The “Platonic Ideal” for an income tax that maximizes equitable prosperity is the flat-rate tax. This, together with the gold standard, was an iconic plank formulated by Committee co-founder Steve Forbes and central to his influential presidential campaigns. As Forbes wrote in 2016:
NEXT TO THE UNSTABLE DOLLAR, the biggest deadweight today on the American economy is the horrific federal income tax code. It is past time we junked this incomprehensible, opportunity-killing and corrupting monstrosity and replaced it with a simple flat tax. The returns we, the people, must file by today (even if you file for an extension, you have to pay what you owe Uncle Sam by this date) should be the last time we have to suffer through this ordeal.
More than 40 countries and jurisdictions (such as Hong Kong) have variations of a flat tax, and those systems have worked well.
For those unfamiliar with the concept, a flat tax is a single-rate income tax system that has few or no deductions. You could literally fill out your return on a single sheet of paper or with a few keystrokes on your computer.
The most basic and profound argument for a flat tax is moral.
The IRS estimates we spend 6 billion hours a year filling out tax forms. Experts calculate we spend over $200 billion a year complying with the income tax code. And no wonder. The code gets more horrifically complex each year. The number of words in it and all its attendant rules and regulations comes to more than 10 million. Even adults with no taxable income must file a return. And don’t be deluded by tax-preparation software. Depending on your circumstances, different brands will give you differing amounts of tax owed.
Furthermore, the evidence is compelling that the flatter the tax the more the burden is carried by the affluent. Per Committee founders Stephen Moore and Arthur Laffer writing at Heritage Foundation:
There was another practical reason for chopping tax rates down, as the rich found all sorts of clever and legal ways around paying those high tax rates. When the highest tax rate was between 70 percent and 90 percent, the wealthiest 1 percent of Americans paid less than 20 percent of the income tax burden. Today, with a tax rate of 37 percent, the rich pay almost 40 percent of the income tax burden. High tax rates failed to soak the rich because they sheltered their income from taxes.
And Adam Michel, also writing at Heritage:
The most recent IRS data, from 2016, shows that the top 10 percent of income earners pay almost 70 percent of federal income taxes. However, after the estate tax, the federal income tax is the most progressive part of the U.S. tax code.
Americans also pay less progressive payroll taxes, corporate taxes, excise taxes, and at the state level, property and sales taxes.
Looking at all federal taxes, the Congressional Budget Office shows that the top 1 percent pay an average federal tax rate of 33.3 percent. The data shows tax rates decline with income, and the poorest 20 percent of the population pays an average tax rate of just 1.7 percent.
The “progressive” (escalating rate) income tax is one of the ten key planks of The Communist Manifesto and an instrument of class warfare. It is somewhere between bewildering and ironic that one of the “Ten Commandments” of Communism—the economic system that brought unparalleled misery to the 17 nation-states (many more counting former Soviet constituent republics) where it has been imposed– remains doctrinal to the American political elites. Capitalism, to which the “progressive” income tax is antithetical, demonstrably has brought much of the world out of abject poverty and continues to unleash prosperity wherever applied.
The theory of incentives provides the basis for the concept of a flat-rate tax, which is so-called because a single tax rate applies equally to all sources of income and does not change as a result of the taxpayer’s volume of income. Any exemptions, deductions, differential rates or progressivity would preclude the name flat rate. They also represent a deviation from the principles of efficient taxation. Such exceptions to the even application of a single tax narrow the tax base, lead to a higher tax rate, make for greater complexity and increase tax avoidance.
Incentives can be either positive or negative. They are alternatively described as carrots and sticks or pleasure and pain. In the realm of economics, taxes are negative incentives and government subsidies are positive incentives, subject to all the subtleties and intricacies of the general theory of incentives. People attempt to avoid taxed activities — the higher the tax, the greater their attempt to avoid. As with all negative incentives no one can reliably predict how the avoidance will be carried out or the true costs to the economy (and misery to workers) that such distortions will bring.
In the case of taxable income, people try to shift income from higher-taxed categories to lower- taxed categories. They purchase tax shelters and, in the extreme, they may even earn less income or mischievously seek to evade the strictures of the IRS. Because tax revenue is necessary to sustain essential government spending, one canon of economics has always been to have the largest possible tax base coupled with the lowest practical tax rate. By so doing, people are provided the least opportunity to avoid paying taxes and the lowest incentive to do so.
In the words of Henry George: A good tax should “bear as lightly as possible on production—so as least to check the increase of the general fund from which taxes must be paid and the community maintained.” He also went on to say that a tax should “be easily and cheaply collected … so as to take from the people as little as possible in addition to what it yields government.”
Under a flat rate tax, average tax rates will remain approximately constant for a given level of income or output. However, the after-tax rewards for incremental work by labor, the employment of additional capital and the more efficient combination of the two will all be higher with the flat tax. As a result, more employment, output and production results. Economic growth will accelerate as these effects are incorporated into the workings of the economy. A flatter, or even flat, tax will lead to the robust creation of better, and better-paying, jobs.