Tuesday, July 19, 2005

First of an exclusive three-part series of excerpts.

I believe the stage is now set and that conditions are more conducive than ever to the introduction of a flat tax in this country. Our prior belief in a 1950s “government knows best” high-tax approach has been replaced by widespread recognition that a flat tax which combines stark simplicity with a tax cut would generate more, not less, government revenue.

The salutary effects of tax reduction on the economy have been demonstrated. Starting with the Harding-Coolidge tax cuts in the 1920s and the Kennedy tax cuts in the early 1960s, we have seen how lower tax rates produce prosperity. (Amazing to think that the Democrats in the 1960s were the tax cutters and the Republicans thought such cuts were fiscally irresponsible, a total role reversal from today.) In the late 1970s, the Kemp-Roth tax cut proposal for an across-the-board 30 percent tax cut was adopted by Ronald Reagan when he became president and launched what became the then-longest economic boom in American history.

As our history chapter makes clear, Reagan’s dramatic reforms were undone by subsequent administrations. Today President Bush is attempting to revive meaningful tax reform with his call in 2001 for elimination of the death tax, and two years later, a similar call for doing away with the dividend tax. He also ushered in a cut in the capital gains tax and allowed more expensing of investments for business. Yes, there have been roadblocks. The president’s proposal for supersavings accounts was quickly dropped; the death tax expires in 2010 for just a year, to be reincarnated in 2011. And even the president’s 2005 panel on tax reform, which was formed as I wrote this book, will base its recommendations on static analysis techniques (see chapter seven) believed by many experts to be highly inaccurate in predicting the impact of tax initiatives, especially tax cuts, on the economy.

And yet … the spirit of reform is in the air. The administration has proposed a host of free market initiatives—from taxes to tort reform to private Social Security accounts—that are causing us to reexamine how the government is structured and financed and how it provides services.

At last many people are asking, just how much is the government entitled to take from what we earn? And how much is too much? Meanwhile, ordinary citizens approach me at airports, TV studios, professional and social events, asking: Do you think that we will ever see a flat tax? There is a plaintive tone, a note of frustration in their voices. Small business people complain that, for all the smooth talk, the politicians don’t get it. All they care about, they say, is finding excuses to increase government spending and get as much money as they can without losing their jobs. They don’t understand that every dollar they take is one that we need to pay our people and stay in business. They don’t understand what we go through.

That’s why I wrote this book—to get beyond the sound bites, the political agendas that so often color day-to-day reporting and, instead, encourage a full and reasoned discussion of the issues during this critical period of national debate; to show in clear and compelling terms that the flat tax works. The evidence is there—in the historical facts, economic statistics, and the experiences of nations that have implemented a flat tax system.

The need for a flat tax could not be greater at a time when tax reform overseas is helping to produce new global competitors—countries in Asia and Central and Eastern Europe whose low tax policies have spawned a gold rush of foreign investment. Even high-tax nations in Europe with their stagnant economies have awakened to the threat of these emerging dynamos. America needs to respond.

The flat tax is a reform of our federal income tax system. It does not affect, for example, state and local taxes. But, contrary to what some may fear, it will generate increased government revenue. And that powerful example will induce, I believe, similar reforms in state and local taxes.

Another fact that people seldom realize: the increased revenues and increased value of the nation’s assets that will result from the flat tax will certainly help us grapple with the fiscally challenged Social Security and Medicare programs.

America has a great future. The flat tax will help us achieve it.

Steve Forbes is the author of “Flat Tax Revolution.” The excerpts are from that book.

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