Why Ted Cruz, Rand Paul — and Russian oligarchs — love the flat tax

And now, making its quadrennial, limited-engagement appearance before voters: the irresistible, feel-good, stump-speech staple known as the flat tax!

It’s so appealing, the flat tax. You just trash the entire labyrinthine tax code and start over with a system so simple it can be printed on one page. Two Republican presidential candidates — Sen. Rand Paul of Kentucky and Sen. Ted Cruz of Texas — favor a flat tax, though neither has spelled out the details of his plan. Sen. Marco Rubio of Florida, another presidential candidate, has a more detailed plan that would compress six income tax brackets into two and incorporate other ideas drawn from the flat-tax playbook. Assuming Jeb Bush enters the race, it’s likely he’ll call for a simpler and less burdensome tax code as well, as Mitt Romney did in 2012.

The flat tax has been a staple of conservative politics since at least the 1980s, and it was the centerpiece of Steve Forbes’s two presidential bids, in 1996 and 2000. But a federal flat tax has never come close to being enacted in the United States, and the prospects don’t seem any better now.

“The flat tax has been around for years and years,” says Howard Gleckman of the nonpartisan Tax Policy Center. “But the idea of doing a pure flat tax is just a pipe dream.”

Several countries do have a flat tax — but you won’t be hearing candidates mention them, because they’re not the sort of places America seeks to emulate. In Russia, there’s just one income tax rate: 13%. That might sound low, but Russia has a rigged economy in which the state earns revenue through shady deals and ownership of huge companies, well-connected oligarchs often slither out of paying taxes, and only the rank and file play by the rules. Other former Soviet republics have similar tax structures and their own problems with tax compliance.

Several eastern and central European nations — including Estonia, Slovakia, Romania, the Czech Republic, Ukraine, Bulgaria and Hungary — adopted a flat tax after escaping Soviet domination in 1989. A simple system with a single low tax rate seemed appealing to nations eager to adopt capitalism and lure global investors. But a flat tax tends to lose popularity when growth slows, hard times hit, and it suddenly seems like wealthy citizens are contributing less than their fair share. During the last few years, Slovakia and the Czech Republic repealed their single-rate system and imposed higher rates for wealthier earners.

Alllure of the flat tax

Still, the flat-tax plays well in political campaigns because it’s the kind of simple idea that seems intuitive to voters. And the idea of chucking a creaky, unpopular tax system for a shiny new one can easily be imagined as a free upgrade. Some polls suggest Americans love the idea of a flat tax, while others show they don't like it at all. It's probably safe to conclude most Americans haven't thought about the details enough to know for sure.

The basic principle barely needs elaboration: There should be just one tax rate that applies to everybody equally, with few loopholes that give anybody an unfair advantage. But turning that concept into politically palatable legislation turns out to be extremely difficult. Economists typically call a single tax rate “regressive,” because it imposes a heavier relative burden on lower earners than higher ones. That’s why most western democracies have “progressive” tax systems, with gradually higher rates for wealthier taxpayers: in general, western society accepts the idea that people who have more should pay more in taxes (though there remain sharp disagreements over how much more).

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A flat tax system can be modified to make it more progressive--but then it stops being simple. Rubio’s tax plan — co-sponsored by Republican Sen. Mike Lee of Utah and introduced in March — has two tax brackets instead of one: 15% for people earning up to $75,000, and 35% for those earning more. Most Republican flat-tax plans during the last three decades have called for a single rate of 20% or less. But that would generate far less revenue than the current tax system, leaving a huge hole in the federal budget that would have to be plugged through big spending cuts or sharp increases in other taxes — both sure to be unpopular. Rubio drew flak from conservatives for proposing a tax rate as high as 35%, but that’s necessary to keep the government afloat. And even then, the Rubio-Lee plan would fall far short of raising the revenue Washington needs to operate as it does now.

It's not so simple

To remain simple, a flat tax would also entail the elimination of most tax breaks. That, too, is problematic, since those tax loopholes, so often derided, benefit … practically everybody. There are tax breaks for lower-income workers, homeowners, people who get health insurance from an employer, and most people who invest in a retirement account. You could keep any number of them while still moving to a flat tax, but at some point, holding on to a bunch of tax breaks would defeat the purpose of simplifying the tax code and putting every taxpayer on equal footing.

The final problem with a flat tax is that it often entails a new consumption tax — which could be a national sales tax, a business tax that gets passed on to consumers, or some other variety — meant to make up the revenue lost through lower income tax rates. Many economists think it makes sense to tax consumption more and income less, because that would strengthen the incentives to work and save.

But this would also hit lower-income voters harder, unless there were exemptions meant to even out the burden. And even then, voters don’t want to hear about new sales taxes any more than they want to hear about losing tax breaks they’ve long relied on — even if they’d ultimately end up with a lower tax burden overall. Change is hard, as they say.

Most of the presidential candidates — including Democrat Hillary Clinton — agree that the U.S. tax code is too complex and burdensome and needs to be streamlined. So debate over a flat tax during the 2016 campaign might contribute to a slightly flatter tax code than we have now, with fewer tax brackets, perhaps, or at least fewer moving parts. But a truly flat tax, with just one rate and a few simple rules, will remain relegated to conservative campaign speeches and rallies. That may keep it alive, since the tradeoffs required to actually put one in place could spoil the whole idea.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.