Hi friends,
Iām working on something more substantive for next week but I just listened to my e-pal Kamolika Das talking about āthe flat taxā on a Bloomberg podcast and decided my notes on the episode would make for a suitable Substack.
What is a flat tax, you ask? Well, itās nothing! A flat tax is just an income tax with one single tier (or bracket) that applies to all taxable income as opposed to multiple tiers, with higher rates on earnings above various thresholds. Flat taxes are preferred by conservatives because they tend to be lower and save rich people a whole lot of money. I say ātheyāre nothingā because income taxes vary by many characteristics other than the number of brackets, and so āflatā is just one specific but not particularly telling detail, like a blue car. Regardless of brackets, a state can effectively create a tiered structure by exempting more income from taxation. Or, as Tax Foundation VP Jared Walczak pointed out in a recent blog post, states might have tiered income taxes that are essentially flat because their highest rates kick in at very low levels of income. But moving to a flat tax almost always means dropping the top rate, and that obviously benefits the rich the most. Hence popularity among conservatives.
Why do I care enough to write a full post about one 28 minute podcast on a relatively obscure income tax issue? Well, thereās something about how conservatives like to feel righteous in their horrible ideas about taxes that really grinds my gears. Often, they do it by inventing and repeating a bunch of technical nonsense meant to sound objective. The āflat taxā discourse is a way to do just thatāa marketing gimmick centered on the alleged technical benefits of a flat tax, aimed at distracting from the fact that flat taxes take sorely needed revenue out of our communities and put it back in the pockets of top earners. I find this disingenuous āanalysisā nauseating and the Bloomberg podcast episode is full of it.
The episode featured two perspectives on a wave of tax cuts in Arizona, Iowa, Georgia, and Mississippi, all of which pared down income taxes down to a single rate. In her part of the episode, my pal Kamolika makes all the important points about why these tax cuts are bad. First and foremost, she points out, they reduce tax revenues by hundreds of millions or billions of dollars that are badly needed to fund public goods like schools, transit, and health care. In the case of Iowa, for example, the fully phased-in income tax cut will eat up $1.65 out of a $2 billion surplus. The cost of public services like education and road repairs will rise, and Iowa will be unable to meet the basic needs of their citizens. Though smaller, Mississippiās $500 million cut might be an even bigger disaster since it is already one of the most underfunded states in the country.
The other part of the issue, Kamolika reminds us, is that the benefits of cutting higher income tax brackets go overwhelmingly to the rich, while a larger relative tax burden is pushed onto those with less. That, or lost revenues result in cuts to services and programs. Usually itās a mix of both and thatās a disaster for everyone.
Kamolika does a great job explaining all of this and her part of the show is worth a listen. But the interview I want to discuss in more depth is with Katherine Loughead who works at the conservative Tax Foundation and thinks flat taxes are good. Loughead makes three arguments, which I will discuss in turn:
1. Flat taxes are easier to understand and simpler to administer. I start with this because it is the most telling in terms of the Tax Foundationās strategy: Make some smart-sounding technical arguments and disassociate āgood tax policyā from the suffering and obvious public sector problems it will cause. But the alleged technical benefits donāt just matter less than the public investments on the other side of the ledger, they are also total BS: Income taxes are made simple or complicated by a number of details not related to how many tiers they have. In fact, income brackets are probably one of the simplest features that could be added to an income tax. Calculating taxable income is by far the most complicated part of computing income tax liabilities. It requires accounting for numerous subtractions, deductions, exemptions, as well as the addition of credits and sometimes the application of various formulas. But once calculated, taxable income can easily be applied to whatever rate structure you want, so saying a flat tax is simple because it has only one rate is like saying a bicycle is simpler than a tricycle because it has fewer wheels.
Loughead also states that flat taxes are good because their revenues are easier to predict. This is an even more ludicrous idea. The notion that revenue prediction is a public policy priority on part with access to quality schools, transit, or housing is laughable. And, of course, the argument itself is also just made up nonsense: The hard part about forecasting revenues comes from the difficulty of predicting overall economic performance. How much will employment rise, production grow or shrink, or wages rise or fall? This is a tough task and forecasting firms often get it wrong. But variable tax rates are not the hard part of predicting revenue. I have no idea where this argument came from but it sounds smart if you donāt think about it, and thatās pretty much what this whole interview consists of.
Ironically, when asked about flat taxes being less progressive (taking relatively less from top earners), Loughead suggested child tax credits and other special deductions and exemptions could be introduced based on income, in order to relieve the burden on lower-income families. Wo much for all that simplicity!
