Media Reality Check
  Notable Quotables
  Press Releases
  Media Bias Videos
  30-Day Archive
  The Watchdog
  About the MRC
  MRC in the News
  Support the MRC
  Planned Giving
  What Others Say
  Take Action
  Gala and DisHonors
  Best of NQ Archive
MRC Resources
  Site Search
  Media Addresses
  Contact MRC
  Comic Commentary
  MRC Bookstore
  Job Openings
  News Division
  NewsBusters Blog
  Business & Media Institute
  Culture and Media Institute

Support the MRC


What The Media Tell Americans About Free Enterprise

Tell a friend about this site

January 1996


A Flat Tax Fact Sheet
Guest Editorial, by Dan Mitchell

Virtually every Republican presidential candidate has endorsed some version of the flat tax, as has the Kemp Tax Reform Commission. This support is mirrored by public opinion, with polls showing anywhere between one-half and two-thirds of taxpayers prefer the flat tax over the current system. Needless to say, with all this attention, it comes as no surprise that many in the media have begun writing about and describing this revolutionary proposal. Unfortunately, this new-found publicity has been accompanied by frequent errors. In order to maintain accuracy, reporters should avoid these two most common mistakes:

Mistake #1: Many reporters write that the flat tax contains a huge loophole for the rich because they have trouble understanding how income is taxed under a flat tax. This error shows up in several ways. Some report that dividend and interest income is tax free. Others write that only labor income is taxed.

Reality: The source of these common mistakes is that the most well-known versions of the flat tax collect taxes on capital income at the source. Under the Armey- Shelby flat tax, for instance, a corporation must pay tax on behalf of shareholders before the income is distributed in the form of dividends. This approach, which reduces administrative costs and ensures greater compliance, makes a dividend check similar to a worker's paycheck in that both are after-tax payments. The same is true for interest income. Under the flat tax, businesses and financial institutions pay tax on interest payments they make, so there is no need to collect the tax a second time at the individual level. Once again, the motive for taking this approach is simplicity and compliance.

Message: Reporters can argue that the tax should be collected at the individual level. They can even argue that the income should be subjected to two or more layers of tax. Honesty demands, however, that they acknowledge that all income is taxed with a flat tax, but only taxed once, and that tax is collected in the least costly fashion possible.

Mistake #2: The flat tax will increase the deficit and/or boost taxes on the middle class. Many news reports assume that a flat tax will require a tax rate of 21 percent or more to offset reductions in excessive tax rates on the rich. Even with the generous personal allowance, this tax rate would adversely affect the middle class. Failure to levy a rate that high, on the other hand, would cause larger deficits.

Reality: With a 17 percent rate, the Armey-Shelby flat tax explicitly is designed to reduce the amount of money the government collects. As a result, even without making any assumptions about faster economic growth expanding the tax base (the supply-side effect), it is possible for all income classes to enjoy a lower tax burden. With regards to the deficit, the plan imposes strict new limits on government spending. Enforced by automatic spending control mechanisms, this ensures that the deficit will not climb. The key principle is that the flat tax is accompanied by spending savings to keep the overall package deficit-neutral.

Message: Conclusions that the middle class is harmed are based on analysis of a revenue-neutral tax proposal which does not exist. Reporters can condemn the proposal for reducing the amount of money the government collects, and they can write that the growth of government would have to be significantly slowed to keep the plan deficit neutral as sponsors propose, but it is inaccurate to assert that the middle class will pay more or that the deficit will increase.

With help from biased sources such as the Clinton Treasury Department and the union-funded Citizens for Tax Justice, many reporters have unwittingly (we hope) made one of these mistakes. Some, like Al Hunt of The Wall Street Journal and Ann Reilly Dowd of Money, have made both mistakes in the same article. Fair and accurate reporting depends on the public receiving information in a straight- forward fashion. Avoiding these two mistakes will help ensure the upcoming tax debate is marked by legitimate policy issues rather than distorted media messages.

Dan