Tax Advice for GOP Presidential Candidates

Presidential candidates have been trotting out their ideas on taxes. One doesn’t need to spend much time analyzing Democrat ideas, as they like the current system and just want to tax the wealthy more. Where we find some interesting ideas about tax reform is among the Republican candidates. Ted Cruz has proposed a 10 percent tax rate on wage income, while Ben Carson has floated the idea of “tithing,” a 10 percent rate on all personal income.

An individual income tax system with a single rate, i.e. a “flat tax,” might actually be able to have a rate that is even lower than Carson’s 10 percent and still bring in the same revenue as now. The Tax Policy Center reports that for the 2014 federal individual income tax, the effective tax rate for all taxpayers was 9.2 percent. That’s the average of what everyone pays, and it hews closely to what’s been the average for decades, as the Center also shows that from 1979 through 2011 the highest effective rate for all income taxpayers was 11.9 percent (in 1981) and the lowest was 7.2 percent (2009).

One alternative to the flat tax is the “progressive tax,” which has multiple rates. The federal individual income tax currently has seven statutory rates, and the lowest of them happens to be 10 percent. Also, 10 percent is lower than the rate on capital gains. So a flat tax might allow Congress to tax all sources of income at one rate.

On December 5, National Review ran “Try as They Might, Progressives Can’t Make the Case for Progressive Taxation” by George Will:

[M]any Republican presidential aspirants […] favor a “flat” or proportionate income tax: If taxpayer A earns 20 times more than taxpayer B earns, taxpayer A pays 20 times more dollars.

Proportionate taxation always is what progressive taxation never is: simple. What justifies progressive taxation, and characterizes progressivism, is confidence that at any moment in society’s endless evolution, what is equitable can be known and society can be fine-tuned to achieve it. Which is how we got our baroque tax code.

Consider a single rate designed to bring in the same revenue as the current seven rates. If that single tax rate were 10 percent, it would constitute a significant tax hike for 90 percent of Americans, as only the top 10 percent of taxpayers have an average effective rate that tops 10 percent. Yes, there are taxpayers in the bottom 90 percent, and even in the bottom 50 percent, whose effective rates are above 10 percent, but they are the exception.

Under any flat tax rate, the only taxpayers who would be neither winners nor losers would be those who were already paying at the new flat tax rate. And if that rate were 10 percent, most of them would be clustered right around the 91st percentile. So a flat tax isn’t going to appeal to most Americans. Even some of the swells at the top, like Bill Gates, wouldn’t go for it.

A taxpayer whose income is currently the lowest that is taxed, would see his income tax liability go from $1 to $1,015 under a 10 percent flat tax. That would be entirely unacceptable to the American people, so Flat Taxers get around that problem by exempting the lower rungs from taxation. Because the bottom half contributes only about 3 percent of income tax revenue, the Flat Taxers could exempt the entire bottom half of income earners and the flat tax rate wouldn’t need to go up much more to retain revenue neutrality. But the middle class would see an even larger tax hike.

The reason we tax billionaire hedge fund managers at a higher rate than burger flippers if because that’s where the money is. The top 1 percent of income earners has an effective rate of about 25 percent. That same cohort provides 30-some-odd percent of the personal income tax revenue; they provided more than 40 percent in 2007. But with a 10 percent tax rate, the Flat Taxers would cut revenue from the One Percenters by 60 percent.

On the Nov. 29 edition of Fox News Sunday, Carly Fiorina discussed taxes, along with several other issues, with anchor Chris Wallace. You can read the transcript at Fox, but I recommend this Grabien webpage, as both its video and transcript deal only with the taxation portion of Fiorina’s appearance on Fox News. Here’s a bit of what she said:

A 73,000-page tax code is so complicated. This is how the government maintains power. […]

The fundamental design philosophy, however, is lower every rate, close every loophole, […]

This is what the government does. It takes away too much money and then with all those deductions and loopholes, it exerts power. […]

If you go from 73,000 pages down to three pages, everybody’s ox gets gored -- every politician, every lobbyist, every accountant, every lawyer.  The only people who benefit are the small, the powerless, the new business. […]

The tax code, the complexity of government, favors the big, the powerful, the wealthy, the well-connected. It's called crony capitalism. […]

If you level the playing field by simplifying, then you help the small, and the powerless, and the middle class. 

Candidate Fiorina has been criticized recently for not being specific enough about her tax plan. Actually, Ms. Fiorina has said plenty, but what she’s said may be so radical, so “paradigm-shifting,” that journalists can’t really grasp what she’s saying, which is: that she would eliminate every exception in the Tax Code, including the deductions for home mortgages and charity.

If you want the lowest possible tax rate(s), then you need to accept ending all exceptions, as Fiorina advocates. In fact, the only reliable way that George Will’s example of taxpayers A and B paying proportionately the same is if there are no exceptions whatsoever.

It’s “unfair” that the income earners at the top pay so much more than everyone else. But there is another issue of disproportionality that is also unfair, and even more irritating. That’s when taxpayers earn the exact same incomes but don’t pay the exact same income taxes. This second type of disproportionality, however, can be fixed without the severe dislocations of the flat tax. It entails ending all exceptions and setting statutory tax rates to effective rates. (Get an idea of what those new rates would be.)

The Mises Institute is running a 2009 speech by Laurence Vance that should be read by everyone who favors a flat tax: “The Flat Tax Is Not Flat and the FairTax Is Not Fair.” The transcript begins with a two-paragraph history of the personal income tax from 1913 to 2009 that alone is worth the price of clicking. Vance’s piece is eminently readable and I highly recommend it.

Nonetheless, a flat tax is “fair”; taxing everyone at the same rate is the very definition of “fair.” A capitation, or head tax, whereby everyone pays the same amount, is also “fair.” To produce the same revenue as we are now, replacing the individual income tax with a capitation would mean taxing every man, woman, and child in America more than $10,000 each. But taxing everyone the same amount is also “fair.”

American voters should be heartened by the Republican field. Watching the CNN debate on Dec. 15, this voter was proud of them all. Any one of them would make a far better president than Hillary Clinton. Despite that, some keep trotting out a truly awful idea: the flat tax. So I’m going to once again trot out a better way to reform the income tax. Read it, love it, live it.

Jon N. Hall is a programmer/analyst from Kansas City. 

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