More broadly, itās unclear for whose sake a simple income tax is important. In theory, a simpler tax might be easier to file. But Americans lack an accessible free filing option anyway, so Iām not sure how much simplicity would benefit us. And, again, a flat tax doesnāt solve for simplicity, since varying exemptions, deductions, and credits are the hard part and those donāt go away with a single rate.
What all of this adds up to is a very bad reason to slash hundreds of millions or billions of dollars of state funding and give huge tax breaks to the wealthy. I know I am writing a bit more than you might care to read about these wonky arguments but these sort of technical-sounding points annoy me so because they seek to paint taxes as a dense science that should be judged separately from their impact on state funding. That seems absurd to me since that is why we have taxes to begin with.Ā
2. Flat taxes are less distortionary. The ādistortionā in this argument refers to economic decisions, like how much to work or invest. The theory is that higher marginal income tax rates will discourage people from working or investing because they will take home 80% of their pre-tax earnings instead of 82% or whatever. I find this point kind of silly for the obvious reason, and also because America has had a progressive federal income tax forever and it hasnāt seemingly stopped people from earning as much as they can. If anything, business investment has declined as marginal rates have lowered, according to research performed by my former colleague J.W. Mason when I was just a wee policy pup at the Roosevelt Institute.
In her remarks, Loughead focused on the impact that marginal tax rates have on business investment as opposed to individual labor decisions, which I found interesting. Individual income taxes do matter for business decisions since many businesses are organized as partnerships, which pay personal income taxes instead of corporate profits taxes. But the more common argument associated with income taxes is about how much people choose to work (the theory being higher taxes ā less incentive). Iām not sure why Loughead danced around this one, but my guess is that it might have something to do with the current labor shortage in low-wage jobs.
These jobs donāt push earners into higher brackets, so the argument that higher tax rates are a cause of our workforce supply problem seems sort of dated. The bigger barrier to work these days seems quite obviously to be a lack of good paying jobs with benefits that can attract people to work. That, and the high price of childcare, housing, and other basic needs that enable workforce participation. These things, of course, are often funded by government revenues potentially erased by flat taxes, so maybe Loughead focused on business investment decisions because she didnāt want to be vulnerable to that obvious critique.
Without going on too much longer about this, I just donāt buy that it matters. Yes, investment firms and some others may hunt low-tax places. But the majority of businesses open because there is an opportunity to make money and fill a need, and their businesses succeed or fail based on the quality of the idea and its execution, as well as as the strength of the community it relies on. The fear mongering about distorting economic behavior and so on are just that. Speaking of whichā¦
3. Finally, Loughead argues that flat taxes are more competitive. This is the standard Tax Foundation tax flight argument, which holds that lower taxes will attract more workers and businesses. Iām not going to get too deep into tax flight here, but there is little evidence that taxes actually impact migration, and to the extent it may, the impact is nothing compared to the much more important dynamics of general human and economic well-being that are largely shaped by collective investments in schools, health, infrastructure, and so on. And while Tax Foundation peeps love to use phrases like āincentives matterā or suggest that tax rates may matter more than ever because of the mobility extending from remote work, they also know they donāt have a leg to stand on. Last year, the (Republican) Chair of the Senate Tax Committee here in Minnesota invited the Tax Foundationās Jared Walczak to present and when asked about migration even he stopped short of claiming any likely population growth stemming from tax cuts.
This argument about competitiveness also conflicts with the other points that suggest single brackets are a technical virtue, rather than just an excuse for top-heavy tax cuts. With this point, Loughead reveals her deeper motivation, by admitting the real reason to like flat taxes is because they tend to be lower. And of course we know who that works for.
Iām about done, but to strike a more conciliatory tone before I close, Iāll say there is one point where I agree with the Tax Foundation and disagree with Kamolika. At one point in the show, the idea of exempting grocery store purchases from sales taxes comes up. I might write more about this another time, but for now Iāll just say that this is a bad deal for working people. In a pretty sharp analysis, Walczak finds the richest 10% spend 3-times as much on groceries as the bottom 10%, which means they pay 3-times as much in sales taxes. The top 40% all spend double or more. Groceries are a huge category of expenditure and the revenue these sales taxes generate can pay for enormously important public investments. A lot of people I really respect disagree with me on this, but consumption taxes are an important revenue source in every successful welfare state so cutting them with poorly targeted tax breaks is the wrong idea.
Ok, Iāve gone on long enough. The key takeaway, as always, is that taxes matter a whole lot less than the things they fund. But the staff at the Tax Foundation do not extend their analysis to consider the value of public goods or the essential role they play in upholding a stable, safe, and prosperous society.