For no obvious reason, many Republicans and some (few) Democrats are fans of the flat tax. That is a fixed percentage tax on every dollar earned with no deductions, or very few. They see the flat tax as better, or more fair, than the progressive, graduated tax found in the US and most industrial countries. While most Republicans don’t like high taxes, as in Sweden, France, or in the UK, the flat-taxers want a single tax rate: a constant percentage for all. A common version is what Ben Carson described earlier this month, “if you earn ten million dollars your tax will be one million; if you earn ten dollars, your tax will be one dollar.” Herman Caine (R) proposed something similar eight years ago, and (surprisingly) so did Jerry Brown (D).
Ben Carson proposes a 10% flat tax.
As it happens, of the 230 nations on the planet, several already have a flat income tax, and none of them are industrial juggernauts. I will list the larger of these countries in order their tax rate: Mongolia and Kazakhstan, 10% flat tax and hardly any services; Russia and Bolivia, 13% flat tax: moribund, raw-material-based, police-states; Romania and Hungary 16%; Lithuania and Georgia 20%; Zambia 22%; Switzerland, 35% when you include the Cantonal and municipal flat rates, and (topping the list) Greenland at 45%. Not one of these is a productive, industrial powerhouse, like the US, and there is no indication that this will change any time soon.
I suspect that the flat tax enters the minds of conservatives from the Bible, from the 10% of grain that was given to the Levites (Numb. 18:24), and the second 10% eaten of pilgrimage festivals or given to the poor (Deut. 14:22-24). If that’s the source, let me suggest a better modern version is to give out cans of food, or to support ones church. But as a model for government finance, I’d suggest it’s best to leave more in the pockets of the poor, and tax more from the rich. Even in Biblical times, the government (king) levied a substantial tax above the 10%s described above.
A measure of tax rate is the percentage of the total GDP that goes to taxes. As things go, our tax rate isn’t particularly high.
A flat tax does not necessarily imply a low tax, either. Greenland’s flat 45% rate is among the highest in the world, and Israel had a 50% flat tax until fairly recently. It’s also worth noting that personal income isn’t the only thing one can tax. Several countries combine moderate personal income rates with high corporate rates (Venezuela, Zambia, Argentina), or add on a high sales tax, or a transaction tax. Herman Caine’s 9-9-9 tax plan included a 9% transaction tax and a 9% federal sales tax that would have gone on top of whatever the state tax would have been. The revenue collected by the 9-9-9 plan would have been no less than we had, but would be, he claimed, simpler. Cain’s flat tax wasn’t even really flat either, as there was an exclusion, an income level below which you were taxed 0%. That is, he was really proposing a two tier system, with a 0% rate at the first tier. Rand Paul seems to favor something similar today.
The two advantages of a flat tax are simplicity, and that it reins in the tendency to tax the rich too much, a tendency found with many liberal alternatives. The maximum tax rate was 95% in England under Attlee. Their 95% tax-rate appears in the Beetles’s song, Mr Taxman: “…There’s one for you, nineteen for me; ‘Cause I’m the Taxman.” High rates like this caused the destruction of many UK businesses, and caused The Beetles’s to leave and reincorporate in the Cayman Islands. Bernie Sanders recently proposed a top rate that was nearly as high, 90%, and praised Denmark (60% maximum rate) for its high social services. Sorry to say, Denmark seems to have concluded that their 60% maximum was excessive, and earlier this year reduced their maximum to 47.794%. This is below the maximum US rate if you include New York state and city income taxes. History suggests that if you tax the rich at rates like this, they leave or do other socially unacceptable things, like go black-market. On the other hand, if you tax too little, there is no money for education or basic social services, e.g. for the desperately poor. At one point, I proposed the following version of graduated to negative scheme that manages to provide a floor, a non-excessive top rate, and manages to encourage work at every income level (I’m rather proud of it). And there are other key issues necessary for success, like respect for law, and not having excessive minimum wages or other excess regulations.
Bernie Sanders: tax the rich at 90%; I doubt this is a good idea.
Whatever the tax structure is, there is probably an optimal average rate and an optimal size for the government sector. I suspect ours is near optimal, but have no real reason to think so (probably just nativism). I’ve found that comparing the US tax rates to other countries’ is very difficult, too. Most countries have a substantial Value Added Tax (VAT), that is a tax applied to all purchases including labor, but we do not. Some countries have import taxes (Tariffs, I’m in favor of them), while we have hardly any. And many countries tax corporate profits (and sales) at rates above 60% (France taxes them at 66.6%). To make any sort-of comparison, I’ve divided the total tax income of several countries by the country’s GDP (I got my data here). This percent is shown in the chart above. The US looks pretty average, though a little on the low side for an industrial nation: just where I like to see it.
Robert E. Buxbaum, November 29, 2015. I imagine myself to be a centrist, since all of my opinions make sense to me. When I change my mind on something, I stay at the center, but the center moves. If this subject interests you, Alvin Rabushka seems to have dedicated his life to following the flat tax.