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US moves - quietly - toward a flat tax

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Roach, a liberal, argues that the top 1 percent really don't need tax cuts because they have been doing extremely well in recent years. Between 1979 and 2000, the richest 1 percent enjoyed a 201 percent improvement in their average after-tax income. That compares with 15 percent for those in the middle 20 percent of the income spectrum and 9 percent for those in the bottom 20 percent.

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But Roach's tax burden projections (see chart) include some "ifs." Some projections assume that all the tax cuts of 2001 and 2003 are made permanent. Several tax cuts are now scheduled to expire by 2010.

For example, the estate tax, which hits the heirs of only the wealthiest 2 percent of households, is now scheduled for elimination in 2010. But the law Congress passed in 2001 calls for a return to 2001 estate-tax levels in 2011. Observers suspect Congress will not allow that to happen. Rather, it may raise the amount of an estate exempt from what some call the "death tax" to several million dollars. But should Bush be reelected and Congress remain under Republican control next year, the odds for permanent elimination of the estate tax are raised. Either solution would disproportionately favor the rich, but by varying degrees.

Prior to the 2001 tax cut, the richest 1 percent of households, making an average annual income just above $1 million, paid 42 percent of their income, or $431,800, in taxes to all levels of government. Under current law, they would pay 36.1 percent, or $371,200, in 2010 (see chart). Under current law, the rate would jump back up to 42 percent the following year.

Tax cut for the super-rich

But if the tax cuts are made permanent, these wealthy individuals would pay 33.3 percent or $342,600 in taxes. That would not be much more than those who are somewhat less affluent but still rank in the top 40 percent of incomes.

Not everyone agrees with the analysis. Roach's model is "completely wrong on the way the world works," says Daniel Mitchell, an economist with the conservative Heritage Foundation. It fails to take into account of the positive impact tax cuts have on the economy, he argues. Generally, the rich have more money left over after living expenditures to invest in business - and thus create jobs - than do the middle class. So if the nation wants to encourage growth, flat-tax proponents argue, it shouldn't impose extra taxes on those funds.

Pushing progressivity

On the other side, some Democratic presidential candidates are pushing to restore the progressivity of the system. They advocate eliminating the Bush tax cuts for the rich to free up federal revenues for additional public services, such as more comprehensive healthcare. Or the extra revenue could lower taxes for those with lower incomes.

The amounts involved are significant, according to Roach. Suppose the tax cuts for the top 1 percent were eliminated and the additional revenues rebated equally to the other 99 percent of taxpayers. Under current law, each household would get an extra $613.

"Note that these checks could be provided every year," varying slightly with the status of the economy, Roach says.

Roach has another calculation: If the tax cuts for the top 1 percent were eliminated and those additional revenues were distributed to the bottom 20 percent of households - those with an average income of $9,400, these low- income families would receive a check of $3,032 in 2010.

Of course, the American tax system changes over the years as Congress and state legislatures pass new laws. At the moment, though, the changes under consideration - a corporate tax cut and a new tax-advantaged savings plan - would provide more benefits to the well-to-do than those with lower incomes.