Remember When the New York Times Endorsed the Flat Tax?

May 27, 2015

From a New York Times editorial in 1992:

The present tax code is riddled with wasteful contradictions and complexity. For example, profit from corporate investment is taxed twice — when earned by the corporation and again when distributed to shareholders. That powerfully discourages savings and investment — the exact opposite of what the economy needs to grow.

The remedy is, in a word, integration, meshing personal and corporate codes so that the brunt of taxes falls on consumption, not saving. Tax reform should also simplify the code, making loopholes harder for Congress to disguise, and enact. And for reasons of elemental decency, tax reform shouldn't come at the expense of the poor.

Remarkably, there is a reform that achieves all these objectives. Robert Hall and Alvin Rabushka, economists at the Hoover Institution, have proposed an integrated code that applies a single rate to both personal and corporate income. Their plan wipes away most deductions and exemptions, permitting a low tax rate of 19 percent. The important term is not flat but integrated.

Under the Hall-Rabushka plan, individuals would pay taxes on earnings and corporations would pay tax on interest, dividends and profits. That way, every dollar of income would be taxed once and only once. The plan would subsidize saving, and create an exemption that would protect the poor.

For that very good reason, Hall-Rabushka isn't perfectly flat. But it is perfectly simple; the tax return would fit on a postcard.

The New York Times puts these points so eloquently that I wish I had written them myself.

In 1992, the New York Times identified exactly the type of tax reform we needed then and still need today. It’s about “creating a simplified code that encourages saving,” the Times writes.

As the Times points out, tax reform is not necessarily about the single tax rate. Instead, they write: “The important term is not flat but integrated.”

What they mean by “integrated” is a tax plan that removes all the biases against saving that exist in the current tax code. In the current tax code, a dollar of income can face up to four layers of taxation. The Times editorial correctly identifies a fully integrated tax system as one that would eliminate the extra layers of taxation and tax each dollar of income “once and only once.”

The Hall-Rabushka Flat Tax is one of many ways to accomplish the goal of a neutral tax system.

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