Flat Tax

Today's Wall Street Journal has a commentary piece called "The World is Flat" ($) that endorses and encourages the notion of a flat tax for the U.S. It concludes:

Russia, for example, has reported that it now gets more tax revenues from the rich from its 13% flat tax than from its pre-existing Swiss cheese tax code with massive evasion and 50%-plus tax rates. Russia's revenues with the flat tax grew in real terms by 28% in 2001, 21% in 2002, and 31% in 2003, according to a recent analysis by the Hoover Institution. If the U.S. had that kind of revenue growth, our politicians would be wringing their hands over what to do with budget surpluses.

Last year the Internal Revenue code achieved a new Olympic record for complexity, with nine million words -- 12 times the length of the King James Bible. High tax rates and mindless tax complexity are an economic ball and chain. We hope President Bush's tax reform commission will cut through the class-warfare blather later this month and endorse a simple, broad-based, single-rate tax system.

As many of you know, I have made many visits to Estonia and Russia in the post-Soviet era. I've often noted the amazing sustained economic expansion in Estonia, which was the first country to implement a flat tax (Russia did so years later). Estonia, as the WSJ piece mentions, has already reduced their flat tax rate from 26% to 24%, and is planning to reduce it yet again to 20%. By any measure I'm aware of, the flat tax has been a resounding success in every country that has implemented it. When the flat tax is compared with the U.S. income tax system, the U.S. system comes away looking just plain silly. And yet somehow the U.S. does not seem to have nearly the political will it would take to switch to the flat tax; the pundits collective wisdom is that such a change borders on impossible.

Why is this? Well, most of the answers to this question that I have read focus on the vested interests that many groups and individuals have in our current tax code. For example, the solar energy credits are a boon to the solar energy industry, so their lobbyists support this particular piece of the tax code. There are thousands upon thousands of such specific benefits built into our tax code, and an interesting segment of the lobbyist population spends their time promoting them. Fair enough, but I suspect that's not the entire explanation. Also mentioned — and this resonates strongly with me — is the fact that our political system in many ways owes its incredible growth during the 20th century to the leverage politicians have because of our byzantine income tax. What better way to get your particular tweak to the tax code than to help elect your very own Congressman?

These factors have been enough, so far, to keep the flat tax movement from gaining much foothold in the U.S., despite the fact that poll after poll has shown overwhelming support by the electorate for a flat tax (see this Tax Foundation poll). Steve Forbes — perhaps the most visible proponent of the flat tax in the U.S. — was treated as if he were on the lunatic fringe of political thought, and an unserious contender, during his Presidential primary runs in 1996 and 2000. Is there no hope for us?

I am feeling optimistic that the flat tax will get a thorough hearing in the next election cycle (2008), though I can't explain exactly why. And I think there's even a reasonable chance that within the next few years enough political momentum can be generated to get a flat tax passed in the U.S. One interesting possibility in our federalist system is that a state could be the first to do so, and I think that's actually the most likely scenario. Success in a state would help spread flat tax fever in the U.S., much more so than any amount of European success, I'd wager. And I can easily imagine states like Idaho, Utah, or Wyoming jumping into the flat tax boat. Here's hoping!