All Commentary
Sunday, September 1, 1996

The Flat Tax: Freedom, Fairness, Jobs, and Growth

Government Takes a Huge Bite out of National Income

Dr. Peterson, an adjunct scholar for the Heritage Foundation, is Distinguished Lundy Professor Emeritus of Business Philosophy at Campbell University in North Carolina.

Mounting taxes push the Tax Foundation’s “Tax Freedom Day” out to May 6, a day when presumably John Q. Taxpayer stops working for government—federal, state, and local—and at last starts working for himself. But fiscal expert Grover Norquist and his Washington-based Americans for Tax Reform figure the truer Cost of Government Day occurs on July 3 by taking into account hidden taxes via deficit spending and regulatory burdens. Thus the estimated total cost of government in 1995 came to almost $3.3 trillion, including $720 billion in federal regulatory costs. This means working Americans have to toil 52 percent of the year for government.

If this strikes you as a sign of trouble on the tax front, you’re right.

Beyond the flat taxers are those who would bravely dump the income tax for a national sales tax. These advocates see solid advantages; no withholding deductions; no more tedious bookkeeping, including filing away receipts and canceled checks; no more IRS audits, penalties, interest charges, levies, liens, threats, and seizures; no more deadly April 15 and quarterly tax deadlines; no more hits on savings and investment—on capital formation, the very sinew of economic growth and job creation. And, hear this, no IRS, period.

In his hard-hitting brief for a flat tax, Heritage Foundation analyst Daniel Mitchell takes note that 12,609 special interests are officially registered to lobby in Washington. Assume three support persons behind each lobbyist, and you have an army of 50,000 pulling strings and making deals—many seeking special loopholes in the 14,000-page U.S. Internal Tax Code and rulings. So understandably members of the tax-writing House Ways and Means Committee get big PAC contributions, and Ways and Means and Senate Finance memberships are seen as plum assignments.

Dan Mitchell sees the flat tax as a way to end such “soft” political corruption and favoritism—simply cut out myriad tax deductions, preferences, loopholes, credits, and exemptions altogether.

That proposed cut takes guts and a lot of flak. Take the scare tactic used against the flat tax because it would eliminate deductions on home mortgages, supposedly forcing middle-income taxes up and house prices down. But this is static analysis, argues Mr. Mitchell. He holds the flat tax wipe-out of capital gains taxes, death taxes, and double taxation of corporate income will spur economic growth, cut interest rates, and boost housing prices by some 50 percent in five years after passage of a flat tax.

Another scare tactic is the alleged hit of flat-tax nondeductibility on contributions to churches, charities, universities, and think-tanks (such as FEE), cutting off their lifeline. Mitchell rebuts again with economic growth, noting that when people make more they give more. His chart shows how closely individual giving and personal income track each other over the years. Says Jack Kemp in the preface: “Only a pro-growth tax code can restore America’s confidence at home and her greatness abroad.”

Fine words to be sure but the catch here in this otherwise sharp Mitchell minibook is the paucity of argument for privatization, disentitilization, and deregulation of the economy—for greatly chopping down the size of the federal behemoth. Taxes are a drag on growth but the killer is the huge bite—around 42 percent—that government takes out of national income, let alone out of our civil liberties.

  • William H. Peterson (1921-2012) was an economist, businessman and author who wrote extensively on Austrian Economics. He completed his PhD at New York University in 1952 under the supervision of Ludwig von Mises.