- - Tuesday, February 3, 2015

ANALYSIS/OPINION:

Be still, my beating heart. At long last, there’s a flat tax proposal on the bargaining table that could conceivably get passed into American law.

Last week, Republican State Sen. William Sharer proposed a 2 percent flat tax for New Mexico. It would be divided in the following manner: 1 percent to the state, a half-percent to the counties and a half-percent to the cities.

That’s it. Nothing more, nothing less, nothing hidden and nothing else to discuss.

Wait a minute. New Mexico, like other U.S. states, collects different taxes. For example, personal tax rates are between 1.7 percent and 4.9 percent. Corporate tax rates are 4.8 percent for the first $500,000, and go up accordingly. The gross receipts tax — which is used in place of a sales tax — averages 5.125 percent, but is higher in cities like Albuquerque.

How could a tiny flat tax replace state taxes? Wouldn’t there be a huge shortfall to make up?

It can, and there won’t be.

According to The Associated Press, when Mr. Sharer suggested a flat tax two years ago, “a University of New Mexico analysis done at the time found the flat tax would bring in $1.7 billion more for the general fund than the $3.9 billion generated from all taxes combined.”

This proves what many conservatives and libertarians have been saying about taxes: Higher rates hurt individuals, increase government waste, and don’t benefit society. If taxes were collected at lower rates, and used more prudently and effectively, it would be a boon for all Americans.

Mr. Sharer’s flat tax proposal, if ever passed into law, would greatly benefit New Mexico. Imagine what could be accomplished if Congress and the White House ever got behind it.

Alas, that’s a problem which goes much deeper than the left-right political dichotomy. While intellectual discourse about this economic principle remains high, few individuals would ever be willing to put it into practice.

There are many misconceptions about the flat tax: It favors only the rich, hurts the poor, reduces progressivity of taxation, is accompanied by a litany of personal exemptions, and so forth. Although many of these assumptions are incorrect, no American politician has been able to set the record straight.

Part of the problem is there have been so many flat tax proposals it can make your head spin.

Milton Friedman suggested a 23.5 percent flat income tax rate in his 1962 book, “Capitalism and Freedom.” Economists Alvin Rabushka and Robert Hall devised a 19 percent flat tax, which would be filed on a postcard and combined with personal exemptions for married couples, single-parent families and dependents. Others have suggested flat tax or fair tax models with different rates and deductions, including Dick Armey, Richard Shelby, Herman Cain and Steve Forbes.

Sadly, it was Mr. Forbes’ decision to champion the flat tax during his two presidential runs that helped set this concept back into the dark ages. Left-wing Democrats mocked his personal wealth and social standing. They cast his level-headed proposal as a money grab for the rich and powerful.

Hence, Republicans washed their hands of this affair. Many still shudder when they hear “flat tax” mentioned in a political conversation.

They shouldn’t.

The trick is to propose one flat tax (and only one) at a low rate, such as 20 percent. Meanwhile, suggest one major personal exemption, such as retirement or marriage, or else you’ll appear greedy.

It’s also important to emphasize this key finding from the 1995 Kemp Commission: “A flat rate tax would not only be a fairer system for middle-income Americans but also would abolish income taxes for relatively poor people by providing for a generous personal exemption.” Removing low-income Americans from the tax rolls — for good — would be a huge selling point for both political parties.

Moreover, prove what others have failed to do in the past: A flat tax would benefit all Americans.

Economic historian John Steele Gordon wrote in the May-June 1996 issue of American Heritage that the marginal rate (tax on the next dollar of earned income) may be flat, but the effective tax rate (the amount of total income taken in taxes) is progressive. While a straight comparison of graduated personal income taxes with a flat tax favors the wealthy over the middle class, that’s not valid when you directly compare personal and corporate income taxes.

Is America ready for a flat tax revolution? I’m not sure. Depending on what New Mexico decides, flat may be where it’s at.

Michael Taube is a contributor to The Washington Times.

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