On The Flat Tax

Ben Domenech is one of the shrewder conservative writers out there. He supports a flat tax writing:

The whole point of starting with the argument for a flat tax is to end up with a tax structure that looks more like Simpson-Bowles and less like the mess we have today . . .

Of course Republicans need to become more sophisticated in how they connect tax reform policy to the challenges Americans face in their daily lives. Better analytics is not a strategy. But this does not demand that they ditch the populist goal. You make the case for a flat tax not as a purist aim, but because it makes logical sense to the people, even if you just end up getting to a flatter tax because of it.

I’m not sure this works as either a negotiating strategy or as a populist goal. It depends on the distributional impact of the flat tax proposal. Whenever I hear about a Republican politician with a flat tax, or a fair tax, or a comprehensive tax reform, my first thought is “What is the distributional impact?” That is not the only question that matters, but the answer will tell you a lot about the political viability of a proposal. The following analysis only applies to flat tax proposals that would increase the tax liability of families at or near the median while cutting taxes on high-earners - which is my read on Rand Paul’s flat tax proposal.)

A flat tax has advantages in simplicity, transparency and efficiency. A problem is how a flat tax proposal impacts different groups. A flat tax might poll well at first, but if it raises the tax liability of families at or under the median while cutting the tax liability of high earners, I suspect it would injure the political prospects of Republicans in otherwise competitive races. I just don’t see that the argument “Well you will be paying hundreds of dollars more in taxes but it is so simple, and now you will know what (lower) taxes are being paid by the rich with their armies of accountants.” Simplicity has its place, but we can get a simpler tax code without going to, or even advocating, a flat tax.

The arguments from economic efficiency and faster economic growth suffer from the same political problem. We just went through an election where the Republican candidate’s tax cut proposal would have primarily cut the tax liability of high-earners. According to opinion polls, fifty-three percent of voters thought that Romney’s policies primarily benefited the rich and only thirty-four percent responded that Romney’s policies favored the middle-class. How much worse would Romney’s numbers have been if he had actually advocated a tax increase on many middle-class families? Such a proposal would make the Republicans look less populist to the unaligned voter. The good news is that you can make the tax code more pro-growth and cut taxes on middle-class working families.

I’m skeptical about whether a flat tax proposal works all that well as a negotiating strategy. Candidates can win or lose for lots of reasons but, to the extent that Republicans are associated with a flat tax that raises the tax liability of the middle-class, it will be tougher for Republicans to win elections. I think that Republicans will have maximum leverage to negotiate if there are more elected Republicans who are advocating widely popular policies that can withstand critical scrutiny.

So any flat tax proposal needs that critical scrutiny before Republicans in competitive races adopt it, because the Democrats and their media allies will figure out and publicize the distributional impact of the the proposal in the general election.