November 15, 2004
Volume 6 / Number 35
Dear Colleague:
Now that President Bush has named tax simplification one of the top priorities for his second term, tax reform advocates need to ensure that tax reform doesn’t end up raising taxes on many families, especially large ones.
Steven W. Mosher
President
Action Item: Please call or write your Congressman and Senators and tell them that tax reform must not end up raising taxes on middle class families.
Will Families Benefit from Tax Reform?
Remarks by President Bush have renewed the drive to simplify the federal tax code, which has grown ever more complicated since Ronald Reagan’s tax simplification passed Congress in 1986. Politicians cannot resist handing out favors to campaign contributors and influential constituencies in the form of tax breaks garnered by K Street lobbyists in Washington, D.C..
The President called for simplifying the tax code. For federal income taxes, the simplest solution is the flat tax: After allowing deductions for individuals and dependents, all income would be taxed at the same single rate. No complexity, no favoritism, no unfairness. As long-time flat tax proponents such as former House Majority Leader Dick Armey (R.-TX.) and publisher Steve Forbes have emphasized as a major selling point of the flat tax, Americans could do their taxes on a postcard.
Bush has not endorsed the flat tax, only tax simplification, and maybe this is the reason why: the most popular versions of the flat tax could raise taxes on many middle-class families.
Many conservative, pro-family advocates have long supported a flat tax for its salutary effect on families, such as its elimination of the marriage penalty-which is still around, though in reduced form since the 2000 elections. An additional benefit of a single tax rate is that it will eliminate the insidious ‘marriage penalty,’ which taxes married couples at a higher rate than if the man and woman filed singly as individuals,
wrote Randy Tate, former Executive Director of the Christian Coalition, on July 9, 1999. At a time when family breakups are all too common, tax policy should place government on the side of America’s families. . . But a flat tax does more than simply hand a windfall tax cut to American families-it encourages economic growth. By taxing income only once (unlike the current system, which taxes income when we make it and again when we save it and earn interest), a flat tax encourages savings and investment. Small family businesses will have incentives to invest on the basis of what makes the most financial sense, not what constitutes the best tax write-off.
At a time when more and more families are starting small businesses or relying on income from working for them-most job creation in this country is by small businesses-that can make a big difference. The increased productivity and economic growth triggered by a flat tax could be its greatest advantage.
In the long term, families can expect an increase of about 10% a year in their gross incomes as a result of a flat tax,
said Stephen Entin, president of the Institute for Research on the Economics of Taxation, in an interview. That’s because a flat tax increases the efficiency of the economy by eliminating distortions, i.e. by encouraging people to put their money where it will generate the most income instead of where it will best avoid taxation.
It saves the hundreds of billions of dollars going into the tax system from economic distortion, our friends on K St., and the cost of time and money spent trying to comply with the tax code,
said John Berthoud, president of the National Taxpayers Union, in a separate interview.
There is a moral advantage as well. Why should wealthier people pay a higher proportion of their incomes in taxes? Shouldn’t everyone pay the same rate, which after all means that the rich pay more? What family would penalize its children for working longer hours and earning more money? Shouldn’t such behavior be encouraged rather than discouraged?
But there is a danger in the flat tax. Although in the long term it would lead to higher incomes, in the short term it could lead to higher taxes on families which now benefit from the $1,000-per-child tax credit, assuming it is not allowed to expire under the current system. Entin calculates that a family with four children making $50,000 a year could owe about $1,500 more under an Armey-style flat tax with a 17% rate. A similar family making $70,000 could owe more than $2,000 a year. A flat tax that doesn’t include a tax cut but is revenue-neutral could even raise taxes on many families with two children, said Berthoud.
Flat tax proponents need to find a way to ensure that their idea doesn’t lead to tax hikes on families. Otherwise, there are a lot of people in Middle America whose support they won’t earn.
Joseph A. D’Agostino is Vice President for Communications at the Population Research Institute.
