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.
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.