Flat tax best – decreases IRS overstretch without double taxation

The flat tax never made it through Congress, but it’s been adopted by more than a dozen other countries since 1994.

It’s unfortunate that the United States is missing out on the tax reform revolution. Instead of the hundreds of forms demanded by the current tax system, the Armey flat tax would have required just two postcards. Households would have used the individual postcard to pay a 17 percent tax on wages, salary, and pensions, though a generous family‐​based allowance (more than $30,000 for a family of four) meant that there was no tax on the income needed to cover basic expenses.

Taxes on other types of income would have been calculated using the second postcard, which would have been filed by every business regardless of its size or structure. Simply stated, there would have been a 17 percent tax on net income, which would have been calculated by subtracting wages, input costs, and investment expenditures from total receipts.

While the simplicity and low tax rate were obvious selling points, the flat tax also eliminated various forms of double taxation, ending the bias against income that was saved and invested. In other words, the IRS got to tax income only one time. The double tax on dividends would have been completely eliminated. The death tax also was to be wiped out, as was the capital gains tax, and all saving would have received “Roth IRA” treatment.

Another key feature of the flat tax was the repeal of special tax breaks. With the exception of a family‐​based allowance, there would have been no tax preferences. Lawmakers no longer would have been able to swap loopholes for campaign cash. It also would have encouraged businesses to focus on creating value for shareholders and consumers instead of trying to manipulate the tax code. Last but not least, the flat tax would have created a “territorial” system, meaning that the IRS no longer would have been charged with taxing Americans on income earned—and subject to tax—in other jurisdictions.

Proponents correctly argued that a flat tax would improve America’s economic performance and boost competitiveness. And after Republicans first took control of Congress, it appeared that real tax reform was possible. At one point, the debate was about, not whether there should be tax reform, but whether the Internal Revenue Code should be replaced by a flat tax or a national sales tax (which shared the flat tax’s key principles of taxing economic activity only one time and at one low rate).