Hoover Daily Report

The Flat Tax Revisited

Monday, June 2, 2003

President George W. Bush is actively pushing for a second round of tax cuts as part of his domestic agenda. He has proposed $726 billion in new tax cuts over the next ten years. The House Ways and Means Committee has proposed a smaller ($550 billion) reduction. The more fractious Senate Finance Committee wants to limit the cut to $350 billion. Changes currently being considered include (1) reductions in the tax rate on dividends (some, half, or all); (2) further reduction in the capital gains tax rate (down to 15 percent from 20 percent); (3) accelerating the marginal tax-rate reductions approved in last year's tax bill; (4) tripling or quadrupling first-year write-offs of small business investment from the current level of $25,000; (5) increasing the child tax credit; and (6) granting more relief for married taxpayers.

Each item, on its own, can be justified, but the entire package cannot. The federal income tax code is currently 54,000 pages long—last year's tax bill by itself added up to 2,500 pages. The total number of pages in the federal code has doubled since 1984. Despite repeated promises to simplify the tax code, a succession of presidents and Congresses contrives each year to make the system worse. The only real beneficiaries of these annual revisions are commercial tax preparation services, tax accountants, tax lawyers, tax planners, and lobbyists.

It's time we got back to basics, to a flat tax that can be filed on the back of a postcard. A number of countries have adopted a flat tax: Estonia (1994), Latvia (1995), Russia (2001), and Ukraine (2003, at 13 percent, the same as Russia). As of this writing, the Ministry of Finance in Slovakia has proposed a 20 percent flat tax. If adopted this summer, five former Soviet or East-bloc countries will have implemented a flat tax.

More exciting is the prospect of a flat tax being adopted in the People's Republic of China. A Chinese edition of The Flat Tax (2d edition, Hoover Press, 1995), which I co-wrote with Robert E. Hall, has just been published by the China Financial & Economic Publishing Company. Furthermore, I have been invited by the Ministry of Finance to participate in an international seminar in Beijing on reforming the personal income tax in China, with special consideration of the flat tax.

Adding China to the above list would mean that more than a quarter of the world's population would conduct their economic and financial affairs under a flat tax. If so, the producers in our largest future competitor, China, would have a big advantage over American producers, who, barring any real tax reform, will remain saddled with higher tax rates and greater complexity.

What do former Soviet states and China know that our president and Congress do not?