Brown tries to reverse tax history Flat levy draws fire in U.S. and abroad

THE BALTIMORE SUN

WASHINGTON -- The last time a leading Western politician introduced a flat tax, she paid dearly for it.

Margaret Thatcher's 1988 poll, or head, tax on every Briton led to demonstrations around the country and a violent riot in London's Trafalgar Square, and inflamed the "fairness issue" that contributed to her downfall a year later.

The ordinary Briton was outraged at the notion that the pauper in public housing had to pay exactly the same tax as the lord in his manor. By popular demand, the head tax, which replaced a value-based property tax, is to be converted into a more progressive system next year.

Now comes Jerry Brown, advancing in the Democratic primaries on a tide of voter anger, a slew of vague promises and a single firm policy: a flat 13 percent income tax.

Mr. Brown would tax the salary of the auto executive in Detroit at the same rate as the pay of an auto mechanic in Dundalk, the guest in the hotel penthouse at the same rate as the porter who delivers room service.

What is particularly surprising is that a social liberal from California, that most progressive of states, should be advocating this most regressive of taxes. It would reverse the entire thrust of modern U.S. fiscal policy: the use of taxes to equalize income distribution by charging the the rich more and the poor less.

Citizens for Tax Justice, a think tank that devotes its efforts to making the tax system fairer, calls Mr. Brown's tax suggestion "stupid."

Mr. Brown not only advocates replacing current tax brackets with a flat 13 percent tax on individual income, but he would also scrap corporate taxes and substitute a flat 13 percent value added tax.

The result, according the Citizens for Tax Justice, would be higher taxes on most families, lower taxes on the rich and an increase of $200 billion in the federal budget deficit.

"It would be the greatest thing for the rich and powerful since Andrew Mellon was Calvin Coolidge's Treasury secretary in the 1920s," said an analysis by the think tank.

Advocates of a flat tax do not dispute that it would help the rich, but argue that it would give a major boost to the economy.

"A flat tax is a very good idea. It's an abusive idea that our tax codes should be deliberately designed to redistribute income and punish those who make more money," said Daniel Mitchell, economist with the conservative Heritage Foundation. "Outside of Havana, Cuba, you would think that those ideas would not have much credibility any more."

Without passing direct judgment on Mr. Brown's "not terribly specific" proposal, he said a flat tax would boost the economy by reducing taxes on income that could be saved or invested, and would free the "staggering" amount spent on enforcement and compliance with the current complex tax code.

What worries Mr. Mitchell is that the flat tax idea is being advanced by Jerry Brown and "the message might get mixed up with the messenger."

He said: "As a proponent of a flat tax, I worry that the plan, the proposal, the idea, loses credibility by being associated with someone whose reputation is not exactly stable."

The immediate popular appeal of Mr. Brown's plan, of course, is its simplicity. He likes to say flat-tax returns could be written on the back of a postcard. That is a point that has particular resonance at this time of the tax year.

For individuals, Mr. Brown would eliminate all deductions, exemptions and credits except mortgage interest, rent payments and charitable contributions. Out would go personal and dependent exemptions, the standard deduction, state and local tax deductions. He would abolish Social Security and federal gasoline taxes.

In would come the 13 percent flat tax on individual income, minus the three available deductions. Consumers would also face paying a form of national sales tax as industry passed on his flat 13 percent value-added tax.

Factoring all this in, Citizens for Tax Justice worked out that the 60 percent of Americans with average incomes of $31,970 or less would pay increased taxes. The poorer they were, the more of an increase they would face. The lowest fifth would see their tax bills go up an average 19.5 percent.

The top 40 percent would pay less, with the benefit increasing with salary level until the top 1 percent, earning $566,700 or more, would see their tax bills decrease by 15.1 per cent.

In the process, according to Citizens for Tax Justice, the government would lose $207 billion in revenues.

The last time the idea of a flat income tax was officially aired was in 1982, when the Treasury produced a study based on precisely the flat-rate figure chosen by Mr. Brown: 13 percent. It found that taxpayers with incomes above $50,000 would share a tax break of $40 billion, while those earning less than $30,000 would pay a similar amount in extra taxes. Those in the $30,000 to $50,000 income bracket would stay about even.

Mr. Brown disputes such figures. Without providing statistics, he asserts: "Those earning less than $100,000 annually will pay less in taxes. Those people who make more than $100,000 will pay proportionally more."

He also disputes that his tax proposal would increase the deficit. He says it would bring in the same revenues as the current system. He further denies that his value-added tax would show up as a national sales tax, saying it would be paid by corporations and their shareholders.

Mr. Brown's VAT idea is more conventional than his flat income tax proposal. Canada and Japan, the United States' two major trading partners, have introduced value-added taxes and more than 50 other countries use the system in one form or another.

U.S. policy-makers have considered the VAT idea periodically, but liberals have objected to its inequality and conservatives have worried it would open another spigot for government spending.

A study by the Congressional Budget Office last month on the effects of adopting a value-added tax concluded that such a system would be regressive, with the 20 percent of families in the lowest income bracket, who have to spend more of their income on daily living, facing three times the burden on the top fifth.

The CBO found that under a 3.5 percent broad-based VAT system, the lowest 20 percent of income earners would pay 4.8 percent more in tax, the middle fifth would pay an addition 2.8 percent, and the highest fifth would pay only 1.5 percent more.

Applying the CBO calculations to Mr. Brown's 13 percent rate and broader VAT base ($3.4 trillion against the CBO's $2.8 trillion), suggests that the lowest 20 percent of income earners would actually pay 20.6 percent more in tax under his proposal, the middle group would pay an additional 12.04 percent, and the richest would face an increase of just 3.45 percent.

The CBO pointed out that in Europe, where VAT is widely used, the regressive aspect of the tax has been lessened by excluding necessities such as food, medicine, gasoline. Mr. Brown's proposal makes no mention of such exclusions, but his advisers have indicated it could be amended to make it fairer.

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