Supply-side economists think they've figured it all out. They (apparently) really think that people make decisions about accepting promotions and moving to rural areas based on whether the federal income tax is flat or progressive. I've always doubted the economists' conclusions based on the wealth-maximizing version of the motives behind human behavior, and I especially doubt them when it comes to tax policy, because tax never stands alone and is so intertwined with everything else--what kinds of goods and services the state provides, what we view as our obligation to help those with less, whether we think government is a better regulator of the public good than private, profit-making interests, and so on.
David Henderson at the Hoover Institution is one of those supply siders who believes the arguments (at least, the "moderate claims") --that a flat tax can lead to "more work and more output" while giving "lower-income people a disincentive to advocate [for] more federal government programs, because they will see themselves as paying for those programs" and because "taking roughly the same percentage from everyone's income is more fair." See David Henderson, Don't Abolish the AMT [instead, change it to a flat tax], Wall St. Journal, May 2, 2007, at A21. [Aside-- Henderson, like many supply-siders, claims that empirical studies prove supply-sider claims, but doesn't honor his readers by indicating what studies he is resting his views on.]
Henderson advocates letting the AMT downward creep continue, while moving the rates to a low 20% flat tax, so that over time we are (almost?) all moved to a flat tax system instead of the regular, progressive tax system. He would prefer to lower the exemption amount now, but is satisfied to let it creep downward so that more and more people are paying the "flat tax" rather than the progressive tax. He doesn't approve the progressive reform of establishing a reasonable income threshold for the AMT that is indexed for inflation.
The progressive reform is the right one--it lets the AMT continue to do what it does well--ensure that high-income taxpayers are not able to avoid paying their fair share--while at the same time protecting ordinary taxpayers who have already been taxed through the wage-withholding system from having to pay a small additional amount through the AMT because of its broadened base.
One of the big problems with Henderson's favored result--a flat tax where everybody except those under the exemption threshold pays a tax around 20%--is that, in spite of Henderson's claims that a 20% flat tax on almost everybody can be revenue-neutral, such a tax cannot fund the government programs that we all know are necessary, resulting in lower quality of life. Look at the information that has come out of the recent pet food contamination problem--we have now learned that the FDA has too few inspectors to keep up with the amount of imported foodstuffs, and that factories in China routinely add plastic garbage to food ingredients like wheat and rice gluten to make their exported food even cheaper (and incidentally more toxic and less nutritious). Does anybody really want to pay less taxes in order to have to take the risks of food contamination that would result from cutting back on FDA enforcement even more? How about the Center for Disease Control and other similar federal agencies funded with tax dollars? The fact is, countries with much higher taxes than in the US (which is, in many ways, already a tax haven) have both a higher standard of living and a better quality of life measurement.
Another problem with the flat tax approach is that it is based on a distorted view of what government is all about--most flat taxers (and Henderson appears to be in that majority group, though he couches his arguments in terms of revenue-neutrality) want to downsize government and privatize its functions to the greatest extent possible. Note Henderson's comment that "lower-income people" will have a "disincentive" to advocate for government programs because they'll be paying for them. That carries a presupposition that government programs are bad and "disincentivizing" advocacy for government programs is good. What a perverse view of government that is. We need, instead, to help people understand how important it is to be able to act together through an institution rather than individually on matters that we as individuals cannot possibly address, like poverty, health care, sustainability of quality of life in the face of globalized financial markets, and global warming.
Furthermore, the flat tax will inevitably shift the burden of whatever government we do have onto those least able to pay for it and most in need of governmental help. This is an inevitable result of eliminating progressivity in the system and placing more and more of the tax burden on ordinary people--by far the vast majority of Americans--who labor to earn their livings rather than earning their incomes from capital.
Note that the AMT does not treat capital gains as an AMT adjustment; they are still taxed at extraordinarily low preferential rates. Certainly, it is clear that if Henderson had his way, the new, flatter, lower-reaching AMT would become the main tax system and one would assume Henderson wouldn't add capital gains back in to make the preferential rate an AMT preference item. Although Henderson doesn't address capital gains in this opinion piece, I suspect he would argue that capital gains should not be subject to taxed at all. In that case, Henderson's "flat tax" world would become one in which tax is exclusively imposed on those who labor for an income.
Henderson claims a 20% flat tax could be revenue-neutral. But that assumes that it would be politically feasible to get rid of a few additional deductions still not treated as preferences under the current AMT. The home mortgage interest deduction is the elephant in that room. I'd support eliminating that (just as I'd support treating the capital gains preference as an AMT add-back), but I doubt if it stands a chance politically. The political difficulty of eliminating various deductions is one reason a flat tax rate would in actuality have to be much higher--probably around 40% or more-- to be revenue neutral or else the flat tax would result in huge cutbacks to government revenues.
Eliminating progressive taxation is already underway with the movement--funded almost entirely by hugely wealthy families--to eliminate or downgrade the estate tax. Even the democrats don't seem to understand that we need to leave the estate tax in place. An exemption amount of $2 million is plenty--it exempts anybody that we should have any concerns about, and it taxes those who otherwise will escape paying income tax most of their lives (because they don't sell appreciated securities) and then escape tax again at death. We don't need to use the AMT--which was intended to catch some of these higher-income Americans who weren't paying their fair share--as a way to let even more of them off the hook for their fair share. That's just plain wrong-headed. Americans have always considered that people should pay tax according to their ability to pay.
REVISED 5/4/06
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