Prager U: Forbes lays out case for the flat tax

“It’s time for another tax revolution,” Steve Forbes says in his explanation of the flat-tax reform proposal outlined in his book Reviving America. Prager U produced this five-minute primer on Forbes’ decades-long effort to get rid of the current Byzantine tax codes and reduce both the corporate and individual income tax systems to one simple and universal calculation — 17%. Not only would this force everyone except the poor to pay their fair share, it would relieve both the economy and politics of the burdens of crony capitalism and social engineering.

This is, of course, why it’s going nowhere for the next four years — at least:

Everyone – individuals and corporations – pays a 17 percent flat rate. This single rate is absolutely critical. Whenever we have two or more tax rates, they’re like rabbits: they breed. We saw that with the 1986 tax reforms, which consisted of two rates. They’ve since multiplied into the seven we have today.

Well, you might argue, this sounds great for the rich, and even the middle class, but what about the poor? Seventeen percent is a big burden. That’s why, under this plan, a family of four who makes less than $52,800 would pay no income tax. That’s double the current federal poverty level. This will let people at low income levels keep more of their money.

And for those who think the rich should pay more, they will. Prior to the passage of the tax cuts that President Ronald Reagan pushed through Congress in 1981, the top one percent of American earners accounted for nearly 18 percent of federal personal income tax revenue. By 1988, that same group accounted for nearly 28 percent, an increase of 10 percentage points in only 7 years.

By eliminating loopholes and requiring everyone to pay their fair share, the flat tax offers a model of tax fairness. More than 40 countries and jurisdictions have enacted the flat tax. When all the facts are considered, the real question is not whether America should implement this vital reform, but what are we waiting for?

There are two general concepts on the Right to eliminate social engineering and crony capitalism in the tax system at the federal level — Forbes’ flat-tax proposal and the Fair Tax, which would repeal the 16th Amendment to eliminate the income tax and replace it with a consumption tax. Either of these would accomplish those objectives. Neither is perfect; Forbes’ plan would leave the structure in place for Congress to start offering deductions and incentives, and the Fair Tax has vulnerabilities on manipulating taxes through the distribution chain. Even with their risks, they’re both vast improvements on what we have at the moment.

At least so far in the Age of Trump, they’re both fantasy as well. Democrats and Republicans both talk about tax reform, and the Trump administration now says they want to prioritize it too, but so far no one’s talking about real simplification. Trump’s first acts as president-elect has been to work tax incentives (at the state level, anyway) to keep Carrier from moving a thousand jobs to Mexico, and he’s made it clear that he has no problem cutting deals one at a time with major employers to protect American jobs. A flat tax system would eliminate all of the leverage Trump would have for those negotiations, even if it would produce a big economic boost by leveling the playing fields in industries and eliminating hundreds of billions of dollars in compliance costs.

Trump’s not alone as an impediment to systemic reform. Either system would force Congress to give up its own leverage for social engineering, too. Individual members of Congress might be delighted at that prospect, but there aren’t enough of those even in the GOP ranks to get a floor vote on such a proposal. Unless they got pushed into it by a popular Republican president, and had enough votes to outlast a filibuster from Democrats who would paint either tax system as a bonanza for fat cats, it’s not happening. And as noted above, Trump’s not going to give away his leverage over industrial leaders to push this kind of reform.

It’s too bad … and a reminder that Republicans should have given Forbes a chance in 1996 when they had little to lose in doing so. We’ve been waiting for an opening ever since, and to answer Forbes’ question, we’re still waiting for the political will to make this happen. It won’t come in the Age of Populist Angst, surely.