The Beauty of a Flat Tax

by Byron Schlomach, Ph.D.
Goldwater Institute
 
With all of the scrambling at the Capitol to finalize a budget before the clock ran out on the fiscal year last night, one particularly good idea bubbled up out of the morass­–converting Arizona’s income tax from a graduated system to a 2.8 percent flat tax by 2012.

With a flat tax system, everyone pays the same tax rate on every dollar of income earned. The beauty of a flat tax is that it does not penalize people for working harder and earning more, like a graduated tax does. And, under this proposal, no one’s tax rate would go up, since those currently paying less than 2.8 percent would be exempt. This system has worked well in other states like Pennsylvania. Utah has also recently adopted a flat-tax system.

Some object to low-income people with less discretionary income paying the same tax rate as higher income people. However, a recent Goldwater Institute report by Dr. Art Laffer and other economists predicted that a flat-tax would change incentives so dramatically that 112,000 jobs would be created in Arizona as a result. These are jobs that would go to many people with modest incomes. Besides, the current proposal would exempt anyone earning less than $10,000 from the income tax altogether.

In 1986 the federal income tax was flattened somewhat when the top marginal rate fell from 50 percent to 28 percent and many deductions were eliminated. Tax revenues from higher income brackets increased and the 1986 reform is widely credited with helping to create the long net economic expansion we enjoyed until recently.

If an income tax, which is a direct tax on work, effort, and innovation, has to be part of Arizona’s tax mix, a flat tax is the best way to do it.
 
Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute.


Comments

  1. Emily_Carson says

    Did this pass?

  2. No thank God it didn’t It was fatally flawed and had way too many questions. The biggest being, why give state tax cuts that increased liability for federal taxes. It’s bad enough the waste we have in state government but the Federal government is just a big black hole.

  3. Flat tax rates are good, but this bill would have reduced exemptions and increased taxable income for many people. Then, Jan Brewer would try to get a higher income tax rate on even more taxable income.

    I understand that tax deductions distort private decision making, but the best solution is to reduce marginal tax rates PERIOD and not try to reduce rates while taxing more of our income.

  4. When I get a chance, I should read the Laffer study. Schlomach doesn’t give us even a hint of its findings, save a number, and doesn’t have the good sense to provide the title. Very aggravating.

    What really needs to be done on this is for somebody to estimate how who (how many, at what income levels) is left worse-off due to a flat tax.

    Off topic, I don’t think Schlomach understands how much it makes him look like a pompous buffoon to write of a “Dr. Art Laffer” and to sign his own name “Byron Schlomach, PhD.”

  5. People aren’t “penalized” for working harder under a progressive tax system. That would imply that people would try to limit their income to stay in a lower tax bracket which is absurd.

    Ben – good luck finding the report. Every link I have tried to the report on the Goldwater site seems dead.

  6. Actually, there is a “welfare trap” in the current system where there is an effective marginal tax rate of greater than 100% for some people. That’s not by design, but it sure is perverse.

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