Flat tax & simplification

April 15th coming up. Taxes on the brain. Gotta get those darn forms done!

lcurve.org (video in the previous post) makes a case against a flat tax.

The flat tax would shift the burden downscale even more. The sales pitch for this shift usually focuses on "simplification." Simplification is unrelated to the issue of who the money is coming from. You could have a simple progressive tax just as easily as a simple flat tax. The proposal to eliminate the income tax entirely would be disastrous. Those on the vertical spike would escape virtually all of their obligations and the burden of government would be born almost entirely by those of us on the horizontal spike, both through increases in other forms of taxation and reduction of services. The income tax originally taxed ONLY the vertical spike. This is the direction tax reform needs to take if it is to be truly considered "reform."

But simplicity is critical and the flat tax isn't about getting rid of income tax -- and it can do what the last sentence hints at. Why not combine a flat rate income tax with a distribution (not just an exemption) to take care of that lcurve. Explicit redistribution of wealth. Say the flat tax rate is 25%, and the distribution back to each taxpayer is $15,000.

• A family earning $40,000 a year would pay no taxes, and in fact get $5000 back from the government (preferably, direct deposited to a gov't provided checking account in weekly installments, potentially in lieu of complex benefits programs).
• A family earning $100,000 a year would pay $10,000 (25K-15K) in income taxes
• If BillG ever had $50B in realized gains in a year (which, by the way, he never has) -- he would pay $12,499,985,000

To truly be a flat tax, there would have to be few/no shelters or deductions, so wealthy taxpayers can't just hire accountants and lawyers to find shelters their income. Check out this IMF study (warning: long) for analysis of Russia's 2001 flat tax reforms.

In 2001, Russia dramatically reduced its higher rates of personal income tax (PIT), establishing a single marginal rate at the low level of 13% [with a substantial exemption for lower incomes]. In the following year, real revenue from the PIT increased by about 26%. This ‘flat tax’ experience has attracted much attention (and emulation), making it perhaps the most important tax reform of recent years. But it has been little studied. This paper asks whether the strong performance of PIT revenue was itself a consequence of this reform, using both macro evidence and, in particular, micro level data on the experiences of individuals and households affected by the reform to varying degrees. It concludes that there is no evidence of a strong supply side effect of the reform. Compliance, however, does appear to have improved quite substantially – by about one third, according to our estimates – though it remains unclear whether this was due to the parametric tax reform or to accompanying changes in enforcement.