Capitol Comment 181 - The Flat Tax Lowers Taxes for America's Families
April 20, 1998 By Michael Keegan
The American people are currently beleaguered by some of the highest tax burdens in history. The Tax Foundation recently reported that the median two-income family now pays $22,521 in federal, state and local taxes, or 38.2 percent of its income; up from 37.3 percent in 1996.1 Federal taxes now represent 19.9 percent of Gross Domestic Product (GDP), the highest peacetime percentage in history. By 1999, taxes will constitute 20.1 percent of GDP, the highest level since 1945. Congress and the president must get serious about passing real tax reform legislation, such as H.R. 1040, the Armey-Shelby flat tax bill, that will offer tax relief to millions of America's over-burdened taxpayers.
Critics of the flat tax have suggested that it would raise taxes on lower and middle-income Americans while providing tax cuts for the wealthy. However, the evidence simply does not support this claim. As the following chart indicates, with a 17 percent rate, and personal allowances that exempt the first $33,800 of income for a family of four, the Armey-Shelby flat tax liberates millions of families from federal taxes. The flat tax is also progressive; meaning that people who earn more will pay more in taxes.
Tax Burden Under the Armey-Shelby Flat Tax
Income Allowance Tax Base Tax Rate Tax Owed
$20,000 $33,800 $0 17% $0
$30,000 $33,800 $0 17% $0
$40,000 $33,800 $6,200 17% $1,054
$50,000 $33,800 $16,200 17% $2,754
$75,000 $33,800 $41,200 17% $7,004
$100,000 $33,800 $66,200 17% $11,254
Source: Citizens for a Sound Economy Foundation calculations.
Not only would lower and middle-income families pay little or no taxes under the flat tax, they would also benefit from higher incomes. A study by economists Barry Seldon, of the University of Texas at Dallas, and Roy Boyd, of Ohio University, found that, under a flat tax, families in every income group would see their disposable income-- money available to save and spend-- rise. As the following chart indicates, the greatest gain in disposable income would go to the lowest-income Americans.
Disposable Income Under the Armey-Shelby Flat Tax2
Income Change in Disposable Income
$0- $12,881 7.6%
$12,882- $25,764 1.6%
$25,765- $38,646 2.5%
$38,647- $51,529 1.4%
$51,530- $64,412 1.0%
$64,413 and up 2.4%
There is little debate that the current tax system slows the rate of economic growth. This can be largely attributed to the disincentives that result from high marginal tax rates, which punish those people who work hard by taking more of their money as they increase their income and are pushed into higher tax brackets. History has shown that lower marginal tax rates, which allow everyone to keep more of what they earn, are a catalyst for economic growth.
Economists agree that a single-rate system, such as the flat tax, would spur economic growth. Unlike the current system, with five marginal rates ranging from 15 to 39.6 percent, the Armey-Shelby flat tax would not punish hard work and success. By lowering all marginal rates to a flat 17 percent, and by eliminating punitive taxes like the capital gains tax and the estate tax, the flat tax would provide everyone with a greater incentive to work, save and invest.
The importance of economic growth cannot be underestimated. Economic growth leads to higher wages, more jobs and improved living standards for all Americans. Even if the flat tax increased yearly economic growth by only half a percentage point (which is a conservative estimate), the average income for a family of four could be as much as $5,000 higher after ten years than under the current system.3
The American people are at the mercy of a two-headed monster — record-high levels of taxation and a tax system that stymies economic growth. Simply making cosmetic changes to the tax code by lowering taxes here and raising taxes there is not enough. The current tax system must be scrapped all together and replaced with a low, 17 percent flat tax that provides tax relief to millions of overburdened taxpayers.
1Claire M. Hintz, "Tax Burden on American Families Rises Again," Tax Foundation Special Report, November 1997.
2Barry J. Seldon and Roy G. Boyd, "The Economic Effects of a Flat Tax," National Center for Policy Analysis, Policy Report No. 205, June 1996.
3Steven Pearlstein, "What’s the Speed Limit on Economic Growth," The Washington Post, January 15, 1995.
