What's Flat?

THE leading proponents of a flat tax are economists Robert Hall and Alvin Rabushka who suggested levying a 19 per cent flat rate on salaries. There would be no deductions, though Hall and Rabushka suggested exemptions of $16,500 for a married couple and $4,500 for a child. Capital gains, interest, and dividends would be exempt from taxes. Businesses would lose many deductions, although investment spending would get an immediate 100-per cent first-year tax write-off. Companies would pay a 19 per cent rate on net profits after deducting wages, salaries, pensions and cost of goods and materials.

Steve Forbes' flat tax US presidential campaign caps the individual's taxes at 17 per cent of income above $13,000, while eliminating deductions for home mortgages and property taxes. With a deduction of $5,000 for each child.

With the flat-rate structure, lower and middle-income salaried workers would pay more taxes while the wealthy would benefit. However, flat tax exponents are trying to highlight that the tax rate on investment income under Forbes' plan will be nil. The flat tax would produce a surge in investment and capital formation which would ultimately benefit the middle-income group, they claim.

 At the same time, abandoning charitable and mortgage deductions would squeeze the middle class. As Businessweek commented: "Perhaps a 'modified', streamlined tax approach is called for, one based on two or three rates and allowing for a few most justifiable deductions."