Under the new GOP Congress, the future looks bright for fundamental tax reform. So Republicans and thinking Democrats should embrace my modest proposal: The 0–10–100 Tax Plan.
“0” is the number of deductions that would be allowed: Zero. The home-mortgage deduction? Gone. Business-dinner write-offs? Kaput. Charitable deductions? Sayonara.
“10” is the flat-tax rate on gross income. What did you make in 2014? Send 10 percent to Washington, D.C. Period. See you next year.
The 10 percent rate applies to income, regardless of source. So wages, speaking fees, capital gains, dividends, royalties, stock sales, gifts, and gambling winnings would face a 10 percent tax in the year that the income is received. Estate income would endure a 10 percent death tax, from dollar one. While I know any death tax will annoy my fellow supply-siders, we live in a world of tradeoffs. Oxen must be gored from Left to Right to make this work.
Now, such a poor person, in turn, might receive, say, $20,000 in welfare. However, every American adult must file a tax return and pay a 10 percent tax on any and all income. Every adult must have skin in the game called the United States of America. We cannot have 57 percent of Americans finance the CIA, FBI, FDA, SEC, and TVA while the balance remains uninvested in our beloved federal leviathan.
Once every American adult pays federal taxes, more will watch closely what Washington does, especially how it frequently incinerates our money.
The corporate tax would work similarly:
“0” deductions. There would be no write-offs for payrolls, new plant and equipment, raw materials, amortization, rent, or anything else. That’s the bad news. The good news is that gross income would be subject to a tax rate of just 10 percent of whatever is generated in each calendar year. Like individuals, 100 percent of companies would pay. No more will Facebook generate $1.1 billion in profits and pay $0.00 in corporate tax, as occurred in 2012.
While it will be tough to tax start-ups before profits kick in, a 10 percent corporate tax will be low (versus 35 percent today) and predictable. It very likely will turbocharge economic growth, so that new companies can blossom quickly and, thus, afford a 10 percent corporate tax. Start-ups should be able to raise and reserve such a reasonable amount, at least during their launch years.
Individuals and companies also will save much of the $168 billion spent annually to prepare taxes, the National Taxpayer Advocate estimates, plus the pounding migraines triggered by towers of IRS documents. The 0–10–100 Tax would liberate America’s accountants and tax lawyers to dedicate their time and talents to more productive pursuits.
American corporations also could repatriate some $2.1 trillion in profits that are moored overseas, awaiting a friendlier U.S. tax climate. The 0–10–100 Tax would welcome this money home, levy it lightly, and immediately put it to work.
Meanwhile, foreign companies and individuals would flock here to thrive under this gentle tax system. This would be splendid news for the unemployed.
The 0–10–100 Tax also would be predictable and stable. It should fill a few pages and speed thousands of IRS agents into retirement. It will be easy to resist calls for new credits and carve-outs, like those that turned the tax code into a honeycomb — without the honey. The first proposed deduction will stand out like a donkey in a kilt. It swiftly could be dispatched.
This proposal gives the Left what it wants: Loopholes will vanish, so the rich will be unable to hide among them. In social solidarity, all will be in this together and face the same tax rate. Everyone will pay his fair share.
The Right will enjoy radical tax simplification and an amazingly low, unobtrusive rate. Also, Uncle Sam will stop social engineering via the blunt-instrument trauma called the U.S. Tax Code.
But wait. Will a 10 percent flat tax generate enough revenue to make this feasible? The rate does seem impossibly low. But remember, the tax base is as broad as possible (short of taxing third-graders) and deductions are blasted into non-existence.
The numbers are encouraging.
Statista.com cites figures from the U.S. Bureau of Economic Analysis. In 2013, U.S. personal income totaled $14.17 trillion. As Statista explains,
According to the BEA, personal income is the income that is received by persons from all sources. It is calculated as the sum of wage and salary disbursements, supplements to wages and salaries, proprietors’ income with inventory valuation and capital consumption adjustments, rental income of persons with capital consumption adjustment, personal dividend income, personal interest income, and personal current transfer receipts, less contributions for government social insurance.
So a 10 percent flat tax should generate roughly $1.4 trillion.
The 2013 federal budget includes personal-income-tax revenue of $1.31 trillion. Thus, the 0–10–100 Tax would generate more than enough such cash inflow to meet Washington’s current expectations.
As for the corporate tax, the broadest measure of private-sector activity is “Gross Domestic Product — Value-added by Industry,” as calculated by the BEA. For 2013, it lists the figure for private industries at $14.55 trillion. A 10 percent tax on that amount would yield $1.45 trillion — far in excess of the $273 billion in federal corporate-tax receipts for 2013.
This suggests that applying the 0–10–100 Tax to personal and corporate income would generate all the revenue now produced by all current federal taxes, including the Social Security, Medicare, gasoline, and other levies. If this is correct, the two components of the 0–10–100 Tax could replace all existing federal taxes with essentially no reduction in federal revenues.
While economist Arthur B. Laffer offered some cautionary words about this idea’s treatment of unrealized capital gains and the need for “static revenue neutrality at full employment,” he otherwise warmly greeted the 0–10–100 Tax. The supply-side pioneer told me: “Your plan is as near perfect as any I’ve ever seen.”
— Deroy Murdock is a New York-based Fox News contributor and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University.