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US moves - quietly - toward
a flat tax
Article re-printed from The Christian
Science Monitor 12/01/2003
Without
much public debate or even awareness, the United States
is heading toward an almost flat tax.
That means the middle class will pour nearly as large
a share of its income into tax coffers as millionaires
and billionaires do. Throw in another tax cut along
the lines of the two successfully supported by President
Bush, and the middle class could actually pay a little
more.
That change would reverse decades of US policy and
constitute a major victory for some conservatives
who have long advocated a flat tax.
"Another significant tax cut could be enough
to eliminate progressivity from the US tax system,"
says Brian Roach, an economist at Tufts University
in Medford, Mass., and author of a new analysis on
what citizens really pay to all levels of government
- federal, state, and local.
Ever since the inauguration of the modern income
tax, in 1913, the US has relied on a simple rationale.
The well-to-do pay a larger share of their income
in federal taxes than the rest of Americans, because
the rich can afford it. In return, the government
protects their wealth and property. The gap in tax
rates has varied over time. (In 1913, only 0.5 percent
of the population paid the tax, and rates rose from
1 percent to 7 percent as income increased.) But it
has always remained progressive.
Then in 1996, Republican presidential candidate Steve
Forbes championed a 17 percent flat tax that would
eliminate personal deductions and many other loopholes,
and exempt interest, dividends, and capital gains.
This flat system, he argued, would bring in about
the same revenues and be far simpler. Though receiving
much attention during the campaign, Mr. Forbes did
not win the Republican nomination and his proposal
soon faded into obscurity.
Today, with state taxes becoming more regressive
- and the two Bush tax cuts providing large tax savings
for the rich - the tax system is moving in the direction
of a flat tax, but doing so out of the spotlight.
For example, despite sharp debate about the administration's
tax cuts on the campaign trail, talk about whether
taxes are regressive or progressive is hardly material
for the stump speeches of presidential candidates.
A break for the poor
Perhaps that's partly because the system looks likely
to remain progressive for the lowest-income Americans.
The poorest 20 percent of households pay on average
about 19 to 20 percent of their total income, and
that's unlikely to change, according to Mr. Roach's
analysis. Generally, the poor pay no federal income
tax. But they do pay Social Security and Medicare
taxes on earned income and various federal or state
sales taxes on purchases.
But at the top, the tax system has already become
regressive. The super-rich pay proportionately less
in federal income tax than the merely rich. In 2000,
the nation's 400 richest taxpayers, making an average
$173 million, paid an effective tax rate more than
5 percentage points lower than those making $1.5 million
to $5 million, notes economist Martin Sullivan in
Tax Notes magazine.
That gap has probably shrunk a bit since then. In
2000, the peak year for stock market prices, the super-rich
probably saved some taxes on their huge capital gains.
(Capital gains are taxed at a lower rate than ordinary
income.) Since then, stock-market capital gains have
diminished. But Congress also cut the capital gains
rate from 20 to 15 percent - a provision especially
beneficial to the rich.
"At the rate we are going, in which more and
more investment income is simply untaxed, we will
end up with a federal income tax that is not only
regressive at the top, but regressive overall,"
warns Richard Kogan, an economist at the Center on
Budget and Policy Priorities in Washington. "The
middle class will be the tax-bearing class."
Roach, a liberal, argues that the top 1 percent really
don't need tax cuts because they have been doing extremely
well in recent years. Between 1979 and 2000, the richest
1 percent enjoyed a 201 percent improvement in their
average after-tax income. That compares with 15 percent
for those in the middle 20 percent of the income spectrum
and 9 percent for those in the bottom 20 percent.
But Roach's tax burden projections (see chart) include
some "ifs." Some projections assume that
all the tax cuts of 2001 and 2003 are made permanent.
Several tax cuts are now scheduled to expire by 2010.
For example, the estate tax, which hits the heirs
of only the wealthiest 2 percent of households, is
now scheduled for elimination in 2010. But the law
Congress passed in 2001 calls for a return to 2001
estate-tax levels in 2011. Observers suspect Congress
will not allow that to happen. Rather, it may raise
the amount of an estate exempt from what some call
the "death tax" to several million dollars.
But should Bush be reelected and Congress remain under
Republican control next year, the odds for permanent
elimination of the estate tax are raised. Either solution
would disproportionately favor the rich, but by varying
degrees.
Prior to the 2001 tax cut, the richest 1 percent
of households, making an average annual income just
above $1 million, paid 42 percent of their income,
or $431,800, in taxes to all levels of government.
Under current law, they would pay 36.1 percent, or
$371,200, in 2010 (see chart). Under current law,
the rate would jump back up to 42 percent the following
year.
Tax cut for the super-rich
But if the tax cuts are made permanent, these wealthy
individuals would pay 33.3 percent or $342,600 in
taxes. That would not be much more than those who
are somewhat less affluent but still rank in the top
40 percent of incomes.
Not everyone agrees with the analysis. Roach's model
is "completely wrong on the way the world works,"
says Daniel Mitchell, an economist with the conservative
Heritage Foundation. It fails to take into account
of the positive impact tax cuts have on the economy,
he argues. Generally, the rich have more money left
over after living expenditures to invest in business
- and thus create jobs - than do the middle class.
So if the nation wants to encourage growth, flat-tax
proponents argue, it shouldn't impose extra taxes
on those funds.
Pushing progressivity
On the other side, some Democratic presidential candidates
are pushing to restore the progressivity of the system.
They advocate eliminating the Bush tax cuts for the
rich to free up federal revenues for additional public
services, such as more comprehensive healthcare. Or
the extra revenue could lower taxes for those with
lower incomes.
The amounts involved are significant, according to
Roach. Suppose the tax cuts for the top 1 percent
were eliminated and the additional revenues rebated
equally to the other 99 percent of taxpayers. Under
current law, each household would get an extra $613.
"Note that these checks could be provided every
year," varying slightly with the status of the
economy, Roach says.
Roach has another calculation: If the tax cuts for
the top 1 percent were eliminated and those additional
revenues were distributed to the bottom 20 percent
of households - those with an average income of $9,400,
these low- income families would receive a check of
$3,032 in 2010.
Of course, the American tax system changes over the
years as Congress and state legislatures pass new
laws. At the moment, though, the changes under consideration
- a corporate tax cut and a new tax-advantaged savings
plan - would provide more benefits to the well-to-do
than those with lower incomes.
THE DRIFT TOWARD FLATTER TAXES IN THE US: According
to Brian Roach, an economist at Tufts University in
Medford, Mass., taxes might become almost flat in
the United States by the end of the decade if President
Bush's tax-cut plans become permanent.
ADAM WEISKIND - STAFF
SOURCE: GLOBAL DEVELOPMENT AND ENVIRONMENT INSTITUTE/CITIZENS
FOR TAX JUSTICE
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