GOP presidential candidate Fred Thompson has proposed an interesting tax reform. It’s not a “flat tax” because it has two rates — 10 percent and 25 percent — but it might simplify the tax code.
The idea of a flat-rate tax system — all incomes would be taxed at the same rate and, beyond a basic allowance, there would be no deductions, preferences, or exemptions for politicians to sell to lobbyists — gained considerable popularity in the 1990s.
But it does not seem to be on a politically serious agenda just now.
When professors Alvin Rabushka and Robert Hall wrote their book “The Flat Tax” in 1985 and then-Rep. Richard Armey introduced the idea in the early 1990s, one of the objections was there was little real-world experience, that the benefits of a flat tax were all theoretical.
Since 1994, however, 14 countries, most of them formerly in the Soviet bloc, including Russia itself, have adopted a version of a flat-rate tax. All of them have experienced an increase in tax compliance, a stable revenue stream, economic growth and low unemployment.
Estonia, which has come closest to enacting a pure flat tax, has seen the most dramatic economic improvement.
Furthermore, the tendency among countries with a flat tax is to reduce the level of taxation. Estonia started at 26 percent, reduced it to 22 percent and plans a further reduction to 18 percent. In Macedonia, a 12 percent flat tax brought in 20 percent more revenue than projected, so they’re reducing the rate to 10 percent.
Montenegro, Mauritius, Albania, and the Czech Republic plan to go to a flat tax next year and flat-tax proposals are pending in Hungary, Croatia and Poland.
Countries find the flat tax attractive because it promotes economic growth, gives countries seeking foreign investment a comparative advantage, and provides a steady revenue stream with little tax evasion.
Maybe it’s time for the U.S. to revisit the idea.
The ideal tax rate, of course, is zero, but if that is not attainable a system that punishes taxpayers less than does the current unwieldy system is worth considering.