THE IMPORTANCE OF A 'PURE' FLAT TAX
January 31, 1996
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.
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