Ideas for Obama: A Modified Flat Tax

Every undergraduate in political science has the same epiphany when they first see the set of bound volumes known as the federal tax code: Why not get rid of all those special interest tax breaks and deductions and lower the tax rate for everybody?

The idea, like the Roman Rite, has a noble simplicity but it runs up against two big problems. First, tax simplification has no champion whereas those various provisions of the tax code have very well defined champions. The benefit of tax reduction is diffuse but the maintenance of our current byzantine system confers specific benefits. Second, you don’t end up saving that much money. No tax simplification scheme can afford to go after those deductions most middle class earners enjoy such as the deduction for home mortgage interest or state and local taxes, and what’s left over does not amount to enough total dollars to be able to achieve a significant reduction in the overall tax rate.

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Having analyzed the difficulties, most conclude that the idea is, well, sophomoric, and set it aside. Progressives smell a similarity to a flat tax. Conservatives like to talk about the free market, but their business cronies like their corporate welfare: They come to praise the free market not to abide it.

So why do it? President-elect Obama has promised to transform the political system and break the backs of the "special interests," a perennial good-government pledge that sounds good but tends to get lost in the shuffle, the usual ethics reforms involving actions far from public view. But everyone gets a not very simple 1040 form every year so they recognize its complications. And, everyone understands that most of the special tax breaks others get are the result of lobbyists successfully getting the provisions inserted into the code. Obama’s army of supporters might be able to mobilize support for tax simplification if you mailed them a copy of a proposed four-page tax code, easy to read and understand, and mailed it around April 15.

Of course, because Obama would have to keep those deductions most people claim, the tax simplification would not raise significant revenue for the federal government. Obama might even want to make the proposal revenue neutral to highlight his emphasis on limiting the power of lobbyists. He can point out that the companies who are losing their special tax breaks will save money over the long-term because they will no longer need to employ the lobbyists who get the tax loopholes in the code, nor the gaggle of lawyers and accountants who harvest the loopholes year-in and year-out. And the smart and talented people who work on K Street can start to find more productive work. Corporate America can start to make decisions based less on the tax consequences of those decisions and more on their inherent worth.

No Democrat can support a pure flat tax but a modified flat tax such as this could win support from both the populist left and the populist right. The progressivity of the tax code can be maintained and is no insult to simplification because it is not difficult to understand: After you figure out your taxable income, you just look it up the amount on the tax table.

The benefits of this proposal are not primarily economic but political. By making an easily understood and readable change in such a central function of government, Obama would be restoring some sense of what it means to be self-governing. It is a challenge for our modern democracy that the laws of the land can only really be understood by a lawyer. No wonder people feel alienated. President-elect Obama seems uniquely attuned to the value of the symbolic in governance from announcing his candidacy where Lincoln had once served to his selection of former rival Hillary Clinton for his Cabinet. Adopting a modified flat tax would put some very demonstrable content into his promise to change the ways of Washington.

 

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8 years 12 months ago
A modified flat tax won't raise the needed revenue, but there are plans that can be used and which progressives may accept. The chief among them is a combined Value Added Tax/Simplified Income Tax with a standard deduction of $50,000 for individuals and $100,000 for families. This is proposed by Michael Graetz of Yale University. Like the Fair Tax, it would have a prebate, which would be paid refunded by employers against wage tax receipts (along with EITC payments and other family credits). I have a similar proposal, which would broaden the base of Business Income Taxes to include all forms of ownership, transfer all non-retirement social insurance taxes to the BIT, repeal the deductibility of wage income to employers and increase the credit for dependents (including dependent non-working spouses) to $500 per month per dependent (creating a living wage). Other credits to the BIT at the state level might include a contribution to alternate providers of eduction, social services, mental health care and corrections in lieu of taxes (like Catholic Schools, Catholic Charities and Catholic Health Care - which should replace CCA in the private prison business). I would also raise the standard deduction for individuals to $100,000, count all distributions from inheritances as normal income and end the aggregation of spousal income for tax purposes (if the spouse makes under the standard deduction it is exempt, not additive).

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