In Honor of a Tax Day Past

April 16, 2004

UPDATE 4/16 8:15 PM: I was beginning to get worried that the following post was being unfair to the mainstream Republican punditocracy. I didn’t really look around the web for new renditions of April 15 Flat Tax Fantasies, and so maybe they were finally petering out, being kept alive only by the truly faithful. By way of Kevin Drum, I see that the National Review came through to keep the noble Republican pundit tradition of only listing the pros of a proposal and never contemplating the cons. Aahhh, and all was right in the world of the Right…

In honor of the tax day just ended (at least in the Central and Eastern Time Zones), let’s take a trip down memory line to a more innocent time, a time when Republican control of Congress was a new thing and exuberance wasn’t really yet irrational. In that brief interval of not-yet-really-irrational Republican exuberance, proposals of replacing those ghastly, complex tax forms with a simple flat (yet progressive! oh-why-won’t-you-believe-us-it’s-progressive!) tax came fast and furious. And following the proposals in slower and more staid fashion was top-notch analysis from the U.S. Department of the Treasury (ah, yet another innocent aspect of that time: economic projections that were transparent and trustworthy).

Given how every April 15, the usual suspects among the conservative intelligentsia trot out these flat tax proposals, at least for old times’ sake, I think it’s worth reprinting the key thrust of this Treasury Department analysis:

Treasury Estimates of the Distributional Aspects of Various Revenue-Neutral Flat Tax Plans
Family incomeAverage Tax Rates*
Percentile Rank1996 income rangeActual 1996 LawProposal #1Proposal #2Proposal #3
Lowest Quintile$ 0-16,000-2.4%3.8%4.6%-1.5%
Second Quintile$16,000-30,0002.0%6.7%8.3%3.1%
Third Quintile$30,000-49,0007.1%9.5%10.9%8.5%
Fourth Quintile$49,000-79,0009.3%11.2%12.3%11.1%
81-90th Percentile$79,000-109,00010.8%12.9%13.1%13.2%
91-95th Percentile$109,000-145,00012.8%14.2%13.5%14.6%
96-99th Percentile$145,000-349,00015.7%14.8%13.2%15.0%
Top Percentile$349,000 and up22.4%13.5%11.3%14.3%

* “Average Tax Rates” are the total effective rate incurred from the federal personal income tax and federal corporate income tax

The three proposals are all estimated to be revenue-neutral under the conservative assumption that they do not induce economic growth beyond current law. (Of course, many Conservatives hate this assumption and prefer to fantasize about massive induced economic growth of several % points of GDP per year in perpetuity.)

Proposal #1 = 20.8% Flat Tax, $31,400 exemption, no Earned Income Tax Credit
Proposal #2 = 17% Flat Tax, $15,000 exemption, no Earned Income Tax Credit
Proposal #3 = 22.9% Flat Tax, $34,700 exemption, keep 1996 Earned Income Tax Credit

Some things to note:

1) The incidence of FICA and state taxes are not included, only the incidence of federal personal and corporate income taxes. The 1996 tax structure was not as progressive as the “Actual 1996 Law” column looks.

2) No revenue-neutral flat tax proposal under the “static” economic forecasting assumption of no induced growth was expected to maintain a progressive structure. Indeed, all of them have the interesting feature of having the top 1 percent pay a lower effective rate than the 91st – 99th percentile (and again this is even before the FICA and state taxes noted it item #1)

3) Worse than that, every revenue-neutral flat tax proposal under the static economic forecasting assumption *increased* the effective tax rate on the bottom 95 percent of the income distribution.

4) There’s no reason to believe that items #2 and #3 have qualitatively changed for these proposals if the analysis were recalculated today (and don’t even get me started on the utter inability for the US to stay on a revenue-neutral course after the 2001-2003 tax cuts).

In closing, there’s a lot to be said (although it’ll be said at a different time) in favor of tax simplification, and such simplification could be done in a truly progressive fashion (see especially the reference below… it’s probably the most comprehensive guide for the layperson on tax policy). But all the major flat tax proposals don’t even come close to this goal, actually significantly raising tax rates on the bottom 95% of the income distribution if they’re to be revenue-neutral as well as generically giving a windfall to the top 1%.

[Reference for Table: Table 7.1 from Taxing Ourselves: A Citizen’s Guide to the Great Debate over Tax Reform, 2nd Edition, page 226 by Joel Slemrod and Jon Bakija (Cambridge, MA – MIT Press 2001), itself relying on data from:

1) US Department of Treasury, Office of Tax Analysis. “A Preliminary Analysis of a Flat Rate Consumption Tax” (Washington, DC – March 7, 1995)

2) US Department of Treasury, Office of Tax Analysis. ” ‘New’ Armey-Shelby Flat Tax Would Still Lose Money, Treasury Finds.” Tax Notes (January 22, 1996) 451-61.


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