Opponents of a flat tax claim that it would impose burdens on the poor, would benefit the wealthy disproportionately and would increase the federal deficit. However, an economic model that has been published in several peer-reviewed journals finds no basis for these claims.

The model divides the economy into 14 production sectors and 14 consumption sectors, then compares relative prices and quantities of the output of the sectors before and after a tax change and their overall effects. Analyzing the effects of the 17 percent flat tax proposed by Rep. Dick Armey (R-TX) and Sen. Richard Shelby (R-AL), the model finds:

• Production would increase for all industries except subsidized agricultural crops, which would lose their tax subsidies.

• The growth in production would be fueled by increased consumption, with most sectors growing between 2 percent and 4 percent.

• The fastest-growing sector of the economy would be savings, which would increase by 7.4 percent more than they otherwise would.

Critics of the flat tax allege that fundamental tax reform would benefit the rich at the expense of the middle class and would make the poor worse off by eliminating the Earned Income Tax Credit (EITC). However, according to the findings of the model:

• Every income group would gain, as the elimination of inefficiencies produced by the current tax system caused the economy to be larger than it would be otherwise.

• The greatest gain in percentage terms (7.6 percent) would go to the lowest-income Americans, those with incomes under about $13,000 a year, even with the elimination of the Earned Income Tax Credit.

• In percentage terms, the gains of the highest income group would be third highest among the six income groups.

The model also differs from Treasury Department findings that a flat tax would reduce government revenues. It finds instead that a flat tax would result in an annual increase of 1.8 percent in government revenues. This increase arises from the increases in the majority of sectors in the economy and accompanying increases in employment of labor, capital and land.

Source: Barry J. Seldon and Roy G. Boyd, "The Economic Effects of a Flat Tax," NCPA Policy Report No. 203, June 1996, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, TX 75251, (972) 386-6272.