When we last heard from Steve Forbes, the magazine editor and publisher, he was investing his own money to run for President. In 1996, and then again in 2000, he declined federal funding while campaigning for the Republican nomination. He did well in several primaries and acquired a handful of delegates, but his return on invested capital included neither the vice presidential nomination nor appointment as secretary of the treasury. In 1996 and 2000, the Republicans nominated a Dole and then a Bush—as they have every year since 1976—proving, if nothing else, that American politics is a branded business, perhaps something along the lines of Viagra or L.L. Bean.
Now Steve Forbes is back in the political arena with a book on the flat tax, the idea that all Americans should pay 17 percent of their income to the federal government. To note my own special interests, I should say that I have the book as a gift from my good friend and long-time colleague, Stephen Beekman, whose sister is married to Steve Forbes. As a result of my friendship with Stephen, I have met Steve Forbes at several public events and have heard him address a conference. On some of these occasions, Forbes has made mention of the flat tax, around which he had earlier run for President. But now with his book, Flat Tax Revolution: Using a Postcard to Abolish the IRS, he has elaborated on the idea that was scorned during the campaigns but which is gaining converts, and currency, around the world. For me, it is a straightforward and good idea.
One of the problems with the book is that it is brought to the market by Regnery Publishing, a distributor of conservative doctrine, and has a forward by Newt Gingrich, elements that could consign the flat tax proposal to the right-wing choruses. But that would be a shame, as I see no reason why only Republicans should endorse the idea of a simplified tax code under which everyone would pay the same percentage of their income to Uncle Sam. Why should Democrats carry the fire for such convolutions as the Alternative Minimum Tax? Forbes even has a quote from Democratic icon Thomas Jefferson, who asked: “Would it not be better to simplify the system of taxation rather than to spread it over such a variety of subjects and pass through so many new hands.” In many ways, the idea of the flat tax is neither Democratic nor Republican, but populist in its conception and aimed at the permanent government in Washington. Forbes writes: “The flat tax will deal a devastating blow to a Washington political culture more interested in special interests than in the well being of America.”
What I like about the flat tax idea is that it is a simple solution to the question of how the U.S., or any government, can most efficiently collect revenue to pay for state-sponsored services. Early in the life of the American republic, import tariffs were sufficient to pay for the limited reach of government. Only during the Civil War did President Abraham Lincoln first impose a federal income tax, but that lapsed after the fighting stopped. Not until early in the twentieth century did the states pass the sixteenth amendment to the Constitution, authorizing a federal income tax. During World War I, according to Forbes, marginal rates grew from 7 percent to 77 percent.
During the balance of the twentieth century, the tax code—now stretching to a mind-boggling 9 million words—was altered not simply to collect money, but to foster an array of social policies. At one time or another, taxes have been increased or decreased to promote marriage, home ownership, professional baseball, national defense, children, and social security. Some or all may be worthy social goals, but that does not mean the existing tax system is the most efficient way to collect money to pay for them.
Under the so-called Forbes Flat Tax, the government would collect a flat 17 percent from both personal as well as corporate income. Only a few deductions would survive. For that mythical family of four, no federal income tax would be due on the first $46,165 of income. Nor would there be tax on dividend income, personal savings, or capital gains. The 17 percent corporate tax, prior to the payment of dividends, would cover that revenue stream. Eliminating double taxation is a tenet of the Forbes proposal, which would also do away with estate duties, what he calls “the death tax.” You paid tax on that money while you were living, so why pay again just because you are dead? Forbes would also eliminate most of the sacred cows of deductible expenses: for example, those for charity and mortgage interest. His argument is that what you lose in tax optimization you win by a general surge in economic activity now that investors can make decisions based on anticipated profits, not simply to lower taxable income. By his reckoning, in good times and bad, Americans give about 2 percent of the national income to charity, notwithstanding any tax write-offs that may accrue.
For whatever reasons, although it cannot be affection for the current tax regime, many Americans respond warily to the idea of the flat tax. They sense it is a stalking horse for the rich, for Halliburton, to cheat the poor, to bail out Enron, something other than an idea whose time has come. At the same time the average American spends, according to Forbes, 28 hours filling out their tax forms, and when you add in things like Social Security and sales taxes, they pay more than half of their earned income to the government. (In turn, I would argue that what they get back is things like a missile shield and a war in Iraq, but how taxes are spent is beyond the scope of both Forbes’s book and this column.) What the flat tax would eliminate overnight is the tax loophole businesses, all the lawyers and lobbyists petitioning government for this subsidy or that bailout, most of which are attached to tax legislation in the middle of the night. As an example, while reforming corporate taxes in 2004, the Bush administration allowed large corporations to repatriate $140 billion, tax-free, in overseas earnings.
