Reno Hayek Symposium

Peter Ferrara’s op-ed in today’s WSJ posits the forward thinking Republicans-Conservatives-need. The article points out that the Republicans are responsible for most of the tax credits and give backs that benefit the lower wage earners today. Obama takes office with 40% of income earners paying no tax and the next 20% paying only 4.4% of federal income tax revenue. In essence the bottom 60% pay less than 1% of income tax revenue. Obama’s new $400 per worker refund, effectively reduces the bottom 60% tax to 0% of income tax revenue. So why not make this explicit as a Republican program and eliminate the complex credits and give backs.

But what if Republicans proposed a federal tax reform with a 0% income tax rate for the bottom 60% of income earners? With that explicit 0% tax rate framing the issue, abolishing the refundable tax credits that actually ship money to lower income earners through the tax code would become politically viable. Trading an explicit 0% tax rate for the bottom 60% in return for eliminating the refundable tax credits would likely be at least revenue neutral, and probably result in a net increase in revenue.

Such tax reform can and should be combined with overall welfare reform based on work that would ensure an adequate safety net for the poor. Considering the success of the 1996 reform to the Aid to Families with Dependent Children (AFDC) program, further reform could result in huge overall savings. Besides AFDC, there are 85 more federally administered welfare programs that could benefit from reform.

Moreover, we should then be free to adopt sound tax policy for the top 40% of earners who make 75% of total income. Suppose we tax all of the income of those top 40% once with a 15% flat tax? That would be close to revenue neutral on a dynamic basis (i.e. counting work incentive effects).

The usual distribution arguments against such a flat rate would not apply because the bottom 60% would bear a 0% rate. All flat tax proposals effectively try to do the same through generous personal exemptions that are tax neutral for low- and moderate-income workers. But the explicit 0% rate would make the reform more easily understood.

This — rather than adopting still more refundable tax credits as some conservatives are advocating — is also the way to eliminate the distorting tax preference for employer-provided health insurance. For the bottom 60%, there would no longer be any health insurance tax preference, and for the rest the favoritism would be reduced to a minimal 15%. Or the tax exclusion for employer provided health benefits could be eliminated altogether, affecting only the top 40%. The economic distortions caused by every other tax preference in the code would be minimized or eliminated entirely in this same way.

Contrary to the fears of conservatives, this tax system would sharply limit the size of government. No politician would dare suggest imposing income taxes anew on the bottom 60%. While the last two Democratic presidents won by running on a tax cut for the middle class, that game would be over. Instead conservatives can argue for middle-income and working-class votes to protect the 0% tax rate from big government liberals. As the Obama administration will soon learn, higher income earners have flexibility in their taxable income and increasing revenues by raising taxes on them is not easy.

Mr. Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation. He served in the White House Office of Policy Development under President Reagan.

via The 0% Tax Rate Solution – WSJ.com.

The benefits of a flat tax are even being recognized by the CA Democrats. Yes, the fact that high bracket tax payers have options (like Nevada) is beginning to sink in. Kudos to whoever furnished the 2 X 4 to crack heads! Joe Mathews article Democrats For a Flat Tax? in the July 11th Journal details the enlightenment starting to take hold in CA. Hopefully, Obama will take heed and learn, but I’m not holding my breath!

Tom Motherway, tom@renohayek.com