The Adam Smith Institute and Others
About a Flat Tax
Volume 13, Number 2
Issue 602
The Adam Smith Insitute (www.adamsmith.org) profiles many debates currently raging around the world and, especially, in Great Britain: scrapping existing tax codes and going to a flat income tax. Hey, aren't we having the debate in the colonies, er, the United States, too?
Adamsmith.org states "Tried in nine countries so far, it has achieved impressive results. It involves setting a single rate of income tax and doing away with all of the allowances and exemptions. The threshold is set high enough so that low earners pay no income tax at all, and everyone else pays a fixed rate. There are no tax loopholes, nor the need for them, given the low rate. Instead of paying accountants to shelter income and move it offshore, people find it cheaper just to pay the tax. And a low rate makes it more worthwhile to earn more, which brings economic expansion.
"The countries doing this have found the low flat rate produces more tax revenue than the complex system which went before. When tax rates are cut the richest people end up paying a higher share of the total. The top ten percent stop avoiding and evading taxes and put their effort into earning more instead. The result is that they pay a higher proportion of the total. And economic expansion produces higher revenue from the lower rate.
"Hong Kong brought in a flat tax in 1947. Other flat tax adherents include Estonia, Latvia, Lithuania, and Slovakia, all EU members. They also include Russia, one of the G8 countries. Even the US is interested, with some of the Bush team looking at the possibility of a flat tax during his second term.
"In Britain the flat rate might be about 20%. Estonia, which brought in a 26% flat rate a decade ago, is lowering it to 20%. At 20% few people would object to paying the tax, so out would go the exemptions and allowances, and in would come an economic boom. Out, too, would go a legion of tax inspectors; flat tax is simpler and very much less costly to collect.
"A flat tax is simple, letting people understand their obligations. It is fairer, with low earners paying nothing and the rich paying their due. And it unleashes all the talent and enterprise being held back by a devious and complex system."
Murray Weidenbaum, of the Center for the Study of American Business at Washington University states that, "Maintaining revenue neutrality also comes into the picture when discussions of tax reform begin. (1) a flat tax, (2) the saving-friendly "USA Tax," (3) a national sales tax, and (4) a value-added tax (VAT). Several caveats can be offered right off the bat:
. None of the proposals is as simple as its proponents claim;
. Each has substantial advantages and disadvantages; and
. All proposals to overhaul the federal tax system should be structured to raise
the same amount of revenue as the existing federal income tax.
In general, there is strong support for fundamental tax reform of some type. Reform should simplify tax collection and reporting, base taxation on consumption and reduce the role of the IRS in the daily life of the nation."
The Iraqi Provisional government has what most Americans would probably only dream of, a simple income tax system. According to a November 2003 article in the Washington Post, "It took L. Paul Bremer, the U.S. administrator in Baghdad, no more than a stroke of the pen September 15, 2003 to accomplish what eluded the likes of publisher Steve Forbes, Reps. Jack Kemp (R-N.Y.) and Richard K. Armey (R-Tex.), and Sen. Phil Gramm (R-Tex.) over the course of a decade and two presidential campaigns. 'The highest individual and corporate income tax rates for 2004 and subsequent years shall not exceed 15 percent,' Bremer wrote in Coalition Provisional Authority Order Number 37, 'Tax Strategy for 2003,'
"Iraq has a flat tax, and the 15 percent rate is even lower than Forbes (17 percent) and Gramm (16 percent) favored for the United States. And, unless a future Iraqi government rescinds it, the flat tax will remain long after the Americans have left. 'It's extremely good news,' said Grover Norquist, head of Americans for Tax Reform and a Bush administration ally. Bremer's vaguely worded edict leaves open the possibility that Iraqis could face different levels of taxation below 15 percent, but 'they told me it's a flat rate and it appears as though it's a flat rate,' Norquist said. The tax fighter added: 'It might be a hint to the rest of us.'"
I've written extensively about my strong personal desire for a fair, simple and flat income tax that all Americans can understand. My writings are in the back issue library of TaxFaxT, in the small "zine" pamphlets that I have published and in my upcoming book, Tales, Ideas and Quotes from a greatcpaT.
I hope that all readers of TaxFaxTM will form their own opinions about a flat income tax and advocate that opinion to their elected officials and through public opinion, such as letters to the editor.
The "devil" is always in the details and with regard to a flat tax, the devil would especially be in how we address carryforward issues, such as capital losses and alternative minimum tax.
David B. Robinson, CPA
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