Tax Analysts Blog

Rand Paul’s Tax Plan May Be Radical, But It’s Not Impossible

Posted on Jun 25, 2015

Last week Rand Paul unveiled his plan for the “Fair and Flat Tax.” That makes him the latest – but certainly not the last – presidential candidate to embrace the rhetoric of flatness. If recent experience is any guide, it won’t be an easy sell. Just ask Steve Forbes, Newt Gingrich, Rick Perry, or any of the other failed candidates who put flat taxes at the center of their campaigns.

A long view of history, however, suggests that flat taxes may have some legs. The United States has been using graduated rates for the federal income tax since 1913, but there’s precedent for flat rate levies, too.

Congress has twice enacted single-rate taxes on income, the first in 1861 and again in 1894. Both disappeared before they were collected. But the debate surrounding their adoption -- as well as the discussion in 1913 -- reveals ample support for proportional, rather than progressive, taxation.

Confusing Polls

When it comes to taxes, "flat" is one of those words that often elicits favorable poll responses. Last year reported that 62 percent of Americans endorsed the idea of a flat rate tax on income. Similarly, Rasmussen Reports found that 58 percent of respondents favored a flat income tax in 2011.

Other polls have been less encouraging. In 2011 The Hill found that only 35 percent of respondents supported a single-rate tax. Another 2011 survey found similar results. “Flat tax proponents face an uphill battle,” observed David Brady and Tammy Frisby in a Wall Street Journal op-ed. “Americans in general opposed the flat tax proposal 39% to 28%.”

If the polls are confusing, it’s probably because the flat tax is confusing, too. There is no single definition of a flat tax. Politicians have used the term to describe a wide range of plans with little resemblance to each other. Some flat taxes are imposed on income, others on consumption. Some are flat in the sense that they wipe out all deductions, credits, exclusions, and similar tax preferences. Others – including Paul’s – retain some popular (and costly) deductions, like those for mortgage interest and charitable giving.

A single rate would seem crucial for any tax claimed to be flat. But some flat taxes have featured graduated rates. Anyone remember the Fair Flat Tax Act of 2007? Don’t let the name fool you; it was introduced not by Paul but by Democratic Sen. Ron Wyden of Oregon. Wyden, who now serves as ranking minority member of the Senate Finance Committee, made room in his outline for a series of graduated rates as well as some popular deductions.

However, almost every flat tax is rooted in arguments for less graduation in the rate structure. Even Wyden’s plan would have slashed the number of brackets from six to three.

The hostility to graduation can seem nonsensical. After all, we’ve had a progressive rate structure for more than a century; it’s obviously crucial to the tax system.

Or maybe not.

The 1913 income tax was not flat. It featured graduated rates ranging as high as 7 percent. But progressive rates were peripheral in arguments for adopting the tax. Supporters wanted to use the income tax to counterbalance regressive consumption taxes, especially the tariff. In general, they believed that even a flat rate tax would do the job.

“Graduated rates were not seen as essential to achieve the goals of an income tax,” explained legal historian Steven Bank in a 1996 article on the origins of the flat tax. “The progressive rates were a response to the perception that the tariff was burdening the poor, in the form of higher prices, with more than their fair share of taxes.” The thinking was that when levied with the tariff, the income tax would produce a relatively flat overall tax burden, he said. “Thus, consistent with the country's tradition, the income tax in the Act of 1913 was used to achieve the goal of a flat or proportionate rate tax system,” Bank wrote.

Of course, rates increased rapidly after 1913. Just four years later, income in the top bracket was taxed at 77 percent. But for the most part, the income tax was viewed as a compensatory tax, designed to balance other, more regressive levies. In 1913 the tariff needed a counterweight. Today, it's payroll taxes.

Over the years, some left-leaning politicians have suggested using the income tax as a way to redistribute wealth or income. Franklin Roosevelt comes to mind. But more moderate (and numerous) politicians have defended the income tax as a way to redistribute the tax burden, with the ultimate goal being something close to proportionality.

Which brings us back to Paul’s Fair Flat Tax. It’s certainly radical and a sharp break with the recent past. As my colleague David Brunori has pointed out, it would reshape not just the tax system, but government as a whole, by starving the federal government of revenue.

But radical doesn't mean implausible. Since proportionality lies at the heart of Paul's plan, history suggests it might have a shot.

Read Comments (1)

AMT buffJun 24, 2015

Low rates would blow away with the next shift in political winds. Each party
needs to avoid moving beyond what the other party is willing to tolerate when
it regains power. Otherwise our tax system becomes a game of ping pong, with
taxpayers being the ball.

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