Flat Tax Now!
In the U.S. and the U.K.
ANDREW SULLIVAN - LONDON TIMES
The election was supposed to be about the war. Then it was supposed to be about "moral values." Debates about George W. Bush's close but decisive win will no doubt consume the psephologists and political junkies for quite a while. But the post-election has turned on something that barely registered in the campaign. Yes, the president had referred to it in broad terms. But it had never really featured in any of the debates, had been largely absent from the president's stump speech, and was barely debated in the press or the blogosphere. The great missing issue? Tax reform. Or rather, a hugely ambitious attempt to transform the American tax system into a flat tax paradise. Of all the ideas being batted around in Washington, it remains the smartest of the president's second term objectives. And if they care about winning the next British election, the Tories will watch very closely. And, even better, follow suit.
The idea has been around for a while. Back in 1996, Steve Forbes proposed eliminating almost all income tax deductions and moving to a single, flat rate of tax for everyone. It was strong enough a platform to catapult him to temporary front-runner status in that year's uninspiring collection of Republicans. George W. Bush never emphasized it in his first term. With education reform, a new prescription drug entitlement, and the all-consuming war on terror, he had enough on his plate. But before the election, he had signalled to his core supporters that it was going to be a key item after his re-election. According to reporter Ron Suskind, Bush told his biggest fundraisers at the White House in September: "I'm going to come out strong after my swearing in," Bush said, "with fundamental tax reform, tort reform, privatizing of Social Security." In his first press conference after the election, he said the same, with the emphasis on fundamental tax reform.
Politically, the reasons for Bush's move are obvious. The Republican coalition, however victorious November 2, is by no means without strain. The cultural issues have split libertarians from social conservatives. The war has split neocons from realists. The spending binge has upset fiscal conservatives. Immigration reform is already causing some headaches with Bush's nativist base. But tax? That's what brings Republicans together, as it is what brings Tories together. Bush has already cut taxes, and refused to budge on them, despite massive and increasing government debt. What's left is reform of the tax code altogether.
Several ideas are on the table: a national sales tax, a consumption tax, or a flat income tax, or some combination of them all. But the Forbes-style flat tax on incomes is the most attractive. The reason is simple. If you believe that markets are the most effective way to apportion wealth and investment, the job of government is to stay as far out of the way as possible. That means not trying to micro-manage the economy with tax incentives for this activity, tax write-offs for another form of business, and endless tax shelters for various corporate interests. This amounts to a passive form of industrial policy - and it almost always increases inefficiency. By setting a single rate for all forms of income and consumption, you remove any extraneous intervention in the way the market operates.
You can also steal populist themes from the left without damaging the economy. How? In Washington, the entire lobbying industry, with its massive incentives to pour money into the political system in order to buy favorable treatment, is entirely dependent on a complicated tax code. It's all but impossible to fight this system one loophole at a time. The powerful sum of individual interests greatly outweighs the broader but less palpable common good. That's why, since the last major tax reform of 1986, the U.S. tax code has slowly become ever-more complex and ever-more corrupt. Walk down K Street in D.C. or visit a major law and lobbying firm in downtown Washington, and you wll see the congealed wealth of all this corruption. Lunchtime in the capital city is a buzz of various lobbyists securing new and intricate corprate exemptions in this part of the tax or regulatory code or another. And as these exemptions mount, general tax revenues dry up and more and more middle class Americans get left with the burden.
Get rid of all those exemptions in one swoop and you revolutionize both politics and economics. The politician who allows every citizen to fill out her tax form on a postcard with a simple calculator will become one of the most popular in history. It takes a president with a real mandate and a pliable Congress to achieve this kind of breakthrough, which is why the last success was Ronald Reagan's in 1986. And that is Bush's opportunity right now.
The political principle is equally simple: government should, as far as possible, treat all its citizens equally. Politicians often talk about equality, but they seldom live up to its core meaning. A true egalitarian doesn't believe in affirmative action, because it means the government discriminates on the basis of race. A real believer in equality opposes heterosexual-exclusive civil marriage, because it means the government discriminates on the basis of emotional/sexual orientation. And such a liberal also opposes punitive or "progressive" taxation, because it means the government discriminates on the basis of personal success. If we get rid of different rates of taxation, and we're all taxed at the same proportionate rate, the successful and hard-working still pay far more into the public coffers than the unsuccessful. They're just not penalized even further by a higher rate. If you want to help the poor, and we should, then we need to focus government spending on programs that help the under-privileged. We should boost educational standards in state schools; provide effective welfare that leads to work; ensure good healthcare, and so on. But there's no need to penalize hard work and success. Or to defend inequality, on the basis of envy.
Besides, a flat tax still has a basic exemption. Most flat tax schemes allow people who earn below a certain level - say 20,000 pounds - to pay no income tax at all. And that basic exemption carries on for those higher up the income scale. So some progressivity is built into the system, but only as a way to ensure that the poor are not over-taxed, rather than to ensure some socialistic ideal of income redistribution. And the money saved in bureaucracy and closed tax loopholes can make the single rate of tax low enough to be attractive to a majority.
Right now, after seven years of drift, the Tories are suddenly deciding to become a low tax party again. But by emphasizing the stealth tax increases of bracket creep, they are still being far too cautious. George W. Bush's great political skill - the reason, despite so much failure, he is still in command of American politics - is that he understands the appeal of the bold and the simple. Cut taxes by a large amount and stick to it. Crush terrorism, don't negotiate with it. These are messages that people understand. And they appeal to the core of conservative brand: low taxes, and a tough foreign policy. It works.
There is much that the Tories should not borrow from Bush: his crude moralism, his fusion of religion and politics, his social illiberalism. But there are some basic lessons that he could teach them. Among the most important is that people need to have a reason to vote Tory. No one will ever vote Tory rather than Labour because they want a bigger public sector or higher taxes. So offer them what they expect from you: lower taxes. But offer it in a new, simple and populist way. Promise to simplify the tax code in one swoop, sack most of the bureaucrats at the Internal Revenue Service, and end the corporate welfare that helps strangle a free economy.
Fortune favours the brave, as Machiavelli understood. The Tories have been cautious for far too long. And in tax policy alone, George W. Bush may well be signaling the way back to conservative government.
November 14, 2004, Sunday Times.
copyright © 2000, 2004 Andrew Sullivan
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