by Rod D. Martin
January 9, 2004
In the Washington Post, a recent headline blared, “Flat Tax Imposed On Iraq.”
New taxes heartlessly heaped on the backs of hapless Iraqis? Well, not exactly.
You wouldn’t guess from the headline, but on September 15, what U.S. administrator L. Paul Bremer did was cut Iraq’s top tax rate from 45% to 15% for individuals and businesses.
So Iraq is now the latest member of the flat tax club. Hong Kong’s amazing success story is largely attributable to its flat tax, Ukraine has just followed suit, and in 2001, Russia replaced its maniacally Keynesian code with a 13% flat tax on individual income, easily the lowest rate in Europe.
Russia’s experience has been astonishing, not to mention instructive. For years after the fall of Communism, Russia was a basket case, in large measure stifled by an impossibly complex tax system which punished investment and encouraged corruption. Today, Russia’s economy is growing faster than any in Europe, and its tax revenues have been skyrocketing. They doubled in the first year alone.
These results fit well with America’s past — albeit fleeting — experience with lower, flatter taxes.
In the 1920s, 1960s, and 1980s, we cut taxes across the board and drastically reduced the top rates of taxation on Americans. The results were phenomenal: dramatically decreased inflation and unemployment, increased revenues, and soaring productivity.
Why does a flatter tax system work so well? Simply put, it rewards people for being givers, not takers. It encourages hard work, saving, and investing — the three pillars of any economy.
Contrast this with our current system of “progressive” taxation, a grotesque living fossil with the survival skills of a Houdini — or a Beltway bureaucrat. As Ronald Reagan once said, it’s government torpedoing your ship when it comes in. Your small business gets off the ground, or you land a higher paying job as a reward for upgraded skills, only to be pushed into a higher tax bracket. Progressive? Only if your motto is, “Success is a crime we must punish.”
Our tax system remains a national disgrace, but not solely for economic reasons. Our present tax system is inscrutable. No ordinary person can decipher it. The broad middle class of this country does not know what it owes nor why it owes it. Moreover, that is by design: it lets Washington’s taxoholics tax arbitrarily and unaccountably, while rewarding their friends and punishing their enemies.
The whole system is grossly unfair. It is legalized theft. It robs Peter to pay Paul. Sometimes, Peter is wealthy and Paul isn’t. Often it’s the other way around: Peter happens to be a middle-class taxpayer and Paul a rich multinational corporation. Either way, this unjust system penalizes marriage, pilfers families and robs home equity. Even if you survive the income-tax obstacle course and accumulate wealth by the time you die, it strips your children of it before you’re cold in the grave.
Besides working economic wonders, a flat tax system would turn all this right-side up. It would be fair: everyone would pay their share, at exactly the same percentage of income as everyone else; and as Russia’s experience has shown, people stop cheating when they believe the system’s fair.
Moreover, it would be transparent, and that in turn would create accountability. Taxpayers will be able to calculate and file their taxes on a postcard. Unable to duck behind mountains of deductions, exemptions and plain old loopholes, politicians will be held truly responsible for even the slightest tax increase, and for what they do with the money they have.
Some tax reformers advocate a national sales tax instead. Such a tax, while workable, would be invisible, with disastrous results. Government could and would set different rates on different items for different people. Moreover, as evidenced by the gas taxes we pay, nobody would really know how much they’d paid in a year. Holding tax-happy politicians accountable would be virtually impossible.
A flat tax system is clearly the better way to go. And if at the same time we take the logical and overdue step of abolishing withholding, billing every American monthly as though their tax bill were their mortgage, they would begin to realize that that is true: their tax bill is the biggest mortgage of all. Actually receiving the money, putting it in the bank, and then having to send off an exact, predictable, final amount to Uncle Sam would teach all Americans a vital lesson small business owners learned long ago: that government can give you nothing it didn’t take from you first. And on that day, the national debate on limited government will really begin.
But even short of such wonderful ends, the short-term bottom line remains: the flat tax works, for government, for businesses and for the people; and if it’s good enough for Iraq, for Russia, for Hong Kong and the Ukraine, it’s certainly good enough for America. We need a flat tax for the new century — and the sooner, the better.
Read the Whole Flat Tax Series, by Rod Martin