Human Events Blog

Death of the flat tax?

James Pethokoukis writes at National Review to suggest that three reforms from the Reagan Revolution wish list are past their sell-by dates: the Flat Tax, the gold standard, and the Balanced Budget Amendment.

To take them completely out of order, Pethokoukis is persuasive about the problems of the gold standard.  On the subject of the Balanced Budget Amendment, he offers a reasonable counter-proposal that seems to miss the point of why the BBA (or some variation on the idea) is necessary:

But why do we need to actually balance the budget? Representative Paul Ryan’s original “Roadmap” plan, for instance, lowered the debt-to-GDP ratio by 30 points over two decades without a single year in the black. Given that the average U.S. debt-to-GDP ratio was 37 percent from 1957 through 2007, a better bipartisan policy goal would be to immediately move the debt-to-GDP ratio onto a downward trajectory, back toward that 37 percent level (from a forecasted 76 percent this year) over the next two decades.

In other words, the real problem is that the government is accumulating far too much debt as a percentage of GDP, and spends too much relative to GDP.  These problems can be corrected without a firm, Constitutionally-enforced insistence on literal balance in the budget.  And Pethokoukis notes that the often-cited target of spending 18 percent of GDP might be “too low a long-term spending target, given the aging of the U.S. population,” which will cause entitlement spending to skyrocket.

Fair enough… but the 18 percent figure, or something in that ballpark, was not selected as an arbitrary weight limit for trim and efficient government.  It’s generally held to be the optimum government spending level that can be sustained across the long term – the point at which the burden of government, including taxation, hits the “sweet spot” that produces the smallest possible drag on private sector growth.  If that’s too low to cover the costs of the entitlement state, it might be time (indeed, it is long past time) to confront those unrealistic entitlement promises.  Particularly since there isn’t much evidence that the demographic implosion reducing the number of taxpayers to entitlement beneficiaries is going to reverse any time soon.

As for the Flat Tax, Pethokoukis agrees that it has objective merit, writing that “Simulations, not to mention common sense, suggest that a flat tax with a low rate would produce a larger economy than the current mess of a tax code does.”  But he speculates that we may no longer be a nation capable of embracing such a superior idea:

But we are not starting from scratch. It would be problematic to transition to a flat tax — at least at the 15–20 percent rate typically proposed — from a tax code that has nearly half of Americans paying no income tax. A flat tax would probably generate too little revenue, making budget deficits worse. One smart way to tweak the idea would be to keep the consumption-tax aspect while adding a more progressive rate structure.

Actually, most Flat Tax proposals do allow for some degree of “progressive” taxation.  There are at least two tiers in every serious proposal floated by the 2012 candidates, and the Flat Tax usually comes with a hefty, entirely non-negotiable standard deduction that keeps the lowest income brackets off the rolls, while minimizing the amount collected from the next bracket.  (One might object that this runs counter to the notion of making everyone have some “skin in the game,” but it’s also a concession to political reality, and the inefficiency of trying to pry largely symbolic tax contributions from the working poor.)

If such a reform is now and forever off the table, it would be a grim comment upon how completely modern America is ruled by the dead hand of the past.  For all of the Left’s rhetorical posturing about “free thinking,” the entire progressive agenda is based around chiseling certain policies in stone, forever.  It doesn’t matter if these ideas fail; they’re supposed to be immutable.  The options available to Americans for arranging their civic affairs have been forever reduced.  The boundaries of possibility have contracted.  The Constitution is a “living document” that can be ignored or rewritten at will, but the New Deal and Great Society are eternal.  In the course of just one century, the American people have been enslaved to political traditions that were not clearly explained to our grandparents… and must be kept off-limits to challenge from our children.

Does America have at least one more revolutionary generation in store, with the courage and creativity to reject this doom?

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