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Sunday, November 06, 2011

"The Problem With Flat-Tax Fever"

There's nothing particularly new here, but it's still worth emphasizing that a flat tax doesn't have the magical properties that supporters claim, and that its distributional consequences are tilted heavily in favor of the wealthy:

The Problem With Flat-Tax Fever, by Robert Frank, Commentary, NY Times: Close watchers of presidential politics weren’t surprised to see many of this year’s Republican hopefuls proposing ... a flat tax. Such plans reliably surface every four years...
Yet none will be adopted, for at least two reasons. One is that a flat tax would do nothing to make filing tax returns any simpler. But, more important, it would greatly exacerbate longstanding growth in income inequality. ...
The contention that a flat tax would be simpler because it involves only a single rate is flatly wrong. The complexity of the current system has nothing to do with its multiple income brackets.
The hard step in figuring your tax bill is to compute your adjusted gross income — roughly, the amount you earn, less the myriad exemptions, deductions and various other offsets described in the 3.4-million-word code of the Internal Revenue Service. You’d also have to calculate your adjusted gross income under a flat tax. But once you’ve completed that step under either system, you consult the tax tables to see how much you owe..., so this step is no harder than it would be under the tables for a flat tax.
The much more serious concern is that a flat tax would reinforce the trends toward greater income inequality that have been seen over the last several decades. ...
According to an analysis by the nonpartisan Tax Policy Center, Mr. Cain’s proposal would increase the annual tax bill of a typical family of four earning $50,000 a year by more than $4,000, but would reduce the taxes owed by a similar family earning between $500,000 and $1 million by almost $60,000. The center also estimated that families in the top one-tenth of 1 percent of households would enjoy an average annual tax reduction of nearly $1.4 million... Similar distributional effects are common under all flat-tax plans, not just Mr. Cain’s. ...
For the time being, then, our best bet is to do all we can to reduce the gratuitous complexity of our progressive income tax.

    Posted by on Sunday, November 6, 2011 at 01:26 PM in Economics, Income Distribution, Taxes | Permalink  Comments (52)


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