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Archive for Wednesday, October 26, 2011

Flat tax renews fight on ‘trickle-down economics’

October 26, 2011

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— The flat tax is making a comeback among Republican presidential candidates. But it faces tough opposition in Congress because it tends to favor the rich at the expense of other taxpayers, renewing an old debate about “trickle-down economics.”

Most of the top GOP contenders — Mitt Romney’s an exception — offer a variation of the tax plan in which everyone pays the same rate. Businessman Herman Cain has his 9-9-9 proposal, and Texas Gov. Rick Perry unveiled a 20 percent flat tax on income this week. Even Romney foresees a flatter tax system in the future, though he favors something closer to the current setup in the short term.

The idea of a flat tax has long been championed by conservative politicians as being simple and fair. Publisher Steve Forbes made it a centerpiece of his Republican presidential campaigns in 1996 and 2000. Forbes has endorsed Perry, calling his economic plan “the most exciting plan since (Ronald) Reagan’s.”

“American families deserve a system that is low, flat and fair,” Perry wrote in his tax plan. “They should be able to file their taxes on a postcard instead of a massive novel-length document.”

Conservative economists argue a flat tax would promote long-term economic growth by lowering taxes on the people who save and invest the greatest share of their income: the wealthy.

Lowering taxes on the wealthy, however, could prove politically difficult, especially now, with protesters around the country occupying public spaces and calling for the rich to pay more. President Barack Obama and many Democrats in Congress also want higher taxes for the highest-income Americans.

“It’s all about political rhetoric,” said William McBride, an economist the Tax Foundation, a conservative think tank. “The inevitable result of shifting the tax burden away from saving and investment is that you reduce the tax burden on the rich.”

Liberals and many moderates complain that a flat tax is a giveaway to the rich, renewing an old debate over whether the benefits of tax cuts for those at the top trickle down to the rest of the population.

“This idea of lowering taxes on high-income people and somehow middle class people will benefit has been there for a long time,” said Chuck Marr, director of federal tax policy at the left-leaning Center on Budget and Policy Priorities. “Obviously it hasn’t worked very well.”

Flat tax plans by both Cain and Perry have provisions to protect low-income families from tax increases. But that raises questions about who will be left to pay the tab, said Roberton Williams, a senior fellow at the Tax Policy Center, a Washington think tank.

“If you exempt the low-income people from higher taxes, if you cut the taxes for the wealthy, getting the same amount of revenue means the middle class are going to pay more, a lot more,” Williams said.

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