Flowers: Flat taxes won’t solve economic issues

Darrall Flowers

As the 2016 presidential election draws nearer, GOP candidates have begun making their case for tax reform by calling for a flax tax rate system — better known as the Hall-Rabushka flat tax introduced in 1981 by economists Robert Hall and Alvin Rabushka. From Ben Carson’s idea to invoke a biblical tithes tax system and Ted Cruz’s call for a “fairer” tax system, many conservatives across the Republican spectrum seem to find flat tax rates all the rage this election season. However, the idea of establishing a flat tax rate is not revolutionary; it has been seen many times throughout history as a failed system of taxation.

Let’s start by unraveling the concept of a flat tax rate system. The premise of a flat tax system revolves around establishing a set percentage of taxable income and removing virtually all forms of deductions from the existing tax code with the hopes that consumers will spend more. The idea is said to maintain government income while giving the middle class a much needed tax break, rendering some important tax incentives — the use of green energy throughout your home and small business incentives for the average American — useless.

Carson’s and Cruz’s plan revolve around a flat of 14.9 percent rate among all earners with virtually no deductibles, which is the candidates’ misguided attempt to create economic growth in a slow growing economy by giving more Americans a tax break. Carson’s and Cruz’s idea almost sounds too perfect for the middle-class American needing to get by; however, it fails to address the impact of income inequality and pain small businesses incur. Thus is the reason why the idea is considered to be a failure among modern monetary policy.

The question conservative voters should ask in 2016 is, could a flat tax rate of 14.9 percent with virtually no deductions generate more income and wealth into our economy? Sure, in the short run, but I would urge them to look into where the wealth would disproportionately go and the long-term effects of reducing much needed government revenue.

Small businesses lose

For starters, Americans know small business is the cornerstone of our economic eco system. Carson’s plan to eliminate business interest deduction would run more on bank debt rather than equity. Having a small business pay income tax on the money used to pay bank interest could present difficulties for business during a downturn, which poses a greater risk for them of being bought out by larger businesses that can access equity markets.

The poor and middle class lose

The plan takes from the poor and middle class to give to the rich. The Tax Foundation’s analysis reports that “On a static basis, Dr. Carson’s tax plan would increase after-tax incomes by 4.5 percent, on average. Due to the elimination of nearly all credits, all itemized deductions, and the exclusion of employer-provided health insurance, taxpayers in the bottom nine deciles would see a decrease in after-tax adjusted gross income (AGI) of between 1 and 14.8 percent. Taxpayers in the top decile would see much lower marginal tax rates, which would offset the much broader tax base. Their after-tax incomes would increase by 16.2 percent. Taxpayers in the top 1 percent would see their after-tax AGI increased by 33.4 percent.”

Everyone wins, but the rich see a significant growth in net income that would shift more wealth away from a suffering middle class.

The reality

The truth is that we have had a progressive tax rate in the United States for a century now. While there may be some economists who argue for plans such as Carson’s and Cruz’s, the amount of unforeseen consequences with radical tax change make the policy unfeasible. American voters know that in order to make the economy thrive again, we need to reduce income inequality, empower our middle class and revitalize small businesses. A flat tax rate system just does not provide such results.