The Flat Tax Falls Flat

After the spectacular failure of Margaret Thatcher's poll tax in the United Kingdom, you wouldn't think that anyone would seriously discuss its equally evil twin, the flat tax, in this country. After all, we split with that now-defunct empire because we knew how to do all the taxation and representation stuff much better. But the flat tax, most recently championed by Republican presidential candidate Steve Forbes, has returned to the spotlight.

Forbes and like-minded representatives in Congress have heralded the flat tax as a new, sensible and simple alternative to our current graduated tax system. Though the concept is simple--everyone pays the same income tax rate--it is hardly new or sensible.

Once upon a time, all income taxes were flat. Our country's first income tax, instituted to raise funds for the Second World War, was completely uniform except for some quickly-added exemptions for the destitute. But over the past half-century, as tax rates rose along with national income, we moved to a graduated system with higher rates for higher earners.

There is a reason for this change. We live in a nation where a tiny fraction of the population controls the vast majority of the wealth. Our economic classes have become so polarized that the rich can safely forget the concerns of the poor, with whom they have little or no interaction.

A flat tax does not necessarily aggravate this situation in a given year. Everyone pays proportionally to their means, and, if tax revenue pays for entitlements for the poor, the system can even be slightly progressive. Over time, however, the flat tax is anything but progressive.

Having money means making more money is easier. If the rich pay the same rate as the poor, they are left with much more income in absolute terms. The poor simply cannot keep up as the rich outstrip them through investment schemes and tax advantages that the poor cannot possibly exploit. Rewards from a fast-moving economy fall solely to the wealthy. The classes move farther and farther apart, stretching our social conscience.

The graduated tax system solves this problem. True enough, it slows down the growth of the upper classes' wealth and their potential to invest in new economic ventures. But the graduated tax does contribute to equality in the distribution of wealth.

This goal is particularly important when viewed from a historical perspective. The proportion of poor people in this country, by government definition, has grown steadily since the Second World War. Meanwhile, national productivity has doubled several times over. Must a growing economy also have a growing underclass?

The Reagan years produced the largest polarization of income classes in decades. Part of this was caused by a decrease in the tax rate for the highest-earning Americans and the removal of most of the system's graduations. The graduated tax system reinstated by President Clinton represents our only hope of repairing the damage caused by the Reagan administration.

Perhaps the best barometers of any proposed policy change are its supporters. It's no small wonder that Steve Forbes has made the flat tax his issue of choice, with a multimillion dollar income from Forbes Inc. and his family's huge investments, Forbes would see his own tax rate cut by more than half--a yearly savings of millions, perhaps tens of millions, of dollars.

Unsurprisingly absent from Forbes statements have been mentions of the many intricacies of the tax code that the flat tax might erase. For example, would he do away with all the deductions for business travel and the highly-touted investment tax credit? Or just the Earned Income Tax Credit that gives people below the poverty line extra incentive to work? Forbes and his ilk find such complexities distasteful, but they exist for very good reasons.

As such a poorly-defined policy, the flat tax isn't worth considering. But if it ever makes it to the floor in Congress, it ought to go the way of the Edsels and beehive hairdos which were its contemporaries.

Daniel Altman's column appears on alternate Mondays.