Dear Colleague:

Now that President Bush has named tax simplification one of the top
priorities for his second term, tax reform advocates need to ensure that
tax reform doesn't end up raising taxes on many families, especially large
ones.

Steven W. Mosher
President

Action Item:  Please call or write your Congressman and Senators and tell
them that tax reform must not end up raising taxes on middle class
families.

PRI Weekly Briefing
15 November 2004
Vol. 6 / No. 35


Will Families Benefit from Tax Reform?

By Joseph A. D'Agostino

Remarks by President Bush have renewed the drive to simplify the federal
tax code, which has grown ever more complicated since Ronald Reagan's tax
simplification passed Congress in 1986.  Politicians cannot resist handing
out favors to campaign contributors and influential constituencies in the
form of tax breaks garnered by K Street lobbyists in Washington, D.C..

The President called for simplifying the tax code.  For federal income
taxes, the simplest solution is the flat tax: After allowing deductions
for individuals and dependents, all income would be taxed at the same
single rate.  No complexity, no favoritism, no unfairness.  As long-time
flat tax proponents such as former House Majority Leader Dick Armey
(R.-TX.) and publisher Steve Forbes have emphasized as a major selling
point of the flat tax, Americans could do their taxes on a postcard.

Bush has not endorsed the flat tax, only tax simplification, and maybe
this is the reason why: the most popular versions of the flat tax could
raise taxes on many middle-class families.

Many conservative, pro-family advocates have long supported a flat tax for
its salutary effect on families, such as its elimination of the marriage
penalty-which is still around, though in reduced form since the 2000
elections.  "An additional benefit of a single tax rate is that it will
eliminate the insidious 'marriage penalty,' which taxes married couples at
a higher rate than if the man and woman filed singly as individuals,"
wrote Randy Tate, former Executive Director of the Christian Coalition, on
July 9, 1999.  "At a time when family breakups are all too common, tax
policy should place government on the side of America's families. . .  But
a flat tax does more than simply hand a windfall tax cut to American
families-it encourages economic growth.  By taxing income only once
(unlike the current system, which taxes income when we make it and again
when we save it and earn interest), a flat tax encourages savings and
investment.  Small family businesses will have incentives to invest on the
basis of what makes the most financial sense, not what constitutes the
best tax write-off."

At a time when more and more families are starting small businesses or
relying on income from working for them-most job creation in this country
is by small businesses-that can make a big difference.  The increased
productivity and economic growth triggered by a flat tax could be its
greatest advantage.

In the long term, "families can expect an increase of about 10% a year in
their gross incomes as a result of a flat tax," said Stephen Entin,
president of the Institute for Research on the Economics of Taxation, in
an interview.  That's because a flat tax increases the efficiency of the
economy by eliminating distortions, i.e. by encouraging people to put
their money where it will generate the most income instead of where it
will best avoid taxation.

It saves "the hundreds of billions of dollars going into the tax system
from economic distortion, our friends on K St., and the cost of time and
money spent trying to comply with the tax code," said John Berthoud,
president of the National Taxpayers Union, in a separate interview.

There is a moral advantage as well.  Why should wealthier people pay a
higher proportion of their incomes in taxes?  Shouldn't everyone pay the
same rate, which after all means that the rich pay more?  What family
would penalize its children for working longer hours and earning more
money?  Shouldn't such behavior be encouraged rather than discouraged?

But there is a danger in the flat tax.  Although in the long term it would
lead to higher incomes, in the short term it could lead to higher taxes on
families which now benefit from the $1,000-per-child tax credit, assuming
it is not allowed to expire under the current system.  Entin calculates
that a family with four children making $50,000 a year could owe about
$1,500 more under an Armey-style flat tax with a 17% rate.  A similar
family making $70,000 could owe more than $2,000 a year.  A flat tax that
doesn't include a tax cut but is revenue-neutral could even raise taxes on
many families with two children, said Berthoud.

Flat tax proponents need to find a way to ensure that their idea doesn't
lead to tax hikes on families.  Otherwise, there are a lot of people in
Middle America whose support they won't earn.

Joseph A. D'Agostino is Vice President for Communications at the
Population Research Institute.

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