Flat Tax February 13, 1996February 6, 2017 Welcome to my “daily comment.” The ground rules Ceres and I have agreed to are simple. I can write whatever I want, ranging from a sentence to an epic, and nothing is off limits. I can even say things like, “Don’t trade stocks yourself — for most people, it’s smarter to invest through no-load mutual funds.” Which it is. Steve Forbes is a good guy. The Forbes family and Forbes magazine have added a lot of zest and enthusiasm to the American scene. Though I generally favor Democrats (exceptions: Giuliani, Weld), I even sent Steve $500 for his campaign. Figured the poor guy needed the money; knew he would add a welcome voice to the Republican debate; and wanted to thank him for the support he’s given my own efforts to fix the auto insurance mess in California. (Californians: Vote YES on Props 200, 201 and 202 March 26th!) But c’mon. This flat tax thing, as currently proposed, is not a good idea. Are we to believe that without lowering tax rates on the rich, they won’t work hard or invest? Look how hard Steve and his wonderful dad Malcolm worked building Forbes back in the years when the top Federal bracket was 70% — as it was all the way up to 1980 — and 50% — as it was all the way up to 1986. High tax rates didn’t stop them from working, investing and building America. Those old marginal rates, I admit, were pretty crazy. Thank heavens they’re gone. And Steve is absolutely right: ideally, we would have a far simpler tax code. I’m for that. Filing on a postcard for most people is fine. But the complexity of the zillion-page tax code stems not from its five brackets (15%, 28%, 31%, 36% and, with the 10% “millionaire’s” tax on income above $250,000, 39.6%). Rather, the complexity is in things like depreciation (the accounting for which can keep dozens of people busy in a large company), or the rules on how much you can deduct for driving your car for business or charitable purposes. It would be great to wipe away the complexity of the tax code (although, in a complex world, you would be surprised at how much would have to remain, no matter what). But how much extra complexity would there be if “the postcard” had a separate line for people who made more than $100,000 a year? And one more for people who make above a million? There wouldn’t even have to be extra lines! It could all be one line: “Enter here 15% of all income from $36,000 to $99,999, 30% from $100,000 to $999,999, and 45% above $1 million.” With small print (or a big postcard), that’s one line. Anyone who makes more than $1 million a year ought to be able to figure it out. Of course, the real way to fix the tax code is to gradually move away from taxing the things we want to encourage — like working and investing — toward further taxing the things we want to discourage or conserve, like smoking or energy consumption. If we want to encourage people to spend a little less so they can save a little more, and we do, then why not lower the tax on saving and raise the tax on spending? Lower the income tax and replace that revenue with taxes on things like tobacco products and gasoline? The idea wouldn’t be too raise more tax, just to raise it in ways that lead to a healthier economy — one a little less dragged down by health care costs (were it not for tobacco, it’s been estimated, a third of the nation’s hospital beds could be emptied) and by our tremendous dependence on foreign oil (which sends our wealth abroad and weakens the buying power of the dollar). But the practical problem with any major change to the tax code is that to sell it, it must be accompanied by a massive tax cut , so that virtually everyone saves money. Otherwise, it will never pass. If even just 20% of the voters would see their taxes rise under some new system, whatever it was, can you imagine how loud those 20% would howl? A lot louder than the remaining 80% would purr. And the problem with that — a massive tax cut — is that it would unbalance the budget again. (Pat Buchanan would say we could just “carve it out of the money we waste on foreign aid,” but foreign aid accounts for less than 1% of the budget, not the 15% that the average American, perhaps listening to people like Buchanan, imagines.) So don’t rush to place bets on a flat tax just yet. My guess is that it will be a long, long time coming. Tomorrow: Remember Banks?