At the Republican debate on CNBC in Boulder, Colo., the candidates sparred on the issue of the flat tax, with some touting its merits and others dismissing it as fantasy. So which camp is correct?
A national flat tax, as opposed to our current system of progressive taxation, would tax all income levels at the same rate.
Policy wonks argue over the potential economic result, but flat tax supporters suggest that the increased spending resulting putting the kibosh on a complicated tax code would give government revenues, in the case of a 17% flat tax, a 1.8 percentage-point shot in the arm.
At the debate, Sen. Ted Cruz delineated his flat tax that would have a family of four pay nothing in taxes for the first $36,000 earned. He then proposes paying 10% as a flat tax.
“No hedge fund manager pays less than his secretary,” Cruz said.
In addition, he also proposed a business flat tax of 16%.
The Tax Foundation says Cruz’s plan would allow the economy to generate 4.9 million jobs , raise wages over 12 % and increase growth by 14%. With dynamic scoring, the Tax Foundation says, Cruz’s plan would cost less than $1 trillion.
Every single income decile sees a double-digit increase in after tax income.
According to a seminal study by the National Center for Policy Analysis, the flat tax would boost the production core of the economy in every area by getting rid of corporate tax avoidance schemes, except for subsidized agriculture since tax subsidies would be lost there. In the case of a 17% flat tax, there's also the suggestion that the housing sector would see a 1.5% uptick.
In a plan like the one Cruz suggests, A flat tax system would also remove incentives toward consumption by eliminating the various deductions that offset costs, and instead encourage savings. Advocates also argue that the possibility of reaching a higher tax bracket would no longer disincentivize people from earning more and crossing a tax bracket threshold, thus contributing to long-term economic growth.
Ben Carson also proposes a similar flat tax, for which CNBC’s Becky Quick, one of the debate's moderators, took him to task. Quick had trouble with Ben Carson’s flat tax. Quick argued if Carson imposed 10% flat tax on the total personal income in this country, that would bring in less than $1.5 trillion – less than half of what we bring in now.
Carson uses, as he puts it, the church “tithing analogy” for his flat tax but argues the ultimate flat tax would be closer to 15%. Quick argued that rate still leaves Carson with a $1.1 trillion hole. Carson’s plan is predicated on ending “all the deductions and all the loopholes.”
“You also have to do some strategic cutting,” Carson said. “Remember we have 645 federal agencies. Anybody who tells me we need every penny in every one of those is in a fantasy world.”
“We can stimulate the economy,” Carson said. “That’s going to be the real growth engine…because it’s tethered down now with so many regulations.”
Quick countered Carson would have to cut government by about 40% to make it work.
Flat tax opponents, however, argue that such a policy would increase the national deficit because of lost tax revenue in the higher brackets and also would cause outsized economic burdens on the poor while favoring the rich who can shoulder the same tax rates more easily. Flat tax opponents also argue the policy hinges on trickle down economics, where the rich would pay less and have more money to invest back into the economy.
Gov. John Kasich dismissed Carson’s plan as a “fantasy.”
“I’m the only person on this stage that was actually involved and the chief architect of balancing the federal budget,” Kasich said. “You can’t do it with empty promises. You know, these plans would put us trillions and trillions of dollars in debt.”
Nathan Daschle, president and COO of The Daschle Group, similarly dismisses the feasibility of a flat tax.
"Tax reform of this magnitude is up there with curing cancer," he said. "It's something a lot of people across the spectrum would like to see, but it will never happen, largely because there is no critical mass around how to do it. Everything that people call 'loopholes' are policies that Congress deliberately put into place. They have constituencies and they've already won. Undoing each and every one of them is a gargantuan task, as much as people agree that our tax code is a disaster."
“You don’t just make promises like this,” Kasich said. “Why don’t we just give a chicken in every pot…coming up with these fantasy tax schemes.”