We learned this week from the CBO that over the last 30 years, the income of the top 1 percent of earners shot up 275 percent, compared to the middle three-fifths, whose income grew by only 40 percent. No wonder people feel like there isn't a level playing field in America anymore. That feeling explains why so many people are interested in a flat tax. Done right, a flat tax would lower and simplify federal income tax rates, broaden the base, eliminate deductions and loopholes, attract foreign capital, add certainty for individuals and businesses, end "crony capitalism," and most importantly, spur growth and job creation.
Herman Cain is proposing a 9 percent flat federal income tax for both individuals and corporations (along with a 9 percent federal sales tax); Jon Huntsman likes cutting the top individual rate to 23 percent; Rick Perry unveiled his optional 20 percent flat tax this week. The Republican candidates for president, with the notable exception so far of Mitt Romney, are using the flat tax as a way to challenge the status quo of political and economic stagnation. Like most Americans, they understand that the current system of high-debt, slow-growth, nanny-state, business-as-usual in Washington isn't working.
But while you can say a lot of things about Perry's flat tax—big, bold, out-of-the-box—there's one thing it's not. Rick Perry's flat tax isn't flat. He's proposing an "optional" flat tax: you can keep your current tax rate and all your deductions, or go with a flat rate of 20 percent. If you go that route, instead of eliminating all deductions, Perry proposes keeping the deductions for mortgage interest, charitable donations and state and local taxes. Simpler than what we've got, but still not simple. Could you still take all those deductions and file on a postcard-sized tax return, as Perry claims?
Why anyone currently paying less than 20 percent would go for a higher tax rate voluntarily is beyond me. Warren Buffett talks a big game about wanting to pay more in taxes, but he hasn't voluntarily moved up to a higher rate and sent in unsolicited tax checks out of the goodness of his heart.
It's a rational economic decision to drop down to 20 percent from a higher rate, and so presumably all the higher-rate, higher-income taxpayers would take the tax cut while everyone else would stay where they were. So being "optional" becomes a defacto tax cut for the wealthiest, while everyone else stays at a variety of rates and deductions. Add to that Perry's proposal of a $12,500 standard deduction per individual, and families of four who earn less than $50,000 would pay no tax at all. Perry's proposal doesn't sound flat to me. And it doesn't do much to broaden the base—in fact, it appears to narrow it.
Broadening the number of people who pay lower taxes will go a long way toward leveling the playing field—at both ends. Raising tax rates on high income individuals and corporations, as the left advocates, only means fewer tax revenues, as armies of high-priced accountants figure out ways around the rates. When voters see huge corporations like GE paying little or no corporate taxes—which is perfectly legal under the current system—that feeds political instability and fuels protests like Occupy Wall Street. On the other end, taking more and more lower-income earners off the tax rolls adds to the feeling that our fiscal future is unsustainable: you can't have fewer and fewer taxpayers financing more and more demand for unfunded government services. We're all in this together, and everyone needs to feel that they have a stake in the future of our government. When we don't see that, protests like the Tea Party spring up.
A flat tax—one that is truly flat—solves both problems. We need a broader base of Americans who are financially vested in the future of our country, we need relief from our complicated and unfair tax code, and we need the confidence and optimism that would flow from a level playing field for all Americans. We need the economic growth and job creation that a flat tax would create. Republican candidates, as flawed as some of their proposals may be, are on the right track.