Following up on yesterday’s announcement about the winning entry in my law student writing contest, I am pleased to present the entry which qualified as the runner up. Andrew Moin from Harvard Law School wrote an interesting essay on Fred Thompson’s Flat Tax proposal. Check it out below, and let Andrew know what you think.
A Look at Fred Thompson’s Flat Tax and A Three Step Plan for Interpreting Primary Candidates’ Tax Plans
Recently, the Fred Thompson campaign unveiled what is arguably the candidate’s first daring and interesting idea- a comprehensive set of tax reforms that would drastically reshape the tax system in several ways, notably by eliminating the Estate Tax and AMT (alternative minimum tax) and introducing a two-bracket “flat tax” system with a 10% and a 25% rate. The flat tax aspect of his plan is not particularly new- Steve Forbes based his unsuccessful 1996 presidential campaign on a similar idea of a 17% flat tax. Further, the elimination of the Estate Tax and the AMT has been discussed, and in the former case, partially (though not permanently) done by the current administration.
What is interesting, however, is the kitchen sink approach of the Thompson tax plan (available at http://www.fred08.com/virtual/taxrelief.aspx), along with its utter irresponsibility. Furthermore, Thompson’s new flat tax system would be voluntary in nature, meaning individual taxpayers could choose whether to pay their taxes under the flat tax or under the old system. Sounds interesting, but what are the problems?
1. Where are the offsets? AMT and Estate Tax elimination are both extremely expensive, and Congressional budget projections have been made under the assumption that the AMT will remain and the Estate Tax will return. Aside from a paragraph-long concession about entitelemnt cuts, there is not a single clue as to how we will pay for these reforms. I suppose the real truth- that the only way to keep some fiscal discipline with a narrower tax base would be drastic spending cuts to Social Security and Medicare, is simply too dangerous to mention.
2. Replacing the AMT with a voluntary flat tax system seems nice, and it is indeed true that the AMT is a poorly-designed abomination (the failure to index the initial exclusion for inflation is a nightmare that strikes increasing numbers of taxpayers each year), but the adoption of the VOLUNTARY flat tax will cause one of the worst aspects of the AMT to persist. Namely, it will perpetuate the existence of a parallel tax system. Under the new system, taxpayers, tax preparers, and tax software will still have to calculate two separate tax liabilities- one for the current tax system, and one under the flat tax.
3. The voluntary nature of the flat tax guarantees enormous revenue losses- for the vast majority of taxpayers (or at least the ones with sufficient income), the only benefit of a flat tax system is the possibility that their tax liability under the new system might be lower. Thus, unlike the AMT, which only kicks in when it exceeds one’s regular tax liability, the voluntary flat tax will become an “escape hatch” for taxpayers to cut their tax bills when possible, or a superfluous addition to be ignored otherwise.
What lessons does the terrible Thompson tax plan teach us about reading these tax plans at this early stage in the Presidential primary game?
1. Ignore any proposed reform that lowers revenue, UNLESS it is immediately paired with a revenue offset (like eliminating the AMT but adding an additional “surtax” on higher brackets). Tax cuts are politically popular, easy to promise, and extremely hard to pay for. Unsurprisingly, they are common in the tax plans we’ve seen so far.
2. Ignore any vague promises of entitlement cuts. They simply will not happen, unless there is widespread bipartisan support for incremental and gradual changes (which is exceedingly unlikely to result from a candidates’ proposal now).
3. By contrast, take extremely seriously any candidate’s willingness to raise taxes. Ultimately, tax increases will be hard to push through Congress anyway, so any candidate with the courage to indicate that higher taxes may be necessary is at least trying to address the issue of fiscal discipline. On the Democrat side, there is certainly less fear of angering the rich with tax increases, but professing interest in evaluating the possibility of a tax hike is still a relatively unpopular notion, and is fairly refreshing in this “promise everything” environment.
This three-step rubric isn’t perfect, I’ll admit, and it is somewhat Democrat-favorable, but it provides at least a slight chance of divining anything of significance out of the candidates’ early tax proposals, which have been noticeably promise-heavy and substance-light.
Congrats Andrew!
Sounds like Mr. Moin has spent not enough time paying taxes and too much time wallowing in static analysis.
1. The AMT and the estate tax force complexity, uncertainty, expense and hassle on the taxpayer. A voluntary flat tax should be wildly popular with people who would appreciate the simplicity
2. Who said federal spending is sacrosanct? “Paying for tax cuts” is a false choice. Besides, the elimination of the AMT should act just like a tax rate cut, bringing in more revenue.
3. Dynamic scoring takes into account the incentives of lower marginal tax rates.
4. Fred’s tax plan says its time to inject a bit of sanity on behalf of the taxpayer into a broken tax system.
Democrats have always had little to offer taxpayers except contempt and a desire to lighten their wallets. Mr. Moin’s analysis is wonky and adds little to the debate.