IN THE spring, wrote Tennyson, a young man’s fancy lightly turns to thoughts of love. And in the autumn? Well, this fall, the Grand Old Party’s fancy has delightedly turned to fantasies about a flat tax.
Among the Republican presidential candidates, Herman Cain was first to plight his troth to the notion, with his 9-9-9 proposal. Next came Newt Gingrich, who made a flat-tax option one of his promises in his “contract with’’ courtship of 21st-century America.
This week, as he attempts to rekindle his romance with the Republican right, Texas Governor Rick Perry unveiled a 20 percent flat tax that, he rhapsodized, would free “our employers and our people to invest, grow, and prosper.’’
Even Mitt Romney, once a flat-tax skeptic, is now flirting with the idea of flatter. And as for The Wall Street Journal editorial page? Well, it has already succumbed to commentary’s equivalent of a Stendhal Syndrome swoon.
If flat-tax rhetoric sounds too good to be true, it is. We’ve already discovered that Cain’s 9-9-9 plan, presented as a marvelous gift to America, is actually a Trojan Tax Horse: A big break for upper earners, a bigger tax take from the other 84 percent.
So here are some important tax truths to consider as the campaign proceeds.
First, beware of “flat and fair.’’ Although you’ll often hear both adjectives applied to single-rate plans, the concepts are actually at war here. A flat tax would certainly be simpler than the current graduated system. But it definitely wouldn’t be fairer. Not if what one means by fair is progressive taxation: That is, a system that takes a larger share of upper earnings than it does of middle and moderate incomes.
Further, “under any flat tax that raises an equivalent amount of money, it is unavoidable that middle and lower income people will pay more than they do under the existing tax code,’’ notes Robert Reischauer, former director of the Congressional Budget Office.
That’s a simple analytical reality. Consider: The one rate set by a flat tax will inevitably be well below the top rate of a graduated system. That spells a large tax cut for upper earners. But if such a plan is to be revenue neutral, those lost tax dollars have to be made up somewhere. And that means taking more from middle or moderate earners.
Now, proposing a tax hike on middle America is hardly politically palatable. Thus advocates usually try to wriggle free of a flat tax’s regressive reality by choosing a rate that won’t replace the revenues raised under the current system.
That’s what Steve Forbes, Perry’s flat-tax mentor, did with his plan in the 1996 campaign. His 17 percent flat tax would provide a break for all taxpayers, he promised. But that was only true because his scheme would have collected several hundred billion less than the existing system.
Perry is taking a page from Forbes’s playbook, while adding a clever twist of his own. He’d let individual taxpayers choose whether to pay under the current system or to apply his 20 percent flat rate.
That option means no taxpayers would see their taxes go up. But here’s what would happen, explains Len Burman, professor of public administration and economics at Syracuse University. Top earners would obviously take advantage of Perry’s 20 percent rate, which would provide them an enormous tax cut. And because no one would pay more, the inevitable result would be either a much bigger deficit or much deeper budget cuts to offset the hundreds of billions the flat tax would lose.
Perry, of course, doesn’t have anything resembling a realistic plan for dealing with the existing budget deficit, let alone one rendered much larger by a flawed flat tax.
So keep your wits clear and your wallet close in this time of flat-tax infatuation. Tax-code flat-tery may sound beguiling, but as policy, the idea is a decided dud.