Jerry Brown's Flat Tax -- Intriguing In Theory, Failure Lies In Details
MENTION a flat income tax and most public-policy analysts turn apoplectic. It's regressive, it's simple-minded, it's a flat-earth idea, they say. In other words, just the sort of response Jerry Brown loves. Little wonder that he has seized on the idea and made it a cornerstone of his presidential campaign.
Two months ago, nobody challenged or seriously analyzed Brown's tax proposal. Now his survival in the race for the Democratic nomination forces people to take a hard look at exactly what his ideas mean.
The notion of a flat tax is neither as simple nor as dumb as those who would dismiss it out of hand say it is. The problem with Brown's proposal is not in the theory, it's the details - or lack thereof. Brown seems to be making up the tax plan as he goes along, fudging the numbers as it suits him.
He would replace the current tax code with a 13 percent income tax for individuals and apply a new 13 percent value-added tax (akin to a national sales tax) on all goods produced in the economy. Deductions would be allowed only for mortgage interest, rent, and charitable contributions. Businesses would also be allowed to deduct all equipment purchases in the first year instead of depreciating those expenses over several years.
In return, all other deductions would go, including personal exemptions. And Brown would get rid of the corporate income tax, the Social Security payroll tax, the estate and gift tax, and the gasoline tax.
Nobody but Brown believes his plan would raise the same amount of revenue as the current tax structure. Some groups, such as Washington, D.C.-based Citizens for Tax Justice, claim the plan would bring in $200 billion less than the $1 trillion-plus of taxes collected annually now. The exact magnitude of the gap is difficult to predict, but a gap is certain.
Aside from basic problems with the math, there's the regressivity issue.
A flat tax coupled with a value-added tax would hit low- and middle-income people hardest because they consume a higher share of their income than the wealthy.
The lopsided burden could be remedied by building in generous personal exemptions and creating a negative income tax for the poorest families. Brown's sketchy plan contains neither element. If it did, the flat rate would be less spectacularly low, perhaps 19 percent.
These flaws are fatal to Brown's plan. But the idea of throwing out the 2,700-page tax code, rife with loopholes, has appeal. Indeed, the 1986 tax-reform act had similar aims: eliminate loopholes and allow lower rates for all taxpayers.
President Bush and Congress, however, are fast retreating from the 1986 reforms. Both branches want to reinstate "incentives" - such as passive loss deductions for real estate - that created massive tax-shelter industries in the 1980s.
A decade ago, the flat-tax scheme was a favorite of conservatives who believed a broader tax base (fewer deductions) and lower rates would improve the economy's performance. Brown embraces that approach. Compared to the tax changes Bush and Congress have in mind, a clean sweep with a flat tax, at least in theory, isn't so absurd.
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