Is the flat tax the most efficient way for the federal government to collect money? In my opinion, yes, although other ways include tariffs, a national sales tax, a value added tax, and a progressive income tax, which, in theory, is what we have today. By progressive what is meant is that tax rates increase as does income. One reason Americans are protective of the existing labyrinthine tax code is that they sense it exists to level the playing field between the rich and poor, and thus make the U.S. a more egalitarian society. They have a sentimental attachment to the memory of President Franklin Roosevelt soaking the rich or his cousin Teddy Roosevelt busting trusts. At the same time, the existing tax code has done little to prevent the U.S. from becoming the industrial nation with the largest gap between the rich and the poor.
In his book Wealth and Democracy, the social critic Kevin Philips makes the point that in 1979 the richest American families were ten times richer than the middle classes. By 1997, they were 27 times richer. In 1998, the top 1 percent of Americans had more income than 100 million people in the bottom 40 percent. New York Times columnist Paul Krugman has written that chief executive officers used to earn 39 times what average workers made. Now they make 1000 times more than those on shop floors. The flat tax might not redress this inequality. At the same time, it would at least get corporations to pay their fair share. In the 1950s, companies paid 25 percent of the nation’s tax. In 2001, they paid 7 percent.
Has the flat tax worked? Ironically, the countries that have most eagerly embraced the flat tax are those of the former Soviet Union. Flat taxes are now the law in countries like Estonia, Lithuania, and Russia, which bills its citizens 13 percent on all income. When Russia was Communist, needless to say, its tax rates were 100 percent. After the Russian revolution of 1991, the post-Communist governments of Boris Yeltsin held on to enough of the old tax code that nearly any Russian with money either hid it under the mattress or sent it overseas. As a result few people paid any income tax, and Russia lived off its state-owned enterprises, such as oil and gas. Since 2000, however, the flat tax of 13 percent has encouraged many Russians both to repatriate capital and pay tax. As Forbes writes: “My flat tax proposal has a rate of 17 percent. Putin instituted a 13 percent rate. I never thought the day would come when a former ex-communist and KGB agent such as Vladimir Putin would be more radical on taxes than I.” In Hong Kong, residents have the option to pay under a flat tax formula or under the existing regime, a choice that Forbes would give to American taxpayers under his formula. In other words, you could spend all of March on the living room floor, going through a shopping bag of receipts, or you could send in the Forbes flat tax postcard and pay 17 percent.
Flat Tax Revolution is not so much a book, but an 18th century pamphlet that argues for political change. Indeed the last chapters list the phone numbers of talk radio shows that acolytes can call, and Forbes encourages his devotees to take to the blogosphere. He tries, and does a good job, to show that a flat tax will not wipe out homeowners, charities or municipal bond dealers, returning to the point that it “would be such a powerful tonic to the economy. It would free up capital and energy. We could devote our brainpower and time to more productive pursuits than trying to cope with a time-consuming, bewildering tax code.” I think he is right, but I think Congress is the last place to find adherents to such a populist cause. Congress lives off the word loop in loophole. Indeed its tax reform bill of 2004 came to be known as the “No Lobbyist Left Behind Act.” I find it hard to believe Congress will unattach its strings long enough to drop the federal tax code and embrace a flat tax system. A flat earth, maybe, provided a few Platygaean lobbyists bought the dinner, but not a flat tax.
I do think, however, that Forbes would have a better chance with his idea if he worked to have it passed as an amendment to the constitution. To bypass Congress and the President would require, first, a constitutional convention, called by two-thirds of the states and, after proposing the amendment, ratification by three quarters of state legislatures. (Leave aside Mark Twain’s boast: "I think I can say with pride that we have legislatures that bring higher prices than any in the world.") Normally amendments to the Constitution come first from Congress and then go to the states. While this second method of reform exists, no amendment has ever come from this go-to-the-people approach. Such an amendment could even be used to impose a form of budgetary restraint on the federal government, which could be told that it annually has 17 percent of the nation’s income to spend, but no more. Would going to the states work? Tell me someone outside of Washington or a firm of lobbyists and lawyers who would not trade the current 9-million-word tax code for a flat tax of 17 percent? I also think populist ideas—and this is one of them—have the best chance to germinate among the grassroots.
