Flat Tax Revolution
An idea whose time has come--just not here.
BY STEPHEN MOORE
Thursday, September 1, 2005 12:01 a.m.
The flat tax--the same tax rate for everyone, without all the deductions that now complicate the tax code--is an idea with a decades-long pedigree. Politically its high-water mark in the U.S. came in 1996, when Steve Forbes ran for the Republican presidential nomination against Bob Dole and a tired GOP establishment.
Mr. Forbes single-handedly thrust revolutionary ideas into the political headlights--ideas about health insurance and Social Security, for instance, but most famously about the tax code itself. The GOP establishment hated his message, but the conservative rank-and-file loved it. Mr. Forbes was suddenly the talk of the town. There he was, with his signature horn-rimmed glasses and geekish smile, plastered on the cover of Time magazine. And for a brief moment it appeared that he might even win the nomination and topple the Republican establishment.
But then various deep-pocketed interest groups stirred themselves into action. In January 1996, for instance, the housing industry spent millions of dollars on TV and print ads explaining to New Hampshire voters that Mr. Forbes's flat tax, by eliminating the mortgage-interest tax deduction, would destroy the value of their homes and send their tax bills through the ceiling. Not a word of it was true, but truth is often a casualty in political polemics. Mr. Forbes fell like an oak.
As Mr. Forbes is fond of noting in "Flat Tax Revolution," the idea he touted did take hold--just not in the U.S. Ten nations--most from the former Soviet Union, including Russia itself, with its 13% rate--have embraced a flat tax. And the economies of these countries are reaping their reward: They far outpace crusty Old Europe in GDP growth and job creation. China, Germany and Spain could be the next dominoes to fall.
Mr. Forbes argues that international competition seems to be driving the flat-tax frenzy. "Countries increasingly recognize that if they don't adopt the flat tax, they will lose jobs, capital and their own ambitious entrepreneurs to more growth friendly nations." He shows that, in virtually all the countries with a flat tax, government coffers overflow with tax receipts. These real-life examples are obviously sweet vindication for Mr. Forbes, who has often been accused of self-interestedly trying to push down tax rates on wealthy families like his own while depleting the government of the revenues needed to pay the bills.
Mr. Forbes takes a machete to such fallacious arguments. No, the government's bills will not go unpaid: Revenues will equal what they are under the current system when faster economic growth is accounted for. No, the flat tax will not destroy home values--actually they will rise because the pro-savings flat tax lowers interest rates. No, hospitals and orphanages and the Salvation Army will not disappear with the elimination of the charitable tax deduction. Charitable giving is a function of disposable income, not the size of the tax write-off. And disposable income rises under a flat tax.
No, the flat tax will not destroy the health-care system by eliminating the employer deduction for health insurance. In fact, a new system of health coverage would evolve under a flat-tax regime, a system that would "restore the connection between the health care provider and the consumer and thus get control of runaway health care costs." It is precisely the employer-based health-care system--distorted into inefficiency and waste by the current tax structure--that has driven up doctor and hospital costs and made health insurance unaffordable to so many Americans.
The only low point in "Flat Tax Revolution" is a gratuitous attack on the idea of a national sales tax, the so-called Fair Tax. Mr. Forbes writes that, because the fair tax offers a universal rebate to all Americans, "poor taxpayers may resent that their well-off counterparts are getting the same amount they are." But the flat tax also has a "universal rebate": The first $40,000 of income for a family of four is not taxed.
The truth is that these two reform plans have a lot in common--low rates, uniformity, simplicity--and they both run circles around the current system, which is every bit as bad as Mr. Forbes says it is. "The federal income tax code and all its attendant rules and regulations," he observes (after noting the brevity of the Declaration of Independence), runs to "nine million words." Such complexity is estimated to cost the U.S. economy about $200 billion a year.
Unfortunately, many Americans have lost hope that the tax code really can ever be simplified. It is certainly true that every paralyzing regulation, carve-out, credit and deduction in the code was put there for a special-interest reason and will be difficult to dislodge. The very influence peddlers who tanked the Forbes flat tax in 1996 will fight to preserve their fiefs when the current system is next challenged. The flat tax is indeed what Mr. Forbes calls the ultimate "Washington versus America" battle.
But it is a battle worth fighting and, Mr. Forbes believes, a battle that can be won. Most of the ideas that he campaigned on in 1996, ideas that seemed so revolutionary back then--term limits, Social Security privatization, Medical Savings Accounts, capital-gains tax cuts--have since been adopted or are under serious debate. The flat tax is the last major Forbes reform yet to take root. Eventually, it will.
Mr. Moore is senior economics writer and a member of The Wall Street Journal's editorial board. You can buy "Flat Tax Revolution" from the OpinionJournal bookstore.
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