The Freedom to Choose Flat Tax:

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The Freedom to Choose Flat Tax:
The First Step to Tax Reform
Presented To: The President’s Advisory
Panel on Federal Tax Reform
Presented By: Stephen Moore
Senior Fellow in Economics at
the Cato Institute
May 11, 2005
Problems with the Current Tax System
•
Lost Economic Output
•
Multiple Levels of Tax on Savings
•
Adverse Impact on Trade by Penalizing Investment
•
Political Instability
•
Costs of Complexity
•
How the Tax System Hurts Small Businesses
•
Unfairness of the Tax Code
2
Why a Flat Tax
•
Taxes All Income Once and Only Once
•
Eliminates Most Complexity for Individual Tax
Filers
•
Fair and Economically Efficient Single Rate
•
Increases Savings and Investment
•
Flat Taxes All Over the World
3
Political Barriers to the Flat Tax
•
Well-Funded Special Interest Lobbyists Protect
Their Loopholes
•
Many Americans Want to Keep “Sacred Cow”
Deductions
•
Transition Costs Are Huge and Complicated
•
The Winners and Losers Problem
•
“Middle-Class Tax Hike”
•
Americans Like “Choice”
4
How the Freedom to Choose Flat Tax Works
 Establishes a Hall-Rabushka Flat Tax of 20% for Businesses and
Workers
 Allows Every Worker and Business the Choice to Opt In to the
Flat Tax
 Requires that Workers and Businesses Stay with the Flat Tax Once
They Choose It
 No Transition Rules, Simply Amends the Current Tax Code
 Replaces the AMT with Essentially an Alternative Maximum Tax
 Integration of the Payroll Tax
5
The Freedom to Choose Flat Tax: Answering
the Critics
•
•
•
•
•
Large Revenue Losses – Dynamic Versus Static
Adds Complexity By Creating Two Codes –
Eliminates the AMT
Is a Gimmick – Hong Kong System is Optional
Tax Cut for Rich – Americans Believe 25% Should
Be Maximum Tax
Is Inferior to the Straight Consumption Tax – This Is
First Step to Tax Reform
6
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