July 20, 2005


Flat Tax Revisited:
A Proposal by Steve Forbes

Washington Times Commentary:

In his speech to the Republican National Convention in 2004, President Bush called for substantial reforms to America's fundamental economic systems, including the tax code, which Mr. Bush criticized as "a complicated mess, filled with special interest loopholes, saddling our people with more than 6 billion hours of paperwork and headache every year."
    Traditional reform, however, may not be sufficient; adding provisions -- even those intended to simplify the code -- into what is already a 9 million-word tome could lead to more confusion, more creative interpretation and more detrimental loopholes. Americans now spend on average over 28 hours each year filing their personal income taxes, and the total cost of all compliance was a staggering $200 billion in 2004. This burden is hampering the U.S. economy, drawing money away from potentially valuable initiatives and investments and into the non-productive business of creating tax shelters and developing various other tax-avoidance schemes.
    Through abusive tax shelters, tax-avoidance has cost the government $85 billion over the past decade, according to the Government Accountability Office. Successful schemes save money and result in both a continued incentive to exploit tax loopholes and a greater tax burden on any one without the resources to find and pursue the often obscure and complex tax exemptions.
    Steve Forbes, a longtime proponent of the flat tax system, has released a revised prescription for America's burdensome tax laws, and presents his argument in his new book, "Flat Tax Revolution" (exclusive excerpts begin today on our Op-ed page). The Forbes flat tax -- a 17 percent tax on all personal income, with simple and generous exemptions -- is the kind of idea that should inspire tax reformers. "Think of it this way," Mr. Forbes writes, "Washington politicians take one dollar from your pocket -- and then return fifty cents in various tax deductions. Wouldn't it be better if they taxed you only that fifty cents in the first place?"
    Using historical and international examples, Mr. Forbes introduces several precedents for the success of the flat tax system. With abundant economic analyses, Mr. Forbes responds to his challengers' allegations that a flat-tax would bankrupt the government or curb charitable giving.
    In all, the flat tax may not be as straightforward as Mr. Forbes believes, but his rational thinking should be welcome in shaping subsequent tax-reform discussion.

Second of an exclusive three-part series of excerpts.
    So how do we end the confusion, clutter, and corruption -- the angst and misery of having to prepare and pay our federal income taxes? If you read the previous chapters, you have no doubt reached the conclusion: Small fixes and tinkering won't work. The current system is hopeless.
    We must kill the tax monster, drive a stake through its heart to ensure it never rises again. We must replace it with a fair and simple flat tax system. Come tax time, your return would be completed by filling out a single sheet of paper or postcard. Only then will we see real, lasting reform.
    The Forbes flat tax will accomplish this. It will throw out today's federal income tax code. It will eliminate the confusion, anxiety, and discomfort that are part of the process of filing and paying our taxes. It will do away with the corruption and economic distortion produced by the current system. The flat tax will free America. It will liberate us, as individuals and as a society, from the tyranny of the federal tax code.
    The Forbes flat tax is a single-rate federal income tax and corporate tax of 17 percent. Income is taxed as close to the source as possible. No more double or triple taxation. Income is taxed once and only once. No more effort-sapping, discouragingly high tax rates. Just one, simple rate.
    All the information you need to file will fit on a simple card or sheet of paper. With the flat tax, there's no need to muddle over twenty-page tax tables. No more filling out page upon page of confusing returns. The flat tax would replace today's federal income tax code, the biggest portion of the tax burden for half the population and the most abusive part of our tax system. (It does not supplant Medicare and Social Security taxes or, obviously, state and local taxes.) It is a first, major step towards a total overhaul of the entire American tax system.
    Among key features of the flat tax: Generous and refundable exemptions for adults and children.
    The flat tax eradicates the clutter of varying rates and deductions. It does retain a limited number of basic exemptions for children and adults that have been part of our tax system for decades. However the flat tax version of these deductions is more generous. Here's how they'll work:
    Adults would be able to take a $13,200 standard exemption. Single people who make less than that would come right off the tax rolls.
    Married couples would receive a $26,400deduction ($13,200x2).No penalty at all for being married. Headsof households such as single mothers would have a 30 percent higher exemption of $17,160 to compensate for the additional burden of raising a child alone.
    Families would receive generous exemptions for dependents: a $4,000 exemption for each child or dependent, and a refundable tax credit of $1,000 per child age 16 or younger. Parents of eligible children will receive the $1,000 tax credit for each child, as under the current system.
     In addition, another feature of the current code -- one that's a bit complicated -- would remain: If the child tax credit exceeds federal taxes owed, the family can receive a refund. For example, if a family makes $15,000 but paid zero dollars of tax they can still receive $600 of the child credit (15 percent of the $4,000 of income over $11,000), even though they paid absolutely no federal income tax. We retain this complex relic of today's code -- tacked on the monster in 2001 -- to ensure that no one would pay more under the flat tax than he or she does under the current code.
    All you'd have to do to get the refund is fill out that one-page tax form. The refund would work just like the current child tax credit. A family of four would pay no federal income tax on its first $46,165 of income. In fact, they might receive a small rebate from the government. For instance, if that family of four had a tough year and annual income came in at $40,000, it would receive a tax "refund" of $1,048 from the IRS.
    That $46,165 for the family of four is more than twice the current federal poverty level. A family of six -- mom, dad, and four kids -- would owe no income tax until its earnings exceeded $65,930.