The flat tax is, if nothing else, startling. It has evoked enthusiasm from such disparate individuals as Ralph Nader and Jesse Helms, plus signs of interest from the Reagan administration. But as Congress prepares to examine this tax reform vehicle, it is vital that the elements of the flat tax concept which political foes can agree upon be clearly defined. For, like the proverbial elephant, the flat tax may lose much of its charm once the true features of the beast are made widely known.
Enactment of a flat tax would raise a number of serious political and substantive problems. Despite all its shortcomings, the present tax system is, on balance, slightly progressive. On the other hand, the flat tax would redistribute a greater share of the income tax burden onto the backs of the lower- and middle-income taxpayers. This income-tax regressivity would be in addition to that of the social security tax and other taxes. The social security tax is regressive because it takes a larger percentage of the income of lower and middle class salaried individuals than of the rich. If both the rich and the poor pay a flat tax at the same rate, the combined effect of the social security tax (which only applies to the first $32,400 of wages) and the flat tax would be to impose a higher proportional tax burden on the lower and middle class than the rich.
As more attention is devoted to the flat tax, this fact will undoubtedly be given popular currency. In light of consistent poll results showing the majority of Americans opposing abandonment of a graduated income tax, the news that the flat tax could actually promote regressivity may greatly undermine congressional enthusiasm for the flat tax concept.
Furthermore, broadening the tax base (by eliminating tax preferences, and thus tax shelters) would impose enormous transition costs on certain sectors, particularly the housing industry. In response to elimination of the mortgage-interest deduction, real estate values would fall, and many millions of Americans would find their ''one safe investment'' jeopardized or destroyed.
Moreover, certain existing tax preferences are arguably socially beneficial, rather than harmful. For example, the deduction for charitable contributions can be justified on ''free rider'' grounds. Although most individuals might favor higher aggregate charitable giving, they would ''let the neighbor contribute'' and ''free ride'' on his generosity, absent the lure of tax benefits.
Multiple free riding could lead to a far lower rate of charitable giving than society would desire collectively, if it could vote on the matter and know that allm individuals would be made to share in this burden. Tax credits for particular purposes, e.g. energy conservation, may yield ''positive external benefits'' to third parties, which could not be captured if tax preferences were totally wiped away.
Naturally, arguments along these lines are self-serving - it is very easy to conjure up ''free riders'' and ''positive externalities'' when valuable tax advantages are being threatened. Nevertheless, in a few selected instances - charitable giving being perhaps the best example - these arguments may be compelling.
Thus, as a practical matter, enactment of a pure flat tax with only one rate and no tax preferences may be politically impossible in the foreseeable future. However, this does not suggest that the flat tax should be consigned to the political dust heap. On the contrary, the lure of lower rates makes substantial base broadening a realistic possibility, if concerns about the inequity of abandoning progressiv-ity can be overcome.
These canm be overcome by the simple expedient of advocating a progressive tax with lower rates and base broadening. Supply-side concerns center on the overly high level of tax rates, notm progressivity per se. Accordingly, conservative support for a pure flat tax probably can be translated into support for a mildly progressive tax with substantially lower marginal rates. With this ''unfairness'' issue removed, the focus of congressional debate could then turn to base broadening.
The knowledge that the broader the base, the greater would be the achievable rate reductions hopefully would provide sufficient momentum for the repeal of most preferences. A few politically vital preferences, such as the mortgage-interest and charitable deductions, could be retained, and perhaps phased out over time to achieve even more substantial base broadening.
In summary, a realistic agenda for tax reform based on the flat tax concept may be achievable. Inevitably, some of the beauty of the pure proposal would have to be sacrificed. Nonetheless, such a sacrifice would be well worth the while, if the vital national goals of increased aggregate productivity and reduced sectoral tax distortions could thereby be achieved.