Page 257 - The Principle of Economics

called the flat tax. The flat tax was proposed in the early 1980s by economist Robert Hall and political scientist Alvin Rabushka. Since then, it has from time to time caught the attention of politicians on both the political left (such as Jerry Brown, former governor of California and sometime candidate in the Demo- cratic presidential primaries) and the political right (such as Steve Forbes, multi- millionaire publisher and sometime candidate in the Republican presidential primaries).
Although flat-tax advocates have proposed various plans that differ in de- tail, the essence of all the plans is a single, low tax rate that would apply to all income in the economy. If the tax rate were set at 19 percent, for example, then every taxpayer in the economy would face a marginal tax rate of 19 percent. Most of the plans allow a certain amount of income to be excluded from the tax. If the income exclusion were $10,000, for instance, then a person’s tax bill would be
Tax 􏰁 0.19 􏰀 (Income 􏰂 $10,000).
Because of the income exclusion, a flat tax can be progressive: Average tax rates rise with income, even though the marginal tax rate is constant. Some of the plans even allow a person with very low income (in this example, less than $10,000) to pay a “negative tax” by receiving a check from the government.
Because the flat-tax proposal calls for a major overhaul of the tax system, it raises almost every issue discussed in this chapter, especially the tradeoff between efficiency and equity. Here are some of the points made by flat-tax advocates:
N The flat tax would eliminate many of the deductions allowed under the current income tax, such as deductions for mortgage interest payments and charitable giving. By broadening the tax base in this way, the flat tax is able to reduce the marginal tax rates that most people face. Lower tax rates mean greater economic efficiency. Thus, flat-tax advocates claim that this change would expand the size of the economic pie.
N Because the flat tax is so simple, the administrative burden of taxation would be greatly reduced. Flat-tax advocates claim that many taxpayers could file their returns on a postcard. Because all taxpayers would pay the same low tax rate on all forms of income, people would have less incentive to hire tax lawyers and accountants to take advantage of loopholes.
N Because all taxpayers would face the same marginal tax rate, the tax could be collected at the source of income rather than from the person who receives the income. Income from corporate profit, for instance, would be taxed at the corporate level rather than at the personal level. This additional simplification also reduces administrative costs.
N The flat tax would replace both the personal income tax and the corporate income tax. All income, whether from working at a job or from owning shares in a corporation, would be taxed once at the same marginal rate. The flat tax would eliminate the current double taxation of corporate profits, which now discourages corporations from investing in new plants and equipment.
CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 261