The Patriot Post® · The Flat Tax

A few weeks ago, I advised lawmakers — conservatives specifically — against passing more tax cuts. I argued not that tax cuts were inherently bad but that they were no longer the proper policy prescription for a time when our debt is ballooning and when the working classes suffer a great deal more from mass migration than they do confiscatory marginal tax rates. However, I think it is necessary to examine the trajectory of our nation’s tax policy and what reforms I believe would serve the interests of every American.

The income tax we know (and hate) today was established in 1913. At the time, the highest tax rate was 7% on income of $500,000 and higher. However, these low rates did not last long. World War I brought about a rate of almost 75% that would be reduced to just 25% by Calvin Coolidge — my favorite president — in 1925. In predictable fashion, crises like the Great Depression and World War II were exploited by the United States’s more adored dictator, Franklin D. Roosevelt, into raising the highest rate to a whopping 94% — less than the 100% top rate he wanted on income “of more than $25,000 a year.”

These rates came down when John F. Kennedy signed the Revenue Act of 1964, which implemented a 20% tax cut across the board.

The Revenue Act of 1964 inspired Ronald Reagan, who signed into law the Economic Recovery Act of 1981, which phased in another 20% marginal tax rate cut. As if things could not get any better, Reagan signed into law another tax cut in 1986, which broadened the tax base, cut the marginal rate to 28%, and reduced the tax code to just two tax brackets.

Today, the highest income tax rate is 37%, cut by Donald Trump from nearly 40%. Presidents of both parties struggle to garner the votes to cut taxes beyond this threshold or raise them much further.

In a sense, we’ve reached a political stalemate on taxes — with neither side able to obtain substantial changes to the tax code. While this stalemate might seem far more desirable than the Bernie Sanders and Pocahontas alternative of levying a billionaire and wealth tax, the current equilibrium has many downsides.

The most notable of these downsides is manipulating tax expenditures like the Earned Income Tax Credit and Child Tax Credit to pass more substantive tax reforms.

When Trump and Paul Ryan set about tackling tax reform, among their objectives was eliminating loopholes that disproportionately benefited the wealthy who could afford accountants and lawyers to reduce their effective tax burden. Among those deductions were the mortgage interest deduction and the state and local income tax (SALT) deduction, which primarily benefits higher-income people in high-tax states. While the original goals of eliminating the SALT deduction and capping the mortgage interest deduction to $500,000 mortgages were certainly grand changes, the passed law was much less radical. It ended up only reducing the limit on eligible mortgages to $750,000 and implementing a $10,000 cap on SALT deductions.

Reducing tax expenditures is a means of increasing fairness while simultaneously reducing any revenue loss a tax cut may bring. But to secure both gains in the tax base and the votes required to pass, Congress had to make a drastic expansion in the Earned Income Tax Credit and Child Tax Credit. Many advocates of increasing these tax credits believe doing so will help out families.

However, the unnoticed impact of these tax credits is the removal of more Americans who vote from the tax rolls. In 1913, it was a good thing that a tiny fraction of Americans paid taxes — but this was when the government’s ability to rob Peter to pay Paul was drastically limited by the Constitution. Today, the government will tax the wealthy to pay for the tax credits, food stamps, housing subsidies, and healthcare enjoyed by the less fortunate.

The current trajectory of our tax policy is to remove even more low-income, subsidy-seeking Americans from the tax rolls and pay for this by reducing tax benefits enjoyed by the wealthy. To secure political support for a tax bill, Democrats fight for a downward redistribution of wealth. This redistribution scheme increases the financial and political dependence of the poor on the actions of our political leaders and reinforces the voting behavior of selecting whichever party gives away the most cash (i.e., Democrats).

This equilibrium is not sustainable. Buying votes with government handouts is wrong — regardless of the party that does it.

This brings me to the single tax policy our leaders should consider in the future: a flat tax. Eliminating nearly every loophole and deduction and replacing them with a single inflation-adjusted standard deduction up to a certain income would broaden the tax base enough to establish a single rate. The only additional deductions that should be considered are ones for charitable contributions and married couples with children.

Not only is this policy the most fair, but it would also retain pro-family features without giving away money to single parents. This element would likely be the most controversial, but from a public policy perspective, it just makes sense. To provide benefits to a single parent — with the exception of widows — is to incentivize behavior that hurts the greater good of society. I stand with Charles Murray, who has argued that eliminating any subsidy to single parents would shift incentives enough to stem America’s trend toward broken households.

Another hidden benefit of a broad-based flat tax is that it would end the subsidization of employment-sponsored health insurance. The employment-sponsored health insurance system is easily the biggest hurdle toward obtaining a fairer, free-market healthcare system that covers everyone who needs it. The tax code currently enshrines the employment-sponsored system into law by only allowing Americans to deduct premiums associated with an employer-sponsored healthcare plan. It also costs the federal government over $200 billion, making it the most costly tax expenditure program in the tax code.

Now, one final caveat I must add to my flat tax endorsement is that it must be revenue-neutral. The original proponents of the flat tax, Robert Hall and Alvin Rabushka, made this caveat a part of their plan to eliminate concerns about the fiscal impact of the reform. For reasons of political expediency, a commonsense flat tax would be revenue-neutral to ensure that passing this reform would not further borrow against our children and grandchildren.

Finally, let’s be real. I am awfully tired of talking about taxes. Perhaps the greatest benefit to passing a flat tax is that it would effectively free those on the Right from the mundane topic of taxes and allow them to talk about the issues I previously dubbed The Untouchable Untenables: our debt and mass migration.