Pro & Con: Is the flat tax a solution for what ails the stumbling U.S. economy?

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Opinion Pro & Con: Is the flat tax a solution for what ails the stumbling U.S. economy? Peter Rush, William F. Shughart II For the AJC 1,107 words 21 July 2011 The Atlanta Journal - Constitution ATJC Main A21 English Copyright (c) 2011 The Atlanta Journal-Constitution, All Rights Reserved Yes. Flat tax will free up investment capital, lower tax return costs.

TD By Peter Rush Democrats and Republicans are in stormy negotiations to curb runaway spending and trim a bloated deficit, but any revolution in spending habits must be coupled with a simple, flat-tax system if it is to provide America with long-lasting prosperity. The flat tax should more correctly be called the "fair tax." It is the type of tax envisioned, proposed and supported when the 16th Amendment was passed in 1913 allowing for direct taxation of citizens by the federal government. The tax that was supported in the amendment was 1 percent on the first $20,000 of income --$425,000 of earnings today considering inflation over the past 98 years --- with a surcharge of 6 percent for income exceeding $500,000. The form and instructions were four pages and the return was filed on a postcard. Over the years, the tax code has become an incomprehensible monstrosity that imposes taxes and grants exceptions based upon political power rather than economic reason. It has become a major source of campaign funds for politicians. And it has created the most feared of all government agencies, the IRS. To stay competitive, the U.S. must reform the tax system and a return to the simplicity envisioned when the 16th Amendment was proposed and passed is a good starting point. The advantages of a flat tax are numerous and well documented, including: Elimination of political-favored deductions for well-connected industries and individuals and back-door social engineering. Vastly reducing the volumes of tax code that even the experts admit they don't understand as well as reduce the size of the tax collection bureaucracy. Spurring economic growth by eliminating taxation on savings and investing so that prudent productive individuals and businesses would prosper. And it also would eliminate the huge costs of preparing mountains of tax returns for the government. And, perhaps most important, positioning the United States at the forefront of the world as a country where individuals and businesses can grow and create jobs. Critics' objection that the flat tax is unfair to the poor is demonstrably wrong. Depending upon the threshold set for the personal deduction, people on the lower side of the economic scale would owe no taxes. Page 2 of 4 2011 Factiva, Inc. All rights reserved.

The other major objection to the flat tax is that it won't raise enough money to fund the government. As is now evident to all thinking Americans, government has a spending problem, not a revenue problem. In 1970, the federal tax revenue was $192 billion; in 2010, tax revenue was $2.1 trillion --- and it still isn't enough money to pay for all the programs politicians want. Right now, the people who write the tax laws often need a battery of accountants to comply with them. Joe and Jane Sixpack can't afford that expense, so they struggle for long hours trying to decode tax instructions that at times are unfathomable even to a Harvard economics professor. The opportunity is now and the benefits of flat tax will bring prosperity to our children and beyond. It's time for Congress to seize the moment. Peter Rush is the author of"Class Tax, Mass Tax." No. Flat tax won't fix U.S. spending problem and put budget in the black. By William F. Shughart II Over the past decade or so, China's policy of export-led growth has triggered double-digit economic gains, leading some commentators to predict that the Chinese economy --- already second-largest in the world --- would soon eclipse our own. Meanwhile, beginning with the popping of the real estate bubble five years ago, the United States slid into recession. Although the National Bureau of Economic Research found that the slump ended in June 2009, the recovery has remained weak, with unemployment still hovering around 10 percent. Has America lost its competitive edge? Are we doomed to be overtaken as an economic superpower only a decade into the 21st "Chinese" century? Maybe so, but switching from the current tax code --admittedly a giant mess --- to a flat tax will not by itself solve our economic woes. To be clear: I strongly favor junking the maze-like federal income tax code, 9 million words long and shot full of arcane provisions supplying tax breaks to special-interest groups whose Gucci-shod lobbyists patrol the halls of Congress whenever taxes are on the agenda. Replacing those 9 million words with a single tax bracket of, say 17 percent --- applying to all income, however earned, with few deductions or exemptions and no loopholes --- would produce huge economic benefits. However, a flat tax is no silver bullet for what ails the U.S. economy. Milton Friedman once said that government's burden on the private economy is best measured not by how much revenue it collects, but how much it spends. And federal spending is out of control, producing budget deficits exceeding $1 trillion annually and piling up mountains of debt for future generations of taxpayers. Shifting to a flat tax won't help because any flat tax proposal with a chance of winning approval will have to be "revenue neutral," extracting about the same amount of money from taxpayers' wallets as the existing tax code. This means that unless Washington cuts expenditures dramatically, the federal budget will stay in the red. Restoring America's global competitiveness requires balancing the public budget, not by raising taxes, but by cutting spending: reducing the size of government. It also requires reducing the job-killing regulatory burden on the private sector --- the thousands of pages of rules and regulations that bind the hands and increase the costs of business ---and maintaining a sound and stable currency. Rapid economic growth in China and slow growth in the United States already has narrowed the wage gap between Chinese and American workers, so much so that prominent U.S. manufacturers have begun moving some of their production facilities back home. Page 3 of 4 2011 Factiva, Inc. All rights reserved.

China is a red herring that should not distract taxpayers from demanding that Washington get its fiscal house in order. Most of our economic problems are self-imposed. If we are serious about maintaining our economic leadership, we should reduce these burdens. William F. Shughart II, a senior fellow with the Independent Institute, is J. Fish Smith Professor in Public Choice at Utah State University. CT NS For Reprints in the Original Format: e211 : Government Taxation/Revenue | e2111 : Direct Taxation | nedc : Commentary/Opinion | e21 : Government Finance | ecat : Economic News | ncat : Content Types | nfact : Factiva Filters | nfcpex : FC&E Executive News Filter usa : United States | china : China | apacz : Asia Pacific | asiaz : Asia | bric : BRIC Countries | chinaz : Greater China | devgcoz : Emerging Market Countries | dvpcoz : Developing Economies | easiaz : Eastern Asia | namz : North America

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