Under the headline, "Fix, don't flatten, the tax code," the American Enterprise Institute has posted an article by its DeWitt Wallace Fellow, James Pethokoukis, that originally appeared at National Review Online. The article argues against a flat tax on income, that is, against a tax that would treat everyone the same by applying the same federal tax rate to all income, or to all income above some baseline level.
My initial reaction was to roll my eyes and say to myself, "For this, we need AEI and National Review Online?" My secondary reaction was to try to stifle the initial reaction on the grounds that people on the center-right spend too much time criticizing each other rather than supporting each other. And my third reaction, which I think is the best one, was to try to explain in a constructive and measured way why I think Mr. Pethokoukis' arguments against a flat tax are not particularly strong ones.
Here, then, are Mr. Pethokoukis' arguments against a flat tax (in quotation marks), followed by my responses.
"Millions of individuals and businesses have made long-term plans based on expectations that the tax code will remain more or less the same." The same argument could have been used against the Kennedy, Reagan, or George W. Bush tax cuts, or against the tariff reductions of NAFTA. It's an argument for stasis. Just because people have plans and expectations based on incorrect assumptions doesn't mean politicians should be obligated to honor those incorrect assumptions. While some people may be operating under the assumption that the tax code "will remain more or less the same," many other people have noticed that the tax code has changed plenty of times recently (see the Kennedy, Reagan, and Bush examples above, for instance), and that politicians have been talking quite a bit about changing it some more. In addition, Mr. Pethokoukis himself undermines his own "more or less the same" argument later in the piece when he himself suggests as an alternative tax reform that "One solution is to take the essentially flat consumption tax devised by economists Robert Hall and Alvin Rabushka and give it a progressive rate structure. Or we could combine a consumption tax with a flat income tax on wealthier Americans, as suggested by Yale's Michael Graetz." Somehow, the "long terms plans and expectations" argument is wheeled out against a flat tax on income, but not against these consumption tax plans that are even more radical departures from current law? It's a double standard.
"Half the nation, thanks to all those deductions and credits, pays no income tax." Mr. Pethokoukis writes as if this is a virtue of the current system. But that is misleading. First of all, many of these non-payers do pay payroll tax. Second, if a flat tax increased the number of people who pay some income tax, might that not be a good thing in terms of the health of our democracy and the link between taxation and representation? Third, the half-the-nation paying no income tax phenomenon is relatively new, and it's not clear that it's sustainable long term, because it is made possible in the short term by racking up an enormous debt that will eventually have to be either repaid or inflated away.
"It's unlikely the U.S. can keep spending down at historical levels of 20 percent to 21 percent of GDP while also maintaining a floor for defense spending at 4 percent of output. The best a group of AEI scholars could manage was limiting spending to 23 percent of GDP by 2035." I'm not sure that "4 percent of output" is a useful constraint for defense spending. The defense budget should depend on the current and potential strategic threats. The cost of defending America isn't really that closely related to our GDP. Sure, maybe if the economy is really booming it could cost the military more for things like steel, fuel, or wages. But the cost of a nuclear submarine is the cost of a nuclear submarine, no matter whether the GDP of the nation that owns it is $10 trillion or $20 trillion. You don't need twice as many nuclear submarines to defend a $10 trillion GDP country as you do to defend a $20 trillion GDP country. What goes for defense spending also goes for all spending. Some costs are fixed. We have the same nine Supreme Court justices whether our GDP is $10 trillion or $20 trillion; the cost of running the court needn't vary according to GDP.
"Flat-tax proposals by Newt Gingrich and Rick Perry during the 2012 Republican presidential campaign slashed federal tax revenues by nearly $500 billion to $1 trillion a year, which should give pause to even the most fervent supporters of dynamic scoring." Reducing federal revenues by $500 billion from the $2.093 trillion Americans were taxed in 2012 would bring their levels to about $1.6 trillion, or what they were in 1994, after the Clinton tax increases about which Democrats are so nostalgic. It seemed to me and to plenty of other Americans in 1994 like we were paying plenty of taxes. If someone had proposed back then to increase them by an additional $500 billion a year, there would have been a great deal of resistance. Now we are supposed to treat the current revenue levels as if they are a floor etched in stone?
"The Heritage Foundation would replace income, payroll, and excise taxes with a 28 percent flat tax. It claims the plan would leave the distribution of the tax burden unchanged, but the proposal would also raise revenue of just 18.5 percent of GDP." Just 18.5 percent of GDP? Mr. Pethokoukis writes as if a federal tax burden of 18.5 percent of GDP is somehow paltry, or anemic, or insufficient. Never mind that state and local taxes apply in addition to that. Here is a list of years in which, according to the White House Office of Management and Budget, federal revenues were below the 18.5 percent of GDP that Mr. Pethokoukis says the Heritage plan would raise:
1940, 1941, 1942, 1943, 1947, 1946, 1947, 1948, 1949, 1950, 1951,1955-1968,1971-1978, 1983-1995, 2002-2006, 2008-2012.
In other words, Mr. Pethokoukis is arguing for tax revenues as a share of GDP that considerably exceed the levels of many of the last 75 years.
"Then there's the uncomfortable political reality that the flat-tax concept has never been popular with voters." Seven states have flat income tax rates, and the voters there don't seem to be exactly rebelling. In addition, just because something is unpopular with voters isn't always a reason not to do it, as some of Mr. Pethokoukis' more far-sighted AEI colleagues weren't shy about arguing when it came to, say, finishing the Iraq War. Sometimes political or presidential leadership can bring the public around. And a lot of these polls depend on how you ask the question. If you ask voters if a tax rate of more than 51 percent of a dollar earned is fair, a lot of them will say no, yet that is the top marginal rate rate that applies these days in California and in New York City.