Tax Analysts Blog

Even Under a Flat Tax, Learn to Love Those Loopholes, Because They’re Here to Stay

Posted on May 7, 2015

The flat tax is back, thanks to a variety of GOP presidential candidates, including Ted Cruz, Ben Carson, and Rand Paul. Their collective enthusiasm has given new life to this old idea.

The problem for the flat tax has always been its popularity – or more specifically, the lack thereof. As one of the levy’s most ardent champions, Stephen Moore, recently acknowledged, “’Flat tax’ as a concept does not poll very well.”

Americans, it turns out, are reasonably fond of their progressive tax rates, as well as their tax preferences (or at least the ones they can actually use). By threatening to eliminate both, the flat tax loses crucial support.

Moore thinks he has a solution: Sell the flat tax as a way to roll back favoritism in the tax code.

The only people who benefit from a complicated, barnacle-encrusted, 70,000-page tax code are tax attorneys, accountants, lobbyists, IRS agents, and politicians who use the code as a way to buy and sell favors. The belly of the beast of corruption in American politics is the IRS tax code. The left keeps saying it wants to end the corrupting influence of big money in politics. Fine. By far the best way to do that is to enact a flat tax and D.C. becomes the Sahara Desert.

This makes some sense, in an abstract, moralistic sort of way. But it doesn’t have much to do with real-world proposals for a flat tax -- or the likely results of enacting one.

First, the “flatness” of the flat tax resides principally in its reform of the rate structure. But moving to a single rate is not necessary to eliminate the sort of favoritism that Moore decries. Indeed, it’s possible (and maybe easier, in political terms) to broaden the tax base without abandoning graduated rates.

It’s even possible to change the tax base from income to consumption -- an unheralded element of almost all flat tax proposals -- without giving up on the progressive rate structure. That was economist David Bradford’s point in devising his X tax proposal. Even some of the original flat taxers -- including Robert Hall, coauthor with Alvin Rabushka of the most famous flat tax plan -- have endorsed the idea of shifting to a flat-tax-style base while retaining a graduated rate structure. “A tax design to fit the times might have two or even three different tax rates at the personal level,” Hall wrote in 2005.

Second, there is no reason to believe that any campaign to shut down tax favoritism will actually work. For better or worse, democracy doesn’t lend itself to pristine forms of taxation. Americans have been buying and selling favors in the tax code for centuries. Before they were doing it under the income tax, they were doing it under the tariff.

The flat tax, in other words, is not a panacea. Even if Congress, in a fit of collective self-sacrifice, were to actually enact a clean tax system -- complete with a nice, tidy, uncompromised base -- it wouldn’t stay clean for very long. The natural dynamics of democracy ensure that loopholes, preferences, tax expenditures, or whatever you choose to call them will necessarily return.

There’s a cruel irony to tax reform: Every time you close a loophole, you create the possibility of opening it again. Milton Friedman made this point in 1986 as he reflected on the landmark tax reform law passed that year. The legislation, he observed:

      was an ingenious solution to the potential collapse of tax reform as a source of campaign funds. His bill disappoints almost all the lobbyists in one fell swoop, but it also wipes the slate clean, thereby providing space for the tax reform cycle to start over again. The initial sacrifice of the lobbyists is only apparent – since there was no more room for appeasing them anyway. And the apparent sacrifice is worth making because the members of Congress look forward to being reelected and the lobbyists to being retained – so this tactic promises future benefits to both groups.
Tax reform, in other words, is not all sweetness and light. Like pretty much everything else in politics, it’s complicated and ambiguous.

That’s not to say we shouldn’t resist the merchandising of tax breaks by contribution-seeking politicians. But that’s a retail fight, not a wholesale one. Once you win the battle, you have to keep fighting it over and over again. That’s tiresome, but it’s also a fact. And not one the flat tax will do anything to change.

Read Comments (10)

Ken WrightMay 7, 2015

Years ago I read a short editorial about the flat tax. I wish I had saved
it---not for content, which I don't remember, but for its title, which I do:
"Those Who Believe in a Flat Tax Believe in a Flat Earth."

edmund dantesMay 7, 2015

Agreed. Talk of flat taxes is a sideshow for the rubes. We'll know tax
reformers are serious when they advocate ending the massive tax exemptions for
muni bonds, foundations and endowments, and employer-provided health care. No
one is talking about those elements, and no one will.

The talk of "abolishing" the IRS, however, is more serious. The new revelation
on the IRS specific targeting of Wayne Root, coupled with the smackdown of IRS
in the Z Street litigation, means the investigation of the politicization of
IRS has a long life. Accountability is coming.

A. HamiltonMay 9, 2015

Exactly right, Joe. Members of the tax writing committees do not come to town
to deny benefits to constituents. Clean up the current mess and the next
Congress will busy itself doling out goodies. That is what the job is all
about.

Mike M.May 10, 2015

How about we sunset the tax code every five years. Restart with with limited
graduated rates of taxation and no deductions or exclusions on income. The
code would at least gain some transparency on its byzantine decent.

david brunoriMay 11, 2015

Edmund, I am curious as why you think the flat tax is for rubes. The idea of a
broad base and low rates has been gospel among tax reformers for 40 years. A
true flat tax is a logistical extemsion of that thinking. Moreover, eliminating
breaks for the munis, health care etc., is only possible with a flat (or at
least flatter tax).

robert goulderMay 11, 2015

"... democracy doesn't lend itself to pristine forms of taxation." You just hit
the nail squarely on the head.

edmund dantesMay 12, 2015

"Edmund, I am curious as why you think the flat tax is for rubes. "

The flat tax is a great idea. To be more clear, I meant to say that the
politicians talking about the flat tax are not serious about it, they are
pandering to various constituencies, some of whom do not have a sophisticated
understanding of taxes.

david cay johnstonMay 12, 2015

Edmund Dantes, who dare not reveal his real name, errs in asserting that no one
has or will 'advocate ending the massive tax exemptions for muni bonds,
foundations and endowments, and employer-provided health care."

The proposed new tax code that I am drafting, and will be finished this summer,
does that and more.

I would, however, not eliminate nonprofit endowments, but change the rules in a
very simple way to ensure that tax advantages flow from the degree of personal
versus public benefits.

edmund dantesMay 14, 2015

"ensure that tax advantages flow from the degree of personal versus public
benefits."

David Cay Johnston, can you tell me how Harvard's endowment stacks up on your
personal versus public benefit test? I would mark it 100% personal benefit.
All the distributed benefits go to the students and the professors. Most of
the benefits are not distributed at all, but are accumulated. For what
purpose, I know not—isn't $36 billion enough already?

What about the Ford Foundation? Given that it funds exclusively liberal/left
wing causes, I'd deny them a tax exemption as well. Whether their work is a
"public benefit" is entirely in the eye of the beholder—I consider them a
public menace. Subjectivity in judging the worthiness of a charity's efforts
is a poor foundation for tax policy.

The tax code would be enormously and appropriately simplified if we stop
wasting resources on who can be tax-exempt and who is not, and simply bring
everyone into the tax tent, where they all belong. I reject the notion that
spending by the nonprofits substitutes for government spending, and so that
justifies their exemption. That is a highly anti-democratic proposition.

Because they are rich enough, Bill Gates and Warren Buffett get to spend their
fortunes on the "quasi-governmental" initiatives that they favor, free of
Congressional oversight or priorities? No, they should pay taxes first, like
the rest of us. All the work of their private foundations is personal
consumption, in my book.

ttMay 16, 2015

Study the international tax history. The first flat tax was introduced by
Stalin in april 1943.

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