Flat Tax Will Benefit Only the Rich
Flat tax will benefit only the richest taxpayers
November 1, 2011
Conservative politicians support tax increases. Not for their wealthy donors, but for the poor and middle-class Americans who would pay more under the so-called "flat tax" proposals that were touted by Dick Army and Steve Forbes in the 1990s and are gaining currency again.
America has a progressive personal income tax, meaning it applies higher tax rates to the well-off and lower tax rates to the less well-off. Any proposal to adopt a single tax rate somewhere in between the existing highest and lowest rates would result in tax cuts for the rich and tax increases for the poor.
It gets worse. Flat tax proposals would exempt investment income, which largely goes to the rich. Our personal income tax already taxes capital gains and stock dividends at lower rates than wages, which mostly benefits the richest 1 percent of taxpayers. Rather than eliminating these and other special breaks, the flat tax proposals would expand them into one big exemption for investment income.
Some wealthy people already disguise their income as capital gains in order to benefit from the lower tax rates. These shenanigans would be even more common if the tax rate on capital gains and dividends was reduced to zero percent.
Flat tax proposals also include a business flat tax that would expand the existing tax breaks for capital investments (most of which companies would make even if there was no tax incentive) into an immediate deduction for all capital investments. Businesses would also pay taxes—which they would ultimately pass on to employees—on fringe benefits like employer-provided healthcare.
My organization analyzed the last halfway serious flat tax bill in Congress, which was proposed by former Sen. Arlen Specter of Pennsylvania, in 2010. We concluded his 20 percent flat tax plan would cut taxes for the richest 1 percent of taxpayers by over $200,000 on average, cut taxes for the next richest 4 percent by $5,800 on average, and raise taxes for everyone else by thousands of dollars each.
Don't believe us? Then read the 1983 book, Low Tax, Simple Tax, Flat Tax, which is the basis for all these proposals. Authors Robert Hall and Alvin Rabushka wrote that the flat tax "will be a tremendous boon to the economic elite" and that "it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people."
- Check out a roundup of editorial cartoons on the economy.
- Read 10 Things You Didn't Know About the Bush Tax Cuts.
- Read how Rick Perry is using the flat tax the boost his campaign.