April 15, 1997
"Flatter, But Not Flat, is the Best Tax Reform"
San Jose Mercury News
By Timothy Taylor
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LAST YEAR, the more extreme advocates of a flat income tax took center stage,
and then painted themselves into a corner. They advocated a single low tax rate.
Critics pointed out that if this rate was too low, it would decrease revenue and
raise the budget deficit. But if the single tax rate was set high enough to avoid
reducing revenue, it would cut taxes for the wealthy and raise them on many in
the middle class. Faced with that dilemma, advocates of the flat tax took a third
path: they gave up and went away. Ever since, instead of focusing on a simpler
tax with lower rates, politicians of both parties have been wallowing in the muddle.
Last year, Congress passed three bills that made 655 minor changes to the tax
code. Today's hot proposals are for tax breaks for children, for college tuition,
on capital gains, for retirement accounts, and more. But although a monomaniacal
one-rate flat tax poses real problems, turning the tax code into a parade of subsidies
is an overreaction. After all, high tax rates do discourage work and savings.
The combination of high rates and numerous complex tax provisions means that the
country pours tens of billions of dollars into tax paperwork, rather than productivity.
A flatter-tax reform finds ways of paying for lower tax rates by reducing the
ways of sidestepping taxes through deductions, credits, exemptions, and so on.
This trade-off has the welcome side effect of making the tax code simpler and
William Gale of the Brookings Institution has offered one model of a flatter
tax. He begins by restructuring tax deductions. Presently, tax deductions reduce
your payments by the amount of your bracket; thus, $100 of tax deductions cuts
$15 off the taxes of someone in the 15 percent tax bracket, but $33 off the taxes
of someone in the 33 percent tax bracket. Gale suggests that the law be changed
so that $100 of deductions would reduce your taxes by $15, regardless of what
tax bracket you are in. This change would arguably be more fair, since deductions
would have the same value to all taxpayers who itemize. It would also raise tax
But the rest of Gale's proposal would then cut the top tax rate back down to
31 percent from its current level of 39.6 percent. He would also scrap a number
of tax provisions that make the tax code more complex for high income taxpayers
without raising much revenue, like the alternative minimum tax, the add-on taxes
for those who saved ''too much'' in their pension accounts, and the picky phase-outs
of exemptions and deductions.
A complementary proposal by Daniel Feenberg of the National Bureau of Economic
Research and Jonathan Skinner of Dartmouth College would reduce everyone's tax
exemptions by one, and then add exactly that same value to the standard deduction.
This change would have no impact on the taxes of those generally poor and middle
class taxpayers who do not itemize deductions, since the sum of their exemptions
and the standard deduction would not change. Some of those who presently itemize
with a relatively small numbers of deductions would find that they were now better
off taking the higher standard deduction, without a need to itemize. However,
those who itemize with many deductions would find that although their deductions
were the same, they had one fewer personal exemption. For those taxpayers, this
change would mean slightly higher taxes.
According to Feenberg and Skinner, this proposal would raise $15 billion a
year in additional revenue from the relatively wealthy who itemize many deductions,
but reduce by 8 million the number of taxpayers who need to itemize. The Gale
proposal would reduce the number of itemizers even further.
These proposals illustrate that our choice is not between an extremist single-rate
flat tax, with its theoretical neatness and practical flaws, and the unrestrained
distribution of tax break goodies. Instead, practical proposals for a flatter,
simpler tax offer broad benefits across the economy - with the possible exception
of the accounting and tax preparation industries.
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