Tax Analysts Blog

A Flat Income Tax is a Good Thing

Posted on May 13, 2015

Theoretically at least, the proposal in Alabama to adopt a flat income tax is a great idea. The proposal -- called the Simplified Flat Tax Act of 2015 -- would amend the constitution and create a flat income tax for individuals and corporations. It is stalled at the moment, but it is worthy of serious consideration. It would cut the personal income tax rate from 5 percent to 2.75 percent and lower the corporate income tax rate to 4.59 percent. It would also end all tax preferences and incentives, in a state that is plagued with tax preferences and incentives.

Sen. Bill Hightower (R) is the sponsor, and he should be praised for his efforts. The proposal would greatly broaden the income tax base and lower rates. Every -- and I mean every -- tax commission that has ever opined on good tax policy has called for a tax system built on a broad base and low rates. To reject Hightower's proposal out of hand is to reject conventional tax policy thinking.

The myriad tax breaks for individuals and corporations complicate the system, making administration and compliance more expensive and difficult. Worse, the system confers a great advantage on the wealthy and connected, who, by hiring lawyers and accountants, take advantage of the system. It baffles me why those on the left, including my friends at the Institute on Taxation and Economic Policy, can't see this. The system favors the rich and powerful. It hurts the poor and dispossessed.

Hightower wants to make the proposal revenue neutral (the current plan would reduce revenue by about $147 million). By the time you read this, the proposal may be dead. The income tax is dedicated to the Education Trust Fund -- and the education community does not like the idea of reform. Moreover, the plan would tax all income, including income below the poverty line, which is a problem. Finally, the plan would tax retiree income. You can be sure that opponents will mobilize everyone over 62 to come out and vote if it ever gets to a public vote. And even on the business end there will be opposition. Corporations that take advantage of a wide variety of preferences and pay no tax will not welcome a new and lower corporate rate. Lest we forget, there are also many people in Alabama and throughout the country who have a vested interest in keeping the personal and corporate income tax system as complicated as possible. It is those folks who are the real danger to tax reform.

Hightower faces a plethora of challenges. Yet his proposal, however imperfect, deserves serious consideration. It would make Alabama's tax system simpler and ultimately fairer.

This post is an excerpt of an article that appeared in State Tax Notes.

Read Comments (2)

robert goulderMay 12, 2015

Allow me to play devil's advocate here, David.

As I understand your post, the redeeming feature of Hightower's bill is that it
would get us to a clean tax base. That is, it would jettison the countless tax
perks and shameful favoritism that litter the state's tax code. Bravo for that;
a worthy goal for sure.

But couldn't you just as easily undertake the same base-purification exercise
while retaining a mildly progressive rate structure? I certainly don't think
'soak the rich' is the answer to all of life's problems (in fact, it might not
be the answer to any of life's problems), but I also don't see why a
single-rate income tax is a condition precedent for eliminating all the garbage
from the tax code.

Also, I have no doubt that if Hightower's bill were to become law, special
interests would immediately go to work the next day seeking to reinstate the
very tax preferences just eliminated. Politicians will forever sell favors to
the powerful via the tax code. It's what they do.

emsig beobachterMay 13, 2015

One person's characterization of certain items in a tax code as perks and
shameless favoritism is another persons's characterization of those items as
legitimate business deductions.

A single flat rate income tax may be easier to sell to the public than an
income tax with a progressive rate structure; especially, if the higher income
residents are fairly innumerate. An income tax regime with generous and
refundable personal exemptions and/or family allowances would be a progressive
tax.

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