Commentary | Budget Taxes and Public Investment

Cutting taxes for the rich never ends well

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You can call it 9-9-9, the Rick Perry two-step, or a national sales tax. But the various flat tax plans being proposed by Republican candidates, right-wing think tanks, and media commentators share some common characteristics that should worry most middle-class Americans.

The basic notion behind a flat tax is to eliminate the current system of six tax brackets—in which people with higher incomes pay higher tax rates—with a single uniform rate. Most flat tax proposals also eliminate most or all of the deductions and credits in the current code—such as the mortgage interest deduction, the deduction for charitable giving, and hundreds of lesser-used preferences.

The flat tax is certainly a good deal for high-income individuals. Although they might not get to deduct mortgage interest payments on their vacation homes, those with high incomes more than make up for it in the lower, “flatter” rate. For example, under a 20 percent flat tax (similar to the one proposed by Perry), the top 1 percent would see an average tax cut of over $200,000.

If the rich are paying less, you can probably guess who would pay more: low- and moderate-income families. For example, under Herman Cain’s 9-9-9 plan, 90 percent of filers with incomes between $40,000 and $50,000 would see a tax increase averaging about $4,000. (The Perry plan gives taxpayers an option of staying in the current system—so it’s unlikely anyone would choose the flat tax option if it means higher taxes. Since low- and moderate-income taxpayers would see an increase under the 20 percent plan, the final result of the Perry plan would be the introduction of an exclusive tax code designed for the high-income individuals, while the rest of us get to keep the old clunker. See who would choose which plan.)

Because flat tax proposals lower rates at the top, and because the top is where an increasing share of income is being concentrated, they also tend to bring in significantly less revenue than the current tax code, resulting in higher deficits, fewer public investments, and pressure to cut programs like Social Security and Medicare.

Proponents of the flat tax argue that lower rates on the rich (or the “job-creators” as some are now calling them) and on income derived from stocks and bonds will boost economic growth and job creation. However, this trickle-down theory has been tried and failed: Bush-era policies moved the tax code in this direction, but the “boom” of the 2000s was the worst on record since at least the 1950s.

Tax cuts for the rich and a higher debt for everyone else? We’ve seen that movie before, and it doesn’t end well.

This commentary originally appeared in U.S. News & World Report


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