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The Importance Of A 'Pure' Flat Tax

excerpted from the National Center for Policy Analysis' Daily Policy Digest

Advocates of a flat tax are stressing the importance of making it a pure flat tax -- without hanging on to a slew of deductibles.

Pressure will be strong to retain the deduction for home mortgage interest. But this would be unwise and unnecessary, they contend.

• Removing taxation of interest income will lower interest rates -- which would reduce mortgage payments, thus offsetting the loss of the deduction for most taxpayers.

• Since slow or negative economic growth severely affects home prices, the flat tax would stabilize the housing market by bringing higher long-term growth. Critics claim the flat tax would jeopardize charitable giving by removing the deduction.

Flat-tax supporters see it differently:

• They point out that the deduction isn't central to a decision to give, since some 80 million Americans now volunteer their time, with no tax deduction at all.

• Also, almost half of all charitable cash contributions come from people who don't itemize -- and thus do not gain from the deduction.

• Of $117 billion donated in 1991, $56 billion came from non-itemizers.

• Of the $61 billion that was deducted, 54 percent came from Americans in low-to-moderate tax brackets.

• Thus, three of every four dollars donated do not lead to a substantial tax benefit.

Advocates say that aside from particular deductions, any loopholes could undo reform because they would be precedents for restoring other special breaks. Even a few loopholes in a reformed federal tax code would be an open invitation to future tinkering.

Source: John Berthoud (Alexis de Tocqueville Institution), "For a "Pure" Flat Tax," Investor's Business Daily, January 31, 1996.