It’s Time for a Flat Tax

Friday, 03 Dec 2010 12:14 PM

By Dick Armey

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From the FreedomWorks website.

Late Nobel Prize-winning economist Milton Friedman first proposed a flat tax in 1962. Nearly 30 years later, the idea gained national prominence when FreedomWorks Chairman Dick Armey introduced a flat tax proposal on the House floor. He pledged that a simple flat tax would allow Americans to “file their taxes on a form the size of a postcard.” Unfortunately, the Armey flat tax failed to pass Congress. To this day, we are still stuck with one of the most complicated tax codes in the world.

But could that change soon? When the new Republican-controlled House convenes in January, we could potentially see the flat tax gain steam again. This week, Rep. Mike Pence, R-Ind., announced his intention to push for a simpler tax code.

There is one system that meets all of these criteria: the best option, the most pro-growth option is a flat tax. I believe it is time that America adopted a flat tax and scrapped the current system once and for all.

In the Senate, Jim DeMint, R-S.C., could potentially introduce a flat tax bill next year. This is encouraging news. We have not seen any serious legislative efforts to improve the tax code in over a decade. Pence further discusses that under his proposal "individuals and businesses would pay taxes at the same rate."

Apply the rate and your taxes are done. Everyone pays the same rate, and the more money you make, the more you pay. It’s fair, simple and effective.

Replacing the current messy tax code with a flat rate tax would be a huge improvement. Since the early 1990s, the flat tax revolution has spread across the world. Currently, 25 nations have adopted a single-rate flat tax system.

Most of these nations have tax rates below 20 percent. This month, Romania’s Senate just approved a proposal to lower their popular flat tax from 16 to 10 percent. After implementing a flat tax, nearly all of these foreign nations have experienced economic growth and lower unemployment rates. According to Cato Institute scholar Marian Tupy,

Seven EU countries (Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Romania, and Slovakia) have introduced a flat income tax, which has proven so popular and economically beneficial that three more EU members (Hungary, Poland, and Greece) are considering it.

Just a few days ago, Hungary joined the flat tax club. Could Greece implement a flat tax before America?

Russia is one of the prime examples of the success of the flat tax. In 2001, Russia replaced its progressive tax code with a single flat rate of 13 percent for all. The results have been outstanding.

Between 2001 and 2004, The Hoover Institute found that tax revenue actually rose by 79.7 percent. Even a New York Times headline read “Russia Imposes Flat Tax on Income, and Its Coffers Swell.” When people find their taxes to be low and sensible, they are willing to produce and invest more. As Art Laffer says:

People do not work, consume, or invest to pay taxes. They work and invest to earn after-tax income, and they consume to get the best buys after tax.

In just the first year of implementation, Russia’s GDP grew a dramatic 5 percent. It’s important to note that the flat tax has not solved all of Russia’s problems. As Cato Institute scholar Dan Mitchell correctly notes, many of Russia’s problems can be blamed on lack of property rights and excessive government intervention in the economy.

So why hasn’t the United States joined the flat tax revolution? Powerful special interest groups have blocked any efforts to improve the tax code.

According to Mike Pence, our current tax code has “special preferences and tax loopholes that Congress and an army of lobbyists have built into the tax code over time. These fuel special interests and generally benefit one person, business or industry over another.” No wonder so many special interest groups are hostile to a flat tax. It would actually treat people equally.

Just imagine filling out your tax forms in five minutes with a flat tax. According to the IRS, the average American taxpayer spends 26.5 hours preparing and sending in their taxes. Even IRS commissioner Douglas Shulman admits that he uses a tax preparer to file his own taxes, “I've used one for years. I find it convenient. I find the tax code complex so I use a preparer.” Over a day of valuable time is lost each year that taxpayers could have spent being productive, spending time with family and friends or any way that they choose.

It’s promising that the flat tax is finally making a comeback. Hopefully, Mike Pence, Jim DeMint, and other lawmakers will successfully push for a flat tax code. It’s been reported that even China may now be considering a flat tax.

We need to boost our global competitiveness. One notable way is to implement a flat tax that will lead to faster economic growth while treating everyone the same.

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