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Why Shouldn't We Have A Flat Tax Rate?

By John Dietz - Email Editor

Date: 29-Nov-2005

According to the Tax Foundation Report, the current tax code exceeds a staggering 60,000 pages. This causes Americans to waste well over 6 billion hours just to complete their returns every year. And just trying to decipher the tax code costs the U.S. a whopping $203 billion a year! And its complexities generate additional job-killing distortions throughout our economy.

Last year the Internal Revenue code achieved a new record for complexity. The code now has over 9 million words. This is 12 times the length of the King James Bible.

It may well be time to scrap the code and replace it with a system that is simple, fair, honest, and most important of all, flat.

A flat tax has a single, low rate that treats all fairly and has no deductions or loopholes for special interests. It is clear, honest and easily understood. Best of all, experts say that passing a flat tax would liberate taxpayers and turbo charge the economy.

Ironically, one area of the world where the flat tax thrives is in the former communist Eastern Europe. It started in the Baltic states of Lithuania, Estonia and Latvia. So successful was the flat tax in the Baltic nations that Russian President Putin implemented a 13 percent flat tax for individuals, along with a 15 percent rate for most business income. The results were astonishing: After struggling for over a decade, Russia's economy grew 5 percent a year after inflation in 2002 and 2003, and 7.3 percent in 2004. The flat tax is a key reason that revenue from the country's personal income tax has grown by 150 percent since 2001.

Other countries soon followed. In 2003, Serbia introduced a 14 percent tax on income and corporate profits and has plans to cut it further. The Ukraine set a 13 percent rate with dividends, and bank interest taxed at only 5 percent. In 2004, Slovakia junked an old tax system that included 66 exemptions, 19 sources of untaxed income and 27 items with their own specific tax rates. It then put in place a 19 percent flat tax on income and profits. As a result, the country's flat tax helped sustain an economic growth rate of 4.9 percent, lowered unemployment and led to a surge in tax revenues as people took advantage of the new opportunities to work and invest. Recently, Poland has debated implementing a flat tax, and in the EU, Germany is talking about it as well. I’ll believe that when I see it.

Former GOP presidential candidate, Steve Forbes, proposed a 17 percent flat rate during his 1996 presidential campaign. However, his opponents derided the flat tax on the grounds that its lower rates would starve public services and allow the rich to escape paying higher taxes.

Well, let’s do some math. A rich man’s income is, say, $1 million a year; an office worker makes $40,000 a year. The rich man will pay $170,000 in taxes, the other man pays just $6,100. This just goes to show everyone that under existing flat-tax systems, the wealthy end up paying a larger share of total tax revenues.

The best way to get more tax revenue in this simple system is to create more wealth. More wealth begets more wealth, and by keeping taxes lower you give people the incentive to report their wealth. Take Russia, for example. It reported that it receives more tax revenues from the wealthy from its 13 percent flat tax than it did from its pre-existing tax code with massive income evasion and 50 percent-plus tax rates.

Now, there are those who don’t want a flat tax because they get money back from deductions (i.e., house, interest, children, etc.) Not to worry. In his book, Mr. Forbes’s flat tax wouldn’t do away with itemizing deductions. So, for those who want the headache of trying to figure out deductions, you can still do so.

As for myself, I kind of like the idea of filing my taxes on a 3 x 5 card.

And, in closing, let me share with you what Sir Winston Churchill said about taxation: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

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