Tax season ended last month, but talk of tax reform is still very much with us.
Many provisions of the Tax Cuts and Jobs Act (TCJA) that the Republican-controlled Congress passed, and President Trump signed into law, in 2017 will expire at the end of 2025, along with other temporary tax provisions not enacted by the TCJA—commonly known as “tax extenders.”
After 2025, marginal tax rates will revert to their pre-TCJA levels of 10, 15, 25, 28, 33, 35, and 39.6 percent. The basic standard deduction amounts will revert to their lower pre-TCJA levels and then be adjusted for inflation. The personal exemption will be reinstated and then be adjusted for inflation. The child credit will revert to its lower pre-TCJA amount. The “credit for other dependents” or “other dependent credit” (ODC) instituted by the TCJA will also expire. Cash contributions to charity will generally be limited to 50 percent of the taxpayer’s adjusted gross income (AGI). Taxpayers who itemize their deductions will no longer have a cap on their state and local tax (SALT) deduction, and the estate and gift tax exclusion amount will be cut in half and then be adjusted annually for inflation.
At a recent event in New York City, Steve Forbes—the editor-in-chief of Forbes who sought the Republican presidential nomination in 1996 and 2000—said that “he is advocating for Trump to support a flat 17% tax rate for all income brackets with ‘generous’ exemptions.’” For a family of four, Forbes suggests that the first $54,000 of income be exempt from federal income tax.
The event was organized by the Committee to Unleash Prosperity, whose mission is “to educate policy makers and the public about government policies that have been proven, in practice, to maximize economic growth and equitable prosperity in America and around the world.” The founders of the committee are Arthur Laffer, Stephen Moore, Larry Kudlow, and Steve Forbes.
Forbes has been one of the biggest proponents of a flat tax, and it was the centerpiece of his presidential campaigns and the subject of his 2005 book, Flat Tax Revolution: Using a Postcard to Abolish the IRS (Regnery, 2005).
I have been one of the biggest critics of the flat tax—and the FairTax and every other conservative tax-reform plan. I first visited the flat tax idea in my 2006 review of Forbes’s book, and then again in my 2008 New American article, “The Flat Tax Is Not Flat.” I revisited the flat tax again in my 2015 LewRockwell.com article, “The Flat Tax Revisited.” I think it is now time to revisit the flat tax yet again.
According to Forbes:
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.
For those unfamiliar with the concept, a flat tax is a single-rate income tax system that has few or no deductions.
The most basic and profound argument for a flat tax is moral.
And according to the Committee to Unleash Prosperity:
The “progressive” (escalating rate) income tax is one of the ten key planks of The Communist Manifesto and an instrument of class warfare.
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.
I will limit my remarks on the flat tax to the arguments raised by Forbes and the Committee to Unleash Prosperity.
That flat tax proponents want to replace the current tax code with a different tax code demonstrates the fatal flaw of the flat tax. The elimination of federal taxes is obviously not their goal. Flat taxers just want to make tax collection and tax preparation simpler, more efficient, and fair. Nor is the overall lowering of federal taxes their goal. All tax-reform plans are always revenue neutral, so a flat tax still gives the monstrosity known as the U.S. government trillions of dollars to spend and maintains all unconstitutional federal departments, bureaus, programs, agencies, and programs.
In fact, all so-called flat tax plans are not actually flat. If you want an example of a real flat tax, look at the Medicare tax, which has a rate of 2.9 percent (divided equally between employer and employee) on every dollar of income earned. Flat tax plans that contain deductions, however, are not really flat tax plans. Neither are flat tax plans that contain no deductions. Forbes wants the first $54,000 of income to be exempt from federal income tax, which again means it is not really a flat tax. So just because the tax rate is the same for all taxpayers does not mean that you have a real flat tax.
There is nothing moral about a flat tax or any other tax that confiscates 17 percent, or any other percent, of someone’s income and then redistributes it, wastes it on government boondoggles, spends it on unconstitutional agencies or programs, sends it to foreigners and their governments, and funds unnecessary and immoral foreign military adventures.
Having a progressive income tax is indeed one of the 10 key planks of the Communist Manifesto and an instrument of class warfare. Yet the flat tax is also progressive, just like the current tax system with its seven tax brackets. Progressivity doesn’t require graduated tax rates. Having one or just a “few” tax deductions makes the flat tax progressive, and exempting the first $54,000 of income from federal income tax really makes the flat tax progressive. I thought that “any exemptions, deductions, differential rates or progressivity would preclude the name flat rate,” something that Forbes has argued, but obviously it does not.
Although it is certainly true that the current U.S. tax code is too complex, too confusing, and too intrusive, what really needs to be flattened is skyrocketing congressional spending, not the procedure used by the government to confiscate the wealth of its citizens. But even that does not go far enough. What is really needed is the abolition of welfare-warfare programs, along with the income tax that funds them.