Sunday, October 23, 2011

Feeling flat

Rise of Cain’s 9-9-9 and other Republican plans show the nation is hungry for a flat tax

Last Updated:  October 23, 2011

The nightmare on Main Street -- the federal income tax code -- is ending, which is fantastic news for our beleaguered economy. Dramatically simplifying this monstrosity would unleash a powerful wave of prosperity and job creation.
Thankfully in 2012 we will get a mandate to make this happen. Presidential contender Herman Cain vaulted to the head of the Republican pack when he proposed his 9-9-9 plan -- a flat 9% income tax, corporate tax and national sales tax. Even better, Texas Gov. Rick Perry will, in a few days, unveil his version of a flat tax, a concept that I have long advocated.
To put things in perspective: Lincoln’s Gettysburg Address, which defined the character of the American nation, is only 272 words; the Declaration of Independence, 1,500 words; the Constitution with all its amendments, 7,200 words; and the Bible, which took centuries to put together, 773,000.
The federal income tax code and all its attendant rules and regulations -- almost 10 million words and rising.
The code has been changed 14,000 times since 1986; last year alone there were 500 changes. The cost of compliance is horrific. The IRS itself calculates that we spend more than 6 billion hours a year filling out tax forms, the equivalent of almost 3 million full-time jobs. The Tax Foundation calculates that by 2015 annual compliance will be costing the American people some $483 billion a year.
The flat tax would junk the current code and replace it with a single rate that would apply to all incomes after generous deductions. There would be no tax on your savings and there would be no death tax -- you should be allowed to leave the world unmolested by the IRS. The business profit tax would also be slashed -- all those poisonous loopholes would be eliminated. You could do your tax return on a single sheet of paper. Under the plan I introduced in the 1990s, for instance, a family of four would have paid no federal income tax on their first $36,000 of income and only 17 cents on the dollar above that level.
The flat tax would stimulate risk taking and productivity. Combined with a stable dollar, it would usher in a great economic boom.
The Cain plan would rid us of not only the federal income tax, but also the Social Security and Medicare payroll taxes.
Both plans would end crony capitalism and reduce political corruption: Half of the lobbying in Washington revolves around the tax code as special interests vie for special tax breaks.
The challenge of the Cain plan is that national sales tax, a tough sell given that the average sales tax in the US on a state and local level is already at 9%. Moreover, there is a real danger in introducing a new nationwide tax. Politicians will always be finding a reason to raise it, which is what’s happened to Europe with its consumption tax, called the Value Added Tax. The flat income tax is the easier, better way to go.
Flat tax critics say that without a deduction charitable giving would wither. Not true. Americans have always given roughly 2% of GDP in cash contributions to charities for decades whether tax rates are high or low. In the 1980s, for example, the top income tax rate was cut from 70% to 28% and many charities thought giving would decline. Instead, not only did contributions go up, but the rate of giving went up as well. When Americans have more they give more.
Critics also claim that the lack of the home mortgage interest deduction would hurt housing. But a flat tax would let you keep more of what you earn. Prosperity and rising incomes help housing.
Can such a big change come to pass? Polls show overwhelming support. Last December even Democrats on the president’s deficit reduction commission endorsed the idea of simplifying the code, although they didn’t go nearly as far as Perry and Cain would go.
Considering the benefits to our economy and our collective sanities, both parties would be foolish not to pursue a flat tax.
Steve Forbes is chairman and editor-in-chief of Forbes Media and author, with Elizabeth Ames, of "How Capitalism Will Save Us: Why Free People and Free Markets Are the Best Answer in Today's Economy" (Crown Business), out now.

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