Robert Frank attacks the Flat Tax as inequitable and as a mirage to solving the problem of complexity. But, the Perry incarnation is only the latest, but not the purest presentation of the Flat Tax. The complexity resides in the retention of various deductions (loopholes), which in the ideal are eliminated in their entirety. Mr. Frank does not discuss the simplification potential, but concludes his piece with a brief submission of his preference for a progressive consumption tax. There is no acknowledgment, however, that his preferred tax would also favor the highest earners, as they have the most disposable income and therefore the very disproportionate ability to save. Most economists would agree that increased savings are important to our economic success, but there is no discussion of this in the column.
Unfortunately, Mr. Frank’s unarguable conclusion is that our politicians are most unlikely to approve a new tax, backed-up by the fact that half the members of the Debt Commission (“supercommittee”) have pledged not to do so.
Mr. Romney and President Obama have yet to declare one way or the other on sweeping tax reform, but the possibility remains, in spite of the pledges taken by members of Congress and Senators, that either might propose a new and different plan. The cleanest, most competitive system for replacement of our outmoded and corrupted tax code would be a clean sweep replacement by a VAT and a FlatTax on personal income with a high threshold. The tax could be balanced between the VAT and Personal Income Tax, so as to retain (increase) progressivity, and the bottom quintiles could be protected from the VAT via the Earned Income Tax Credit. The border-adjustable VAT would make exports more competitive and imports less so. Such a plan was once floated by Gov. Mitch Daniels, but has not reached the light of day without a champion in the presidential campaign.