Yesterday, the Senate Appropriations Subcommittee for D.C. heard testimony regarding the proposal to put forth a voluntary flat income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. for the District’s residents, designed in part to “test the waters” of how a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. would hold if implemented nationwide. From Reuters:
The District of Columbia would become a laboratory for a flat federal income tax system if Kansas Republican Sen. Sam Brownback (news, bio, voting record) has his way.
Brownback, who chairs the Senate Appropriations subcommittee on D.C., said on Wednesday he intends to seek support from Senate leadership for legislation to create an optional flat tax in the U.S. capital, with a low rate but none of the traditional deductions for expenditures like home mortgage interest and retirement savings.
“The federal government has a unique opportunity to try out a flat federal income tax in the District of Columbia,” Brownback said.
Under Brownback’s theory, a flat tax in D.C. would boost the city’s economy, driving up local revenues while drumming up broad U.S. support for a national flat tax. D.C. residents could still file under the old system, but few would want to, he said. (Full Story)
Putting forth an income tax system that broadens the income base, eliminates most deductions and credits, while providing lower rates to everyone should be the tax policy for the entire country, and tax reform of this sort should be a top priority of all lawmakers in Washington.
A few points need to be made, however, with regards to how useful D.C. would be in terms of serving as a guide for future nationwide tax policy. While making D.C. a test pilot for a flat tax throughout the rest of the country sounds intriguing, its predictive value is most likely small.
The District’s federal income tax profile is not one that follows closely the rest of the country. For example, in 2003 (the most recent year in which IRS data is available), only 16 percent of all returns filed in D.C. were joint returns. Compare this to the national average of around 40 percent, and you will see that the District has a disproportionate number of single filers, and this should make sense to anyone who is familiar with D.C.’s demographics. This also means that there are fewer dependents claimed by D.C. residents. The average child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. per all returns in D.C. is only $100. Compare this to the national average of around $174. In summary, the stark uniqueness of D.C. would make it difficult to use it as a model of what would happen throughout the rest of the country; and while it may lead to a short-run economic boom in D.C. and a slight expansion of the entire economic pie in the country, much of the benefit D.C. would gain in terms of additional economic activity would be at the expense of other parts of the country as a result of a tax policy that would be non-neutral across geography.
In terms of budget costs to the federal government, there would be two competing factors playing out, one static, the other dynamic. First off, lower taxes for D.C. residents would most likely lead to less federal tax revenue since everyone’s tax bill would be cut. On the other hand, lower taxes for D.C. residents would lead to higher after-tax incomes and a lower tax burden for the employee and employer. Since the federal government is the top employer of D.C. residents, the before-tax wages they would have to pay in order to compensate their employees would fall. The level of government savings from this dynamic effect would depend upon the economic incidence of the labor market.
In closing, more research needs to be done in order to validate any claim with respect to this plan’s distributional effects. This tax would be voluntary; therefore, nobody’s tax would rise. Who would reap the immediate benefits, however, remains unclear, and many politicians on both sides of the aisle should hold off in merely assuming how a “flat tax” would benefit certain groups of people over others because not all “flat tax” proposals are the same.
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