Bob greene: hall, Rabushka propose a wage tax with generous personal allowances. He says the tax system would remain progressive despite its single rate of 19 percent. The poor would pay no tax at all, and the tax burden would increase gradually, he says. Greene: the idea of a flat tax would be a mistake.
Bob greene: hall, Rabushka propose a wage tax with generous personal allowances. He says the tax system would remain progressive despite its single rate of 19 percent. The poor would pay no tax at all, and the tax burden would increase gradually, he says. Greene: the idea of a flat tax would be a mistake.
Bob greene: hall, Rabushka propose a wage tax with generous personal allowances. He says the tax system would remain progressive despite its single rate of 19 percent. The poor would pay no tax at all, and the tax burden would increase gradually, he says. Greene: the idea of a flat tax would be a mistake.
By Robert E. Hall, Alvin Rabushka, Dick Armey, Robert Eisner, and Herbert Stein
AEI Press 1st edition (July 1996) ISBN 0844739871 127 pages
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Page 2 BusinessSummaries.com www.bizsum.com reprinted with permission from the American Enterprise Institute for Public Policy Research
Robert E. Hall and Alvin Rabushka are generally acknowledged as the fathers of the flat tax, a proposal that captured the public imagination in the 1996 presidential campaign and that continues to stir discussion and controversy in the field of tax reform. In this volume, Messrs. Hall and Rabushka explain their plan and explore its many subtleties. The book includes a commentary on the flat tax by House Majority Leader Dick Armey, who has introduced legislation that would enact the Hall-Rabushka proposal with little change. Also included are two critical assessments, one by economist Robert Eisner, the other by Herbert Stein, a former chairman of the Presidents Council of Economic Advisers and a senior fellow at the American Enterprise Institute. "Tax forms can fit on postcards." With this sentence Robert E. Hall and Alvin Rabushka begin their description of the flat tax, and this element of their proposal, more than any other, has caught the public fancy. But despite the name, a uniform tax rate is certainly not the only important aspect of the flat tax, perhaps not even the most important one. The treatment of business taxation is arguably more significant for the economy than the individual income tax, though the latter is of greater interest to the public at large. Hall and Rabushka propose a wage tax that, in place of deductions, would have generous personal allowances for individual taxpayers and their family members. These allowances would ensure that the tax system would remain progressive despite its single rate of 19 percent. The poor would pay no tax at all, and the tax burden would increase gradually for those with higher levels of income. The name "wage tax" is important. Only earned income from wages and salaries, plus income from pensions, would be taxed. For sound economic reasons connected with the purposes of tax reform, income from interest and dividends would be exempt. This element of the proposal has probably given rise to the greatest controversy, though much of the criticism has been based on a superficial understanding of the plan. If the change in taxation of individuals would be dramatic, the change for businesses would be radical. The tax return of a multi-billion-dollar corporation such as General Motors would consist of only ten or eleven lines. The most consequential change would be that, when businesses calculated the tax they owed, they could deduct from their revenues not only wages and purchases of goods and services from other businesses but also the full cost of any investments in plant and equipment during the year in question. There would be no more impenetrable rules concerning depreciation, with different "tax lives" for different types of equipment, and no more special incentives for select forms of investment. The cost of capital investment would be like any other deductible expense for purposes of business taxation. Page 3 BusinessSummaries.com www.bizsum.com reprinted with permission from the American Enterprise Institute for Public Policy Research
According to Hall and Rabushka, the flat rate of 19 percent applied both to individuals and to businesses would be "revenue neutral." That is, it would raise the same amount of money as the present corporate and individual income tax system, without accounting for any additional revenues from more rapid growth of the economy. As the tax is structured, the importance of revenue sources would be reversed in comparison with the present system, with the business tax raising much greater revenues and the individual tax correspondingly less. Almost every pending proposal for tax reform aims to tax consumption, not income as such. There are many good economic reasons for this, such as encouragement of savings and investment. The Hall-Rabushka plan is no exception; it is a consumption tax, as defined by economists, even though on the surface its "wage tax" seems to be a tax on income. The authors estimate that the reform would increase both human work effort and business investment in plant and equipment. Consid-ering added capital formation alone, Hall and Rabushka assert--on the basis of various studies--that "it seems reasonable to predict a 2 to 4 percent increase in GDP . . . within seven years." The flat tax, with its low and uniform rate, would increase work effort. It would prompt additional members of a wage earners family to enter the labor force because the familys tax rate would not rise with the additional income. Hall and Rabushka conclude that "a reasonable projection is an increase of about 4 percent in total hours of work in the U.S. economy," which would produce an increase by itself of almost $200 billion, or 3 percent, in GDP. Of course, these would be enormous gains, which would translate into higher living standards at all income levels. It is this result, rather than simplicity as such, that has attracted a wide range of supporters to the flat tax. The essay by Hall and Rabushka explores many specific issues associated with the flat tax, including the effects of the loss of the mortgage interest deduction (much less harmful to housing and real estate than feared, the authors conclude), transition problems, and taxation of international transactions. In his essay, Congressman Armey highlights the fairness and growth potential of the flat tax. He also explains how the version of the flat tax that he has submitted to Congress differs in a few minor respects from the plan advocated by Hall and Rabushka. The essence of Robert Eisners criticism of the flat tax in his essay is that it would not be fair. The rich, he asserts, would pay much less tax than under the present system, primarily because unearned income from interest and dividends would not be taxed to the individual (such income would be taxed at the business level). Page 4 BusinessSummaries.com www.bizsum.com reprinted with permission from the American Enterprise Institute for Public Policy Research
Herbert Stein raises several questions that he does not attempt to answer about the underlying objectives and philosophy of the flat tax. After discussing whether an income tax or a consumption tax is preferable and whether tax rates should be graduated, Stein concludes that "proponents of tax reform have no reason to allow flat taxers to monopolize the stage." Fairness and Efficiency in the Flat Tax is a complete description of a far-reaching proposal. While the book explores subtle questions, all the authors discuss the proposal in clear and lively language.