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Is the Flat Tax a Good Idea?: Yes, If Done Right
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20338 |
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Section : |
CURRENT ISSUES
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| Issue
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6 / 1992 |
2,569 Words |
| Author
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Norman B. Ture
Norman B. Ture is president of the Institute for Research on
the Economics of Taxation. |
Thanks to Jerry Brown's presidential aspirations, the flat tax has again captured the attention of the media. Flat-tax proposals have been around for years. For various reasons, they spring up every now and then, and each time they do, there is a brief flurry of interest before the proposal is put back on the tax policy shelf. Clearly, the idea of a flat tax has staying power, even if it doesn't have enough clout to become the law of the land.
There is much to be said for a flat tax. The right kind of flat tax would be an enormous improvement over all of the principal revenue raisers in the existing tax system--the personal income tax, the payroll taxes, the corporate income tax, excise taxes, and estate and gift taxes. Each of these taxes distorts economic incentives and warps business and household decisions about how best to use production resources and income.
A properly defined and implemented flat tax would not only be less of a hindrance to economics efficiency and growth, it would also reduce the deadweight loss produced by the burdens of compliance with and enforcement of the existing tax laws.
What Is a Flat Tax?
Flat-tax proposals have come in all sorts of shapes and sizes, aiming at differing tax policy objectives. In general, however, a flat tax is an individual income tax imposed as a single rate on whatever is defined as taxable income. In practice, some flat-tax proposals have instead called for sharply reducing the number of tax rate brackets instead of specifying a single tax rate. The Tax Reform Act of 1986(TRA86), for example, reduced the number of tax brackets from 16 to 3. Because the tax brackets under the TRA86 are so wide, many taxpayers are likely to confront only a single tax rate during much of their earning lifetimes. For these taxpayers, TRA86 actually produced a flat tax of sorts.
Many flat-tax proponents put at least as much emphasis on how taxable income should be defined as they do on the flatness of the rate. Although popular attention was focused primarily on the changes in the rate structure in the TRA86, just as important were the changes made by the act in the specification of taxable income. In a very real sense, the emphasis on "base broadening" and "loophole closing" in the TRA86 reflected what many tax reformers have in mind in their flat-tax proposals.
Why a Flat
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