Ever since Steve Forbes made the “flat tax” the centerpiece of his 1996 presidential run, the flat tax has been a mainstay of GOP presidential campaigns.
Among the current crop of contenders, GOP contender Ben Carson has proposed “tithing” to the government with a 10 percent flat tax, while candidates Rand Paul, Lindsey Graham, Ted Cruz and Mike Huckabee have also all offered their versions, including in the form of a national sales tax or consumption tax. A flat tax figured in the 2012 campaign of former Texas Gov. Rick Perry and in Huckabee’s 2008 presidential run, when he also proposed abolishing the IRS.
But time and ubiquity can’t change this conclusion: The flat tax popular with the GOP is a bad idea.
Although the candidates tout its “fairness,” the flat tax as proposed by GOP candidates is actually anything but. While the wealthiest taxpayers would be the biggest winners, many middle-class and lower-income Americans would see their tax bills rise – in many cases, substantially.
Under the current tax system’s progressive structure, wealthier taxpayers pay a higher share of their income in taxes – despite all its loopholes and complexity. Even if Americans don’t believe the wealthy pay enough in taxes, they still pay far more than lower-income taxpayers and the middle class.
As the following chart from the Brookings-Urban Tax Policy Center shows, the top 0.1 percent of taxpayers paid 38.2 percent of their income in federal taxes in 2013 – after all deductions and credits – while the middle fifth of taxpayers paid 15.4 percent. The bottom fifth paid an effective federal tax rate of 1.8 percent.
A flat tax, however, would eliminate this progressivity. Ben Carson’s “tithing” system, for example, would be a huge windfall for millionaires and billionaires, whose tax liabilities would shrink to nearly a fourth of what it is now. At the same time, the tax burden would rise for the poorest two-fifths of American taxpayers, who effectively now pay less than Carson’s proposed 10 percent.
The middle-class burden would be even greater under Rand Paul’s plan, which proposes a 14.5 percent flat tax rate. Under this proposal, the middle fifth of taxpayers would see virtually no tax cut at all.
“A lot of middle-income people don’t realize how little they pay in income tax,” said Tax Policy Center Co-Founder Len Burman. “For a family with two children that qualifies for the Earned Income Tax Credit, there’s no positive tax liability until their income comes close to $40,000.”
The loss of so much revenue from the wealthiest households would also blow a crater in the federal budget. According to calculations by Citizens for Tax Justice, Carson’s proposal would raise just $1.1 trillion a year – or less than half of what the government needs to pay for Social Security, Medicare and Medicaid this year. According to the Congressional Budget Office, “mandatory” spending on federal programs like these is expected to reach $2.3 trillion in 2015.
And while the GOP proposals are largely silent on whether to eliminate such popular tax breaks as the home mortgage interest deduction and the charitable deduction, preserving such incentives while lowering rates would gut the budget even more. According to the Joint Committee on Taxation, the home mortgage interest deduction alone will cost the federal government $74.8 billion in 2015.
Nevertheless, the visceral appeal of the flat tax is easy to understand. In the minds of many Americans, navigating the current tax code is like buying a new car. You know you can pay below the sticker price, but you also suspect that someone else will get a better deal, especially with the help of a clever – and expensive – lawyer. This is why Gallup finds that just 25 percent of Americans think wealthy people pay their “fair” share of taxes, while 62 percent believe they pay too little.
But experts also argue that there are many options short of a flat tax that would give Americans a simpler, more transparent tax code. The Tax Policy Center’s Burman, for example, proposes consolidating numerous overlapping tax incentives for purposes such as education and retirement into a single “super credit” that phases out with income. He also proposes moving to a “return-free” system similar to that in the United Kingdom, where 90 percent of taxpayers are exempt from filing tax returns.
If America were to adopt such a system, “April 15 would be just another day on the calendar,” Burman said. Moreover, he said, “Perhaps people would be less hostile to the income tax.”
Unfortunately, that’s probably the opposite of the GOP’s intent in pushing for flat tax “reform.”