Permit me to paraphrase a favorite Ethel Merman song, but the truth is that Everythings coming up flat tax. Todays mindlessly complicated, growth-stifling tax code is tumbling toward the wastebasket of history, and thats why my good friend Senator Richard Shelby of Alabama and I are proud to be sponsors of the Freedom and Fairness Restoration Act.
Our proposal features a tax system so simple you could do your taxes on a postcard, and so fair that it just might restore peoples trust in government. Rather than tinkering with a tax code nobody likes, Senator Shelby and I would scrap the entire code, both corporate and personal, and replace it with one flat tax rate for all Americans.
We would leave only one exception: a family allowance to assure that every family has first claim to its own income sufficient to support itself. Under our proposal a typical family of four would have to earn $33,300 before it would owe a penny of federal income tax. Beyond this, everyone would pay a flat 17 percent on all income. No deductions, no loopholes no special tax breaks, no tables, no schedules just a straight, uncomplicated tax.
Each year you would calculate your income, fill out a postcard-size form, make out a check and drop it in the mail, period. Youd be done with the IRS until the following year. If you had business income the process would be almost the same. Whether you are IBM or a mom-and-pop grocer, youd still fill out a postcard-sized form. Just subtract expenses from gross revenues and pay 17 percent on the remainder - simplicity itself.
Imagine such a bright new world dawning. Gone will be todays 480 different tax forms, as well as the 280 forms that explain how to fill out the first 480 forms. Whole regiments of tax attorneys and lobbyists will be looking for more productive employment. And as for all those IRS agents and auditors, instead of harassing you theyll be sitting at their desks - probably like those Maytag repairmen in television ads - lonely, with nothing to do.
There is also one important change from our 1994 flat tax bill. Weve added a provision requiring a three-fifths super majority in congress to raise the tax rate, to add additional rates, to create loopholes or to shrink the family allowance. The tax is going to stay flat.
The appeal of our flat tax proposal resides in four things citizens know about the bill: its simple, its honest, its pro-growth, and its fair.
First of all, its simple. No longer would Americans spend 5.4 billion work-hours figuring their taxes each year, which, by the way, is more work-hours than required to produce every car, van and truck built in the U.S. last year. One estimate indicates that our flat tax could save $232 billion a year in man-hours, a potential savings of $900 for every man, woman and child in America.
Secondly, by sweeping away all the special interest loopholes, the flat tax will show us how much money government is really costing us. By eliminating the present tax codes incessant social engineering and economic tinkering, the tax is more honest, shifting power from politicians to their citizens when it comes to making financial judgments.
Third, the flat tax is pro-growth, planting the seeds for needed rises in output and wages. The chief cause of our long stagnant wages in the U.S. is our anemic saving rate, and the chief cause of our low saving rate is todays policy of taxing savings twice, once when a dollar is earned, and then again when it produces a return. The flat tax wipes out this perverse bias against saving; savings will rise, the nations pool of capital will grow, workers will be better equipped and trained, and output will expand, leading to bigger paychecks.
But a higher saving rate isnt enough. We also need greater rewards for work and risk taking. Instead of punishing entrepreneurship with steeply progressive tax rates, the flat tax slashes the top rate from 40 to 17 percent, enabling America to unfetter the future Thomas Edison and Bill Gates to create the inventions and industries offering the high-paying jobs of tomorrow. The flat tax would make risk taking worthwhile again, while making America a magnet for foreign investment capital.
The fourth and final reason people like the flat tax idea is also the most politically powerful. Its fair. In America, we define fairness as treating everybody the same - rich or poor, black or white, everyone is equal under the law.
Liberals ought to love a flat tax! When you tax everyone at the same rate, the rich pay much more in taxes than the middle class and the poor. With three times the income, you pay three times the tax, and so on. And beyond this, our flat tax is in its own way progressive. If you make three times the income you pay three times the tax. And thanks to a generous family allowance even with a flat rate a family making $33,300 a year would pay no federal income tax, while a family making $200,000 a year would end up because the $33,300 exemption paying 14 percent of its income. Indeed, about 20 million Americans would be dropped from the tax roles altogether. Whats not for a liberal to love?
So there you have it; simplicity, honesty, growth and fairness - four reasons people love the flat tax. But allow me to address some of the concerns that have been raised.
The first comes from the class-warfare crowd. Our plan taxes investment income at exactly the same rate it taxes wages; but what it doesnt do is tax it twice. Today a dollar of corporate earnings is taxed at the business level, and taxed again when its paid out as a dividend. Our bill, by way of contrast, would tax every dollar of business generated income at the business level, once and only once. To suggest as some have that our plan does not tax investment income is a misrepresentation of the plan.
A second area of concern is the elimination of the home mortgage interest deduction which some critics assume will hurt the real estate industry. But eliminating the mortgage interest deduction wont hurt the industry nearly so much as much lower interest rates will help it.
Interestingly, a recent poll showed that by a three-to-one margin homeowners said theyd be willing to forego the mortgage interest deduction if the loss was offset by a reduction of their tax bills in similar amounts.
A third concern comes from our conservative friends who are worried that charities may suffer without a continued tax deduction for philanthropic giving. But in truth, almost half of charitable contributions today are not even claimed as tax deductions. When President Reagan cut the top marginal rate from 70 percent to 28 percent, charitable giving became much less valuable for tax purposes, and yet charitable giving didnt drop, but actually doubled.
What, then, is the Freedom and Fairness Restoration Act? Its an overdue plan so simple you could do your taxes on a postcard, but its more than that - its a vision of what America can be again - literally a formula for rejuvenating our economy, freeing our entrepreneural talent and reviving family incomes that for too long have remained stagnant.
And who knows? It might just restore peoples willingness to trust their government, which is why I believe theres a flat tax is in Americas future.
This article has been adapted from an address to the National Press Club by Congressman Armey in late 1995.