Flat Tax Talk

Suddenly the idea of a flat tax has become a subject of national interest. There was a time, not long ago, when only a few of us were masochistic enough to touch on the subject (one-quarter of a book I published ten years ago dealt with the desirability of the flat tax). There are objections to the reform, two of them most frequently alluded to, and these are interesting in that they indicate on the one hand a bias born of envy, on the other a bias born of irrationality.

The first of these has to do with the Question of the Rich. I once ventured that if everyone in America could be made twice as wealthy, our opinion-makers would embrace any measure to bring about this effect save one: it would not be permitted that those who are already wealthy should also be made twice as wealthy. Why is this? To understand how deeply rooted envy is, one must reflect that the Lord thought it important enough to devote one of only Ten Commandments to the subject of envying one’s neighbor’s goods.

Although the doctrine of supply-side is in disrepute, and one is not permitted to pronounce the name of Laffer in sophisticated economic quarters, we are nevertheless discovering a thing called the underground economy. The underground economy, by the way, is simply another way of saying that Laffer’s curve, whatever the exact parabola of it, indeed exists out there somewhere. Just as in Sweden you are quoted two prices by most garages, depending on whether you intend to pay cash (service at half charge) or whether you want to be billed (service at full charge), so Internal Revenue is frankly conceding that tax evasion has become a huge industry—so to speak, the illegitimate child of high taxation. One sees estimates of one, two, even three hundred billion dollars of money that would have gone out in taxes if all gross receipts had been reported.

Now, tax evasion is a criminal offense. Tax avoidance is not, and in this category Internal Revenue also loses huge sums of money—from higher earners, whose investment strategy is dominated by the desire to avoid what is deemed excessive taxation.

Now, the flat-rate tax would attack both problems. The garage mechanic who is paying more than 25 per cent tax on the marginal dollar chooses to traffic, to the extent he can, in cash. Reduce the tax rate to a maximum of 25 per cent, and the inducement is to live more serenely with one’s conscience—and pay the tax. The high earner withdraws his money from tax-exempts, depreciation accounts, wildcat oil ventures, gold and antique collection—and suddenly money that was not taxed at all is taxed, at 25 per cent.

But the notion that a wealthy man should be paying only 25 per cent in tax is emotionally intolerable to some. Joseph Pechman, Director of Economic Studies at Brookings, gasps that under one flat-rate proposal, highest-income taxpayers would pay 40 per cent less! He means they would be taxed at a lower rate—not that they would pay less. Actually they would pay more, even as the rich paid more in taxes after Coolidge and Kennedy reduced the top rates. But the mere thought of their paying less casts these critics into a sea of wretchedness. I repeat: they would prefer economic stagnation to the incidental prospect of the rich getting richer.

The second bias is the protective bias of such institutions as depend on charity, notably colleges, hospitals, and cultural enterprises. If the marginal dollar is being taxed at 70 per cent (the argument goes) there is a greater attraction to giving money to the ballet. The reasoning, apparently logical, is in fact paralogistic. Huge fortunes of the few devoted to charity are not equal to such sums as are raised from many who are less than hugely rich, but who with 25 per cent tax payments find themselves with a surplus. It would be interesting to see a study of how generously Americans behaved back, oh, in the early 1900s. In those days, by current standards, 90 per cent of the American people were poor. In those days, per capita, more colleges, churches, and hospitals were constructed than at any time since. The Brookings Institution might profitably study the subject. But no study of human envy, even of the self-defeating sort, is likely to root out an impulse warned against on Mount Sinai.

— William F. Buckley Jr. was the founder and editor of National Review.