Flat tax: make it voluntary

February 22, 2005

Free Market Foundation

A voluntary flat tax would be easier to pass in Congress because it would avoid the meddling of special interests, says Stephen Moore of the Cato Institute.

All that would be needed, explains Moore, is a single page addition to the tax law, which states that workers and businesses may have the option of bypassing the first 10,000 pages of the tax code and instead comply with one flat rate:

The tax rate would be a flat 20 percent on all income (wages, capital gains, dividends, and estates).

The corporate tax rate would also be 20 percent, but all tax credits would be ended.

There would be no deductions on income except for a generous personal deduction and child deduction.

Every filer has the option of sticking with the current tax system, so special interests would not have to give up cherished deductions, such as for homeowners, charitable givers or owners of municipal bonds.

Though in theory people could game the system by filling out both tax forms and paying the lesser of the two, Moore says that this is unlikely:

The average tax filer at H&R block pays $130 in tax preparation costs; thus, they would be willing to pay at least up to $130 in additional taxes to have a “post-card” return.

Similarly, tax compliance costs for firms can be as high as two-thirds of all corporate tax income tax revenues collected; many companies would opt for the flat tax, even if it meant paying more, to avoid the accounting and legal tax preparation costs.

The flat tax is a critical fiscal policy tool because it would boost economic growth by about 10 percent, which would help boost wages, reduce poverty rates and deal with budget shortfalls.

Source: Stephen Moore, How Much Tax Would You Like to Pay? Wall Street Journal, January 27, 2005.

For WSJ text (subscription required): http://online.wsj.com/article/0,,SB110679309205937594-search,00.html

For more on Flat Tax: http://www.ncpa.org/iss/tax/

FMF Policy Bulletin/ 15 February 2005