Is the Flat Tax a Libertarian Reform?
Don’t Let Perfect Be the Enemy of Good
By Justin Hatherly
Libertarians believe that most people can spend their own money far more effectively than any government could. However, most libertarians are not anarchists and accept that some tax revenue must be raised to pay for the legitimate functions of government.
As such, libertarians should advocate for a flat tax, a form of taxation that infringes less upon individual liberty, is more conducive to economic growth, and when done correctly, has minimal collection costs.
The flat tax has many features that should make it attractive to libertarians. The elimination of progressive marginal tax rates would dramatically enhance incentives to work, save, and invest. People who work hard, invest in their education, or start new enterprises would no longer be overly penalized by punitively rising tax rates.
A flat tax could also help constrain the size of government through limiting political discretion and making it harder for the government to single out specific groups. In contrast to progressive income-tax systems, politicians would no longer be able to propagate the illusion that they can foist the cost of new government programs on higher income taxpayers.
With all taxpayers facing the same marginal rate, they are likely to be leery of new spending proposals, correctly grasping that the flat tax would mean higher taxes for all, not just a politically unpopular minority. By clearly highlighting the costs of more government to all, a flat tax would increase the constituency for smaller government and deter politicians from proposing new spending.
A flat tax should also reduce the power that special interest lobbies exercise over our political institutions. Presently, the income-tax systems of most nations are packed with deductions and tax credits that benefit select interest groups.
This narrows the tax base and leads to higher marginal rates than otherwise would be needed to raise sufficient revenue. Under an ideal flat-tax system that replaces the myriad of deductions and credits with one lower rate, legislators would be less favorably disposed towards calls for tax gifts from special interest groups, realizing that granting such preferences would inevitably mean the unpopular prospect of higher taxes on all other taxpayers.
Further, without these deductions and credits, collection and compliance requirements would drop. This would be welcomed considering the Canada Revenue Agency has over 40,000 employees, making it the single largest Canadian federal government department (National Defense is second with nearly 23,000 employees).
Finally, a flat tax would restore equity to the tax system. Through history, there have been two competing conceptions of fairness, the Aristotelian and the Marxian. To the Aristotelian, fairness means treating people equally under a set of neutrally applied rules. In contrast, the Marxian believes that fairness is not procedural but distributive.
A flat tax would move society away from the flawed Marxist conception of fairness. By levying a uniform rate, it would treat all individuals fairly.
The flat tax is a largely libertarian reform. While some may find it imperfect, it is imperative that the perfect not become the enemy of the good.
Justin Hatherly is a researcher with the Canadian Taxpayers Federation. He is currently pursuing studies in history, economics, and political science at McGill University. Follow @evertonhk94.
No Tax Is Libertarian
By Laurence M. Vance
EspañolThe typical flat-tax plan taxes all income at a flat rate (there is no consensus on the rate), often with the exceptions of capital gains, Social Security benefits, interest earned, and dividends received. A flat tax generally includes generous personal and dependent allowances, but greatly reduced tax credits and deductions.
Some plans would still permit deductions for medical expenses, home mortgage interest, and/or charitable contributions. Some plans retain the refundable Earned Income Tax Credit.
There is no question that any version of a flat tax would greatly simplify the tax code and reduce compliance costs. But the flat tax is not a libertarian reform, because these are not the real problems with the US income-tax system.
There are numerous problems with all of the proposed versions of a flat tax.
First, none of them are actually a flat tax. For a real flat tax, look at the Medicare tax. Everyone pays 2.9 percent (split between employer and employee), on every dollar earned, regardless of one’s marital status, age, number of dependents, medical bills, home-mortgage interest paid, or donations to charity.
Because the current flat-tax proposals have exceptions to the income that is taxed and still have some exemptions, credits, and deductions, all taxpayers don’t pay the same percentage of tax on their income.
Second, they are more progressive than our current system. Progressivity doesn’t require graduated tax rates. Current flat proposals shift taxes from the “poor” to the “rich” just like the current system. And the Earned Income Tax Credit ensures that the “poor” family will get a tax refund over and above what they had withheld from their paychecks.
Third, they are designed to be revenue neutral. They do this by lowering the tax rate while at the same time broadening the tax base, eliminating most credits and deductions, and closing loopholes. Any revenue-neutral tax-reform scheme can only shift taxes, not lower them.
Revenue-neutral tax reform implies that government revenue should not be decreased. Under a flat tax, all unconstitutional federal spending could continue just as it is right now.
And fourth, a flat tax is still an income tax. It still says that the government is entitled to a portion of one’s income. It is still government theft. It will still be collected by the IRS, with penalties for non-compliance. It still redistributes wealth and transfers income.
A flat tax still says, in the words of Frank Chodorov, that “the amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.”
A wealth-confiscating income tax based on a simpler tax code and a flat rate is still a wealth-confiscating income tax. The tax code doesn’t need to be reformed or replaced with a flat tax; it needs to be repealed. A progressive, revenue-neutral, income-transferring, government-funding flat tax that is not a flat tax is not a libertarian reform.
Laurence M. Vance is a columnist and policy adviser for the Future of Freedom Foundation, an associated scholar of the Ludwig von Mises Institute, and a columnist, blogger, and book reviewer at LewRockwell.com. He is also the author of Social Insecurity and The War on Drugs Is a War on Freedom.