The Charms and Deficiencies of Flat-Tax Schemes
The number of Republican Presidential candidates backing some form of flat tax stands at three and a half. A 9 percent flat tax is one of the nines in Herman Cain’s 9-9-9 Plan. Newt Gingrich supports an optional flat tax, meaning taxpayers could opt for a flat tax or file their taxes under the current system, which is what Rick Perry has in mind, as well. The half supporter is Mitt Romney, who characteristically says he wants a “flatter” tax but has avoided being pinned down on what that means.
People want their taxes simpler, fairer, and lower. A flat tax promises all three—and would deliver on none.
Let’s start with “lower.” Taxes cannot be lower for everyone and still raise the same amount of money. For each dollar your taxes are lower, someone else’s must be a dollar higher. Yes, we know the argument that cutting taxes may cause people to work harder and thus substantially increase government revenue. This theory has dominated conservative economic thinking for three decades with scant evidence to support it. If you want to give everyone a tax cut—under the current system, under a flat tax, or under any other arrangement—all you have to do is lower the tax rate. This has nothing to do with flatness.
Would a flat tax be “fairer” than the current system? Perry plans to call for a rate of 20 percent, which is lower than today’s top rate of 35 percent and higher than the lowest rate (which is zero). If your income currently puts you in a bracket higher than 20 percent, a 20 percent flat tax constitutes a tax cut. If you’re in a bracket lower than 20 percent, a flat tax will constitute an increase, unless it comes with lots of deductions, in which case it’s no longer flat. If lowering taxes on high incomes and raising taxes on low incomes would be an improvement, then a flat tax is fairer than the current code. Otherwise, it isn’t.
Finally, would a flat tax make paying taxes “simpler”? Under Gingrich’s and Perry’s “optional” arrangement, people will have to calculate their taxes twice in order to decide which system to pay them under. That’s not simpler.
Even if the flat tax were the only option, this wouldn’t make the tax code much simpler. Multiple brackets add one line and one simple calculation to the chore of computing your taxes. What causes the tremendous complexity of the tax code is defining taxable income. Some complexity is unavoidable in a complex economy. Some of it represents the hard work of lobbyists for special interests. None of it has anything to do with tax rates or how many brackets there are.
No one is opposed to reform that cuts loopholes, ends subsidies, and lowers tax rates. But any reform must make the tax code more progressive, not less.
Ask the Swiss to Stop Protecting Cheats
Switzerland’s bank secrecy laws and anonymous numbered accounts have a long and shameful history: They have been used to help criminals conceal illicit gains, to deny Holocaust survivors their stolen inheritances, and to help the world’s wealthy hide taxable income.
So it’s a welcome sign that 11 companies may be on the verge of agreeing to pay billions of dollars in penalties and reveal the names of Americans who used Swiss bank accounts to evade U.S. taxes. The banks, including Credit Suisse Group (CS), the second-largest Swiss bank, and several foreign institutions doing business in Switzerland, are hardly compelled by a sense of moral duty. U.S. prosecutors held out the threat of criminal indictments, tantamount to a death sentence for a bank.
Finance Minister Eveline Widmer-Schlumpf said the country wants to reach an agreement with the U.S. so Switzerland isn’t confronted “with the same issue time and again.” If that’s the case, Switzerland shouldn’t assume the U.S. will accept deals like those reached earlier this year with the U.K. and Germany allowing the identities of customers with untaxed assets to remain secret.
The U.S. should insist that Swiss banks be required by law to provide all necessary information—including the identities—of tax cheats on an ongoing basis. Swiss law now prescribes harsh penalties for anyone disclosing information about bank customers.
Switzerland also should adopt a broader definition of what constitutes tax evasion. Switzerland’s 1996 tax treaty with the U.S., adopted before numerous abuses were disclosed, lets banks protect account information if the depositor doesn’t participate in “tax fraud or the like,” which is absurdly vague. It would be far better if Switzerland fully reciprocated with current U.S. tax law and recognized that American citizens commit a crime when they skirt taxes, even if it doesn’t rise to the level of fraud.
Unfortunately, Switzerland has cooperated only grudgingly in meeting international banking standards, agreeing to do so in 2009 under threat of sanctions and being named as a tax haven by the Organization for Economic Cooperation and Development. Even so, the country this month was ranked at the top of a financial secrecy index developed by the Tax Justice Network in London.
Switzerland should do itself a favor and abandon the financial opacity that has made it the world’s No. 1 destination for offshore wealth. This lack of transparency has no place in a globalized world where money can be electronically whisked from one place to another, except as a cloak for financial wrongdoing.