Hoover Daily Report

Whither Tax Reform?

Wednesday, April 4, 2001

Every year, American taxpayers face the mid-April ritual of filing their federal income tax returns with dread. The year 2001 was no different. Is relief on the way?

President George W. Bush pushed hard for $1.6 trillion in tax relief over the next ten years. Congress approved a smaller number, closer to $1.3 trillion. His plan will lower marginal tax rates, ease the marriage penalty, and perhaps lower estate taxes. Even if his plan is adopted in full, it will not simplify the tax code.

In 1981, Professor Robert E. Hall and I proposed a flat tax for the United States. The forms were so simple that tax returns could be filed on a postcard. The idea was popular in the early 1980s and again in the mid-1990s. Special interests and opponents of low tax rates, however, blocked its adoption.

The flat tax has met success in unlikely quarters. On January 1, 1994, Estonia, a postcommunist transition economy, implemented a 26 percent flat tax. Latvia followed with a 25 percent flat tax a year later. Croatia followed with a tax reform that embodies the core features of the flat tax. All of them have worked well in practice.

The most dramatic story took place in Russia. Under its new president, Vladimir Putin, Russia implemented a 13 percent flat tax beginning January 1, 2001. It replaced a three-bracket personal income tax system that had a top rate of 30 percent but which few wealthy Russians paid.

How has this 13 percent flat tax worked? In remarks at the Ministry of Finance on April 16, 2001, President Putin reported that income tax revenues for the first quarter of this year were running 62 percent ahead of last year at this time and ahead of earlier projections due, in large measure, to the new 13 percent flat tax. President Putin has repeatedly pointed to the 13 percent flat tax as one of the key policy achievements of his new government. (Details can be found at www.russiaeconomy.org.)

Three Polish political parties plan to introduce a flat tax in the Polish legislature in the next few years. The Chinese Taxpayer Press, the leading publisher of tax books in China, has inquired about translation rights for The Flat Tax (Hoover Press).

It is important to reduce tax burdens and marginal tax rates. But the Bush plan, even after its full enactment, will still leave the incredibly complicated nightmare of the federal income tax largely in place, burdened with deductions, exemptions, credits, the alternative minimum tax, and other absurdities that require professional tax advice and help with preparation of returns.

Let us hope that, once President Bush can claim victory for his tax cut, he will turn his attention to real tax reform in the coming years, emulating President Putin’s bold vision of a low, simple, flat tax.