US already moving toward a flat tax

Simpler tax filing would be welcome to most Americans. A new AP-Ipsos poll finds that most Americans think federal income taxes are too complicated, but they're not eager to get rid of some deductions and tax credits. And when asked about instituting a flat tax, a majority doesn't like the idea. Some 57 percent of those surveyed say people with higher incomes should pay a higher tax rate, while 40 percent thought tax rates should be the same for everyone.

In 1913, only 0.5 percent of the population paid the tax, and rates rose from 1 percent to 7 percent as income increased. That income tax level has risen, of course, but progressivity remained an important element.

The system still has progressivity, but that element is shrinking.

When the top 1 percent of taxpayers, those making an average $978,000 last year, sent in their tax forms for 2004 to the Internal Revenue Service in recent weeks, on average they paid 24.6 percent of their income in federal taxes. That rate is down 4.3 percentage points from pre-Bush tax law.

All income brackets have got tax cuts under Bush. But the reductions for less affluent Americans are smaller, proportionally, than those for the millionaires and billionaires.

The "effective" tax rate is that which taxpayers actually pay. It isn't the higher marginal tax rate paid on their last dollar of income.

The poor, the near-poor, and the lower middle class do pay a lower effective federal tax rate. The bottom 20 percent, for instance, pay 7.9 percent - basically just payroll taxes for Social Security and Medicare.

When less progressive state and local taxes are added, the nation's tax system becomes even flatter. CTJ's analysis finds the top 1 percent were paying at a 32.8 percent rate, with the bottom 20 percent paying at a 19.7 percent rate.

A study last summer by the nonpartisan Congressional Budget Office (CBO) of effective tax rates basically confirms the flattening pattern shown in the CTJ analysis. Because the CBO uses modestly different assumptions - for instance, it ignores the estate tax - its numbers are slightly different.

Several factors explain the flattening in the federal tax code. Under Bush, the tax on dividends and capital gains has been cut - although not eliminated, as flat-tax proponent Steve Forbes proposed in his 1996 presidential bid. The wealthy own the bulk of stocks and other financial assets.

Under Bush tax-cut legislation, the estate tax shrinks and then expires in 2010. But it is slated to return to a 55 percent level on large estates in 2011. Permanent repeal, under consideration in the House this week, would flatten federal taxes further in the next decade.

The other tax legislation now under review is a budget resolution in the Senate that would eliminate income taxes on Social Security payments. This would primarily benefit affluent seniors. The rich would also gain, but it would be a drop in their bigger buckets.

The fate of both tax provisions is uncertain. The budget process will likely continue until the fall.

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