How to make the flat tax palatable
President Trump wants to reform the income tax. Based on his previous proposals, he wants three tax brackets – namely, 35%, 25%, and 10%. He would also let us keep more of our own money. The resulting tax law would be better for the economy, but it would be no simpler. What would make it simpler is a flat tax.
A flat tax would be a percentage of income with no deductions. It would be so simple that most people would not need to fill out any tax forms. After all, you do not fill out any tax forms to send in your Social Security tax. A flat tax is also constitutional. Article I, Section 8 of the Constitution says, "[A]ll Duties, Imposts and Excises shall be uniform throughout the United States." This means that one cannot tax people of different incomes differently. We have been violating this law since 1913.
Many people would rejoice at such simplicity, but what would its detractors say? They would complain that a flat tax would no longer have deductions for mortgages and charitable contributions. The charitable contribution deduction should not have been there in the first place. With this deduction, when you give $100 to a charity, the government reimburses you based on your tax bracket. For a 28% bracket, the government gives you $28. The government should not be obligated to give you $28 based on your decision to award a charity that may not be worthwhile. Powerful organizations like the Clinton Foundation will be against this change, but we need a president and Congress who are tough enough to do the right thing.
What about mortgage deductions? The problem is that without the mortgage deduction, the monthly house payment may suddenly become unaffordable. I will give an example. Please excuse the math. A single individual buys a house for $500,000. He puts 20% of the purchase price down, so he borrows $400,000. This is a common down payment, because any less triggers mortgage insurance. The interest rate is 4% for 30 years. His monthly payment of principal and interest is $1,910. Thirteen hundred thirty-three dollars of this is interest. If he is in the 28% tax bracket, then he can deduct $1,333 from his income and pay 28% of $1,333 less. He saves $373 per month on his taxes. If mortgage interest is no longer deductible, then he will lose this.
How can a switch to a flat tax save this homeowner? By lowering the rate enough to make up for his loss. Suppose that he has a taxable gross income of $108,000 per year. A lowering of the flat tax rate of 4% would save him $360 per month. For example, if the revenue-neutral flat tax rate is 24%, then a rate that rescues our homeowner would be 20%. People with mortgages who make less money lose less from the mortgage deduction loss. People in higher tax brackets are well off, so the Democrats will be pleased at their suffering. These well off taxpayers are likely to be wise enough to recognize the advantages of a flat tax, so they should be happy.
As long as we have a president who enjoys upsetting the government apple cart, we should ask him to go all the way. Propose a flat income tax with an extra 4% deduction, and April 15 will become just another day of the year.