is a flat tax reform in our near future? Probably not. Would our country benefit from a flat tax? Absolutely.