It’s obvious: “A flat income tax rate is fair.”
Well…no. Flat taxes are, indeed, unfair. Short of a regressive tax structure, flat taxes are as unfair as you can get. A brief reminder: A regressive tax structure would invert the current rate structure and tax higher marginal income (consumption, if that’s your preference) at lower marginal rates; a progressive tax structure would tax higher marginal income at higher marginal rates.
Flat rate proponents frequently use three arguments. The first is that a flat rate reflects the notion of fairness that is summed up by the dictum, “The rules should be the same for everybody.” The second argument is that a progressive rate structure discourages marginal productivity because it forces highly productive earners to pay a larger share of the marginal income that results from their marginal, higher productivity to the government, i. e., to transfer income from the highly productive members of our economy to the less productive members of our economy—“socialism”. The third argument is that determination and collection of anyone’s tax bill would be simple, easy and cheap; avoidance would be difficult and expensive for the avoider.
The first argument is simply inane. The fact is, in the United States the norm is that rules are always the same for everybody who lives in the same state. The “rules of the game”, whatever legal game you play, are the “laws of the land”, which are the same for everybody. That’s what the founders of this nation meant by “equality before the law.” Sadly, and this outcome seems to be an inexorable result of human behavior, enforcement and punishment are not fair by this criterion. But, that point is irrelevant to this argument and is, therefore, part of a different discussion. This argument is so weak that no further discussion should be worthwhile; it’s inane prima facie.
Despite my opinion of this argument’s merit, I’m going to discuss it. First, our criminal justice system distinguishes degrees of severity of crimes; we adjudicate first- and second-degree murders and manslaughter (essentially third degree murder) as well as attempted murder differently by specific (although hard to apply, sometimes) criteria about the intent, circumstances and outcomes of his behavior. The system distinguishes between petty and grand theft by the value of the goods stolen. If you believe that only a regressive or flat tax structure is fair, then our criminal justice system is unfair; the punishment differs according to the severity of the crime and the intent of the perpetrator. Our civil justice system is equally “unfair”. Not only are monetary damages assessed based on the economics of the lawsuit, but greater monetary damages are sometimes assessed to compensate the harmed for their “pain and suffering” or to punish the offender for the egregiousness of the harm done. Should we change the system to give all criminals and civil offenders the same punishment or the same payment? In each case, “the rules are the same for everyone,” but there are different rules for different classes of people according to the circumstances, motives, intent and outcomes of the behavior. Most, if not all, people consider this structure fair. The equivalence of “fairness” with “one rule for all” is naïve and inane.
The third argument makes a good point: the federal tax structure is too complex to administer efficiently or effectively. But, instituting a simple tax structure with a few simple rules while preserving a graduated tax structure would solve this problem just as easily as instituting a flat tax. Imagine four marginal tax rates, say, 10%, 25% 50% and 70%. Eliminate all deductions; eliminate the “employment” tax (regressive). This structure would be simple, easy to administer for the IRS and for the taxpayer; all individual tax calculations would fit on a Form 1040-EZ; even better, payroll deductions could be precise enough and adjusted real time so that April 15th would become an artifact of a weird past. Such rules single out no class of earners for preferred treatment. Besides, a flat rate is silent on deductions; deductions for special classes of taxpayers would be easy to include and would certainly be targets of special interest groups. The number and levels of tax rates is one factor among several that generate the ridiculous tax structure we have, now, and there are better ways to simplify the tax code.
The second argument is the only one of these three that some thoughtful people take seriously. But, even this argument is manifestly weak. Every April, my father used to say, “I don’t understand why people complain about getting a raise that puts them into a higher tax bracket. They still make more money and get to keep at least some of it!” I remember noticing this comment for the first time when I was 10 years old. I asked him what he meant. He explained by example. In those days (the 1950s), the rate schedule was complex, with the top rate 92% and 22 incremental rates from the lowest, 22.2%, to the highest. The top rate kicked in at $1,693,431 in real 2010 dollars ($3,000,000 in nominal dollars); the bottom rate topped out at $16,934. These income levels are for individuals and married people filing separately; married couples filing jointly used half of these levels each. An individual taxpayer earning $2,000,000 (adjusted gross income, i. e., after deductions) in 1952 would have netted $357,000 and paid $1,643,000 in taxes. Wow. To get actual total income, add back the sum of the deductions multiplied by the relevant marginal tax rate.
Despite this aggressive rate structure, my father, my mother, their friends and corporate executives, including the CEOs who earned $2,000,000, all worked hard to improve their earnings, status, prospects and quality of life. In fact, GDP growth, the securities markets and commercial technological innovation thrived during the period from 1946 to 1970, during which the lowest top marginal rate was 70%. Productivity grew rapidly during this period, beginning to slow down during the 1970s.
The federal government incurred astronomical levels of debt (relative to GDP) to support our role and the roles of our allies during World War II. The taxes levied and collected during the following 20 years were required to reduce this debt and fund the rapid and extensive development of infrastructure and public education that drove our economy to become the largest in the world. Americans worked hard and smart to produce and earn enough to support these two crucial factors in the growth of our economy and increase in the material quality our lives and lead the economies of those nations devastated by war to growth and prosperity. The view that tax structure drives behavior is a shibboleth of the right that they use to protect the special status and concomitant entitlements of the rich and powerful.