The Flat Tax is another awful idea. I studied it a lot when it got a lot of publicity in late 1995 and into 1996 with Steve Forbes' presidential campaign and Congressman Dick Armey's book (which I bought and still own). Also, there was a terrific segment of Firing Line in late 1995 which featured a debate with 8 people, 4 pro-FT and 4 anti-FT. I don't have the transcript to the show but here is a review of it:
ONLY BUCKLEY COULD GET A RISE OUT OF FLAT-TAX DEBATE
Anyway, that show and Armey's book taught me a lot about the Flat Tax and why it is such a bad idea.
(1) The Flat Tax (at least Armey's proposal) was merely a ruse to cut the top rate on ordinary income and remove any federal taxation on interest, dividends, and cap gains.
(2) What makes the tax code complicated is figuring out the income subject to taxation, not the calculation of the tax itself. [I will grant that Schedule D and the worksheets which go with it were simpler in 1995-6] Looking up the taxes due in a table is as easy as (if not easier than) multiplying the taxable income by some percentage.
(3) Tax simplification can be achieved by reducing or eliminating deductions and credits, without flattening the rate.
(4) Tax simplification does not necessarily coincide with tax fairness. Sometimes, one can be acheived only at the expense of the other.
(5) For many filers, doing one's taxes is already as easy as the index-card sized tax form in Armey's book. Form 1040-EZ has only a few lines and is used by many filers. Form 1040-A is also pretty short. I have filed each of them in my lifetime and currently complete Form 1040-EZ for a friend of mine in about 3 minutes.
(6) The overall tax system consisting of the progressive federal and state income tax, the regressive property tax, the (justifiably) regressive FICA taxes, and the somewhat regressive sales tax, is already fairly flat because the regressivity of some of these taxes is roughly offset by the progressivity of the others. Therefore, flattening the federal income tax, the most progressive element of the overall tax system, will make the overall tax system regressive.
(7) Armey's Flat Tax was not revenue-neutral. He "assumed" there would be a tax cut for everyone so he kept the rate too low to generate the same amount of tax revenues as with the current system. His revenue-neutral rate would have to be higher which would create many winners at the high end of the income spectrum while creating losers everywhere else.