Flat tax appeal is compounding

The flat tax -- an idea introduced as legislation last week by House Majority Leader Dick Armey, R-Tex. and Sen. Richard Shelby, R-Ala. -- has been around for a long time.

The flat tax on labor (salaries and wages) and business income was popularized by professors Robert E. Hall and Alvin Rabushka of the Hoover Institution at Stanford University in the early 1980s. Over the years the idea has been supported by politicians who disagree with each other on almost everything else, but it never caught on with the general public. That is now beginning to change.

First, there is the perceived fairness of a flat tax. It is fair because it treats everyone the same. Armey's flat tax proposal taxes all income at one low rate -- 17%. The 17% rate is applied after subtracting a generous "family allowance," which totals $33,300 for a family of four. This total includes a marriage deduction of $22,700 and $5,300 for each dependent. As Armey says, "No matter how much money you make, what kind of business you're in, whether or not you have a lobbyist in Washington, you will be taxed at the same percentage as everybody else."

Even so, Armey's version of the flat tax is also progressive -- i.e., people who make more pay a higher rate. Examples: A family of four earning $32,000 would pay no income tax (because that amount comes in under the $33,300 exemption). The same family earning $50,000 would pay 6% on their total income after subtracting the family allowance. A family earning $200,000 would pay 14% of their total income in taxes, after subtracting the family allowance. Still, the flat tax taxes every dollar in the economy once and only once and all at the same rate, after subtracting the family exemption.

Second is the simplicity of the hat tax. There are no deductions, loopholes or exemptions -- beyond the family allowance. Rather than 8 billion pages of IRS forms and instructions and $232 billion in annual IRS compliance costs (an amount equal to $900 for every man woman and child in the U.S.), the flat tax is so simple it can be filed on a post card, even those taxes paid by the largest corporations.

Third is the freedom that the flat tax gives to ordinary Americans and business enterprises to make their own decisions on how to spend money in a tax-neutral environment. No more building partially filled office towers because they are tax advantaged. The flat tax moves economic decision-making from the halls of Congress to boardrooms and kitchen tables. The growing popularity of the flat tax shows growing support for the idea of eliminating the tax code as an instrument for social engineering or micro-managing the economy.

Fourth is honesty in government. Americans would know exactly what their tax liability is and there are no hidden preferences for special interests.

Finally, the flat tax is pro-growth. Nearly every economic study shows that eliminating the double taxation of capital will promote savings and investment. The Armey people estimate that the average income of an American family of four would be about $4,300 higher in 2002 than it would be if we retained the current system.

There will be many objections to the Armey flat tax. It eliminates the home mortgage deduction. It does away with depreciation, a problem for capital-intensive businesses, especially in the early years. But the growing support for the flat tax is yet another example of the growing numbers of Americans who oppose a government that, as a matter of policy, favors one person over another or one group over another as it goes about its business of creating public goods and serving the public interest.