Paul, Cain and Romney: Loving the flat tax in the GOP – Washington Times
NATCHITOCHES, La., 31 October, 2011—Ron Paul and Herman Cain have something in common: They think income taxes should be flat. Mitt Romney envisions a flatter tax than we have and has even said, “I love a flat tax,” but his final position on the subject remains indeterminate.
Rick Perry incoherently trotted out an optional flat tax, hoping perhaps that it would slow his plummeting poll numbers, but his devotion to the flat-tax gospel is even more indeterminate than Romney’s.
Whether from conviction or campaign strategy, Republican presidential candidates like the flat income tax.
The American tax code is a baroque nightmare. No one person could master it all, and no two people calculating taxes for the same upper-middle income family are likely to come up with the same answer. The costs to our economy of the tax code (inefficiencies, accounting and legal fees, legal tax avoidance and illegal tax evasion) are undoubtedly huge; estimates run from $300-500 billion annually.
The flat-tax idea has much to commend it. It’s simple and would allow us to obliterate most of the tax infrastructure. It eliminates possibilities for tax avoidance, so doesn’t distort economic behavior the way our current tax code does. Unlike sales and excise taxes, it’s not regressive.
If it’s done right.
The flat tax as envisioned by Cain and Paul wouldn’t be flat, but regressive. It doesn’t treat some income as income, and it excludes capital gains.
If a flat income tax is going to be truly flat, it has to treat all income the same way. Warren Buffett famously wrote that he pays a lower tax rate than his secretary. That’s because so little of his income is wages. If capital gains were excluded from the income tax, many wealthy people could pay no income taxes at all.
If you invest successfully, you can make a great deal of money; if you do it badly, you can lose everything. Lower tax rates on capital gains are often justified on the basis of that downside risk. It’s further argued that investment creates wealth and jobs, so it should be encouraged by a lower or zero tax rate.
That’s all true, but if we exclude wealth earned through investment from taxes, we encourage people to engage in riskier investment than they would have given the alternative of earning taxable wages. If gambling income were tax-exempt, people would be more likely to gamble, since the upside would be improved relative to the downside. In the process, we increase the incentive to try to make money through gambling rather than through wages.
The tax structures favored by Paul and Cain would shift some of the burden of income taxation downward. That isn’t an entirely bad idea. If more than half the working population paid income taxes, more people might take an interest in what taxes were being spent on. You care more about what’s being done with your money than with mine. But still it would be perverse to use a flat tax to allow the rich to pay a lower tax rate than the poor.
One attraction of a truly flat tax is that it would actually shift the burden from the long-suffering middle brackets both ways, both up and down. A lot of people think that we should raise the top marginal rates of a progressive income tax on the wealthy, but what good would that do? Leona Helmsley said of the wealthy, they don’t pay taxes; little people pay taxes. And as Buffett so eloquently pointed out, that’s often true. Helmsley avoided taxes by breaking the law, but the wealthy usually do it legally. Why would people who can legally pay below the maximum rate care if you raise the maximum rate?
Cain and Paul aren’t foolish or anti-poor to want a flat tax, and Romney’s stifled impulses in that direction tell us that he isn’t deaf to conservative principles. But their ideas to change the tax code need some work. They’re still worth listening to, especially in comparison to voices who want to keep the same inefficient, job-destroying, wealth-devouring tax code we have.
Whatever we do to the tax code, we should keep this in mind: Raising taxes isn’t the same as asking people to contribute more to society; it compels them to turn it over. Lowering taxes isn’t the same as giving taxpayers a gift; it only means we take less from them of what was already theirs than before.
Any discussion of changes in the tax code should treat all Americans, taxpayers and potential taxpayers, with respect. Whether your values are skewed to protecting the poor or to promoting business, our tax code is not the tax code of a great nation that has its best years ahead of it. It’s a spoils system, it’s unworthy of us, and it has to go.
