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US moves - quietly - toward a flat tax

By David R. FrancisColumnist / December 1, 2003

[Editor's note: The original version omitted the writer's byline.]

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Without much public debate or even awareness, the United States is heading toward an almost flat tax.

That means the middle class will pour nearly as large a share of its income into tax coffers as millionaires and billionaires do. Throw in another tax cut along the lines of the two successfully supported by President Bush, and the middle class could actually pay a little more.

That change would reverse decades of US policy and constitute a major victory for some conservatives who have long advocated a flat tax.

"Another significant tax cut could be enough to eliminate progressivity from the US tax system," says Brian Roach, an economist at Tufts University in Medford, Mass., and author of a new analysis on what citizens really pay to all levels of government - federal, state, and local.

Ever since the inauguration of the modern income tax, in 1913, the US has relied on a simple rationale. The well-to-do pay a larger share of their income in federal taxes than the rest of Americans, because the rich can afford it. In return, the government protects their wealth and property. The gap in tax rates has varied over time. (In 1913, only 0.5 percent of the population paid the tax, and rates rose from 1 percent to 7 percent as income increased.) But it has always remained progressive.

Then in 1996, Republican presidential candidate Steve Forbes championed a 17 percent flat tax that would eliminate personal deductions and many other loopholes, and exempt interest, dividends, and capital gains. This flat system, he argued, would bring in about the same revenues and be far simpler. Though receiving much attention during the campaign, Mr. Forbes did not win the Republican nomination and his proposal soon faded into obscurity.

Today, with state taxes becoming more regressive - and the two Bush tax cuts providing large tax savings for the rich - the tax system is moving in the direction of a flat tax, but doing so out of the spotlight. For example, despite sharp debate about the administration's tax cuts on the campaign trail, talk about whether taxes are regressive or progressive is hardly material for the stump speeches of presidential candidates.

A break for the poor

Perhaps that's partly because the system looks likely to remain progressive for the lowest-income Americans. The poorest 20 percent of households pay on average about 19 to 20 percent of their total income, and that's unlikely to change, according to Mr. Roach's analysis. Generally, the poor pay no federal income tax. But they do pay Social Security and Medicare taxes on earned income and various federal or state sales taxes on purchases.

But at the top, the tax system has already become regressive. The super-rich pay proportionately less in federal income tax than the merely rich. In 2000, the nation's 400 richest taxpayers, making an average $173 million, paid an effective tax rate more than 5 percentage points lower than those making $1.5 million to $5 million, notes economist Martin Sullivan in Tax Notes magazine.

That gap has probably shrunk a bit since then. In 2000, the peak year for stock market prices, the super-rich probably saved some taxes on their huge capital gains. (Capital gains are taxed at a lower rate than ordinary income.) Since then, stock-market capital gains have diminished. But Congress also cut the capital gains rate from 20 to 15 percent - a provision especially beneficial to the rich.

"At the rate we are going, in which more and more investment income is simply untaxed, we will end up with a federal income tax that is not only regressive at the top, but regressive overall," warns Richard Kogan, an economist at the Center on Budget and Policy Priorities in Washington. "The middle class will be the tax-bearing class."