I have little doubt that if we were starting the U.S. tax code from scratch, a flat tax would be the way to go. And if you’re going to go that route, a flat consumption tax is the best version. Most flat tax proposals are flat consumption taxes based on the 1980s work of economists Robert Hall and Alvin Rabushka of the Hoover Institution. In Hoover’s Defining Ideas journal, Richard Epstein makes the case for the Hall-Rabushka flat tax on the usual grounds of greater economic efficiency and improved growth due to a) lower marginal rates on labor income, b) its simpler, broader tax base, and c) elimination of the current income tax’s bias against savings.
But Epstein adds a political rather than economic caveat:
[A flat consumption tax] enjoys virtually no visible political support today … virtually every key tax policy initiative today lurches in the opposite direction. The constant calls for higher levels of progressivity; the short-shelf life for key tax rates that must be renegotiated every year or two; and the constant playoff between interested parties jockeying to shift wealth among income, death, and excise taxes, which only magnifies the amount of political mischief.
But it’s not just the political difficulties. Given the current shape of the U.S. tax code — where decades of tax tinkering has resulted in nearly half of Americans paying no income tax — it would be difficult to implement a revenue-neutral, low-rate flat consumption tax. During the GOP presidential primary season, Texas Governor Rick Perry offered a 20% flat tax, which the Tax Policy Center estimated would lose about $500 billion a year in tax revenue versus extending current tax policy. Making it revenue neutral would mean raising middle-class taxes.
Now I would guess the TPC estimate overstates the revenue loss by understating the resulting economic growth from such a plan. Still, the number causes one to hesitate. Indeed, similar problems faced the Romney tax plan. Its combination of rate cuts and deduction limits on individual labor income made it unclear how pro-growth it would have been since effective marginal rates might have been more or less the same. (The Romney plan was much better on dealing with capital income.)
The question for both policymakers, both wonks and politicians, is that how much energy do they want to expend on pushing a politically and fiscally problematic version of tax reform? Not much, I would suggest. So what are the other options? That’s in my next blog post.