Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, June 27, 1995 TAG: 9506270033
SECTION: EDITORIAL PAGE: A-5 EDITION: METRO
SOURCE: DANIEL MITCHELL
DATELINE: LENGTH: Long
Believe me, this concern hits close to home. After all, my own organization, The Heritage Foundation, is a nonprofit institute supported by tax-deductible contributions. Our supporters are part of the nearly 30 million Americans who deducted more than $63 billion in contributions from their taxes in 1992.
Happily, the fear that nonprofits will suffer under a flat tax is misplaced. Current data show the tax would generate huge increases in personal income for all Americans. And when income increases, so does giving. In fact, studies show that income plays a bigger role in determining how much people give than the charitable deduction ever did. The increase in giving that would result from a flat tax would more than offset any losses nonprofits might suffer from ending the charitable deduction.
How would a flat tax (at least the version introduced by House Majority Leader Dick Armey, R-Texas) generate personal income? By solving the three central problems in the current tax code:
nProblem 1: High tax rates penalize work, savings, investment and entrepreneurship.
Thanks to the Bush and Clinton tax hikes, tax rates now exceed 40 percent for America's most productive citizens. The class-warfare rhetoric used to justify high tax rates on the rich conceal a fact every American should note: America's tax code punishes success.
When Americans succeed, they pay a higher percentage of their higher incomes to the government. Sure, many can absorb this expense. But they do it by cutting back on other things.
When the government confiscates more than $4 for every $10 of additional income, it reduces the incentive for employers to hire more workers. It reduces the incentive for all upper-income Americans to work harder, save and invest, and take more risks. And when state and local income taxes and estate taxes are added to the mix, many successful people pay 80 percent and more for every added $1 of wealth they generate for the U.S. economy. This results in less economic prosperity for all Americans.
Flat-tax solution: The Armey flat tax would impose a simple 17 percent tax on all income above a personal allowance. Incentives to work, save and invest - and hire - would increase dramatically, generating jobs and prosperity. Equally important, a single tax rate would create fairness, in the proper sense of the word, by treating all citizens equally under the law.
Problem 2: The current system taxes savings and investment twice, and in some cases three times.
Dividend income, for instance, is taxed at both the corporate and individual levels. Unlike most of our major trading partners, we also tax capital gains, which constitutes a triple tax when applied to the same investment income as the dividend tax. We also tax interest, which is a second tax on income that individuals choose to plow back into the economy. These and other current tax policies stall economic growth that otherwise would take place.
Flat-tax solution: The Armey flat tax would tax savings and investment only once. This is important because (even liberal economists agree) the only way to generate long-term economic growth is to have high levels of savings and investment.
Harvard economist Dale Jorgenson estimates a flat tax would boost America's wealth by $1 trillion virtually overnight. Other economists show that if a flat tax increased annual growth by as little as one-half of one percentage point per year, average income 10 years later would be $1,400 higher for every man, woman, and child in the country.
Problem 3: The current tax code is incredibly complex, imposing tens of billions of dollars-worth of compliance costs on the economy.
Taxpayers spend 5.4 billion hours each year complying with the personal and corporate income-tax codes. Compliance costs the private sector nearly 25 cents for every $1 the government collects in taxes. And the code is so confusing even the experts can't get it right. Money magazine used to send a hypothetical tax return to 50 experts a year. Every time, virtually every tax attorney came up with a different estimate of the family's tax bill.
Flat-tax solution: The Armey flat tax would require a simple, postcard-sized form. The maze of exemptions, credits, deductions, forms, adjustments and schedules would be eliminated. This doesn't just mean less time filling out forms - it means less money hiring tax accountants.
Make no mistake - a flat tax with no charitable deduction would cause some wealthy taxpayers to reduce their giving in the short term. But overall contributions would rise as the nation prospered. And while a simplified tax code would make life harder for your tax attorney, the benefits - freedom, fairness, jobs and growth - would make life better for all Americans.
Daniel Mitchell is McKenna Senior Fellow in Political Economy at The Heritage Foundation in Washington, D.C.
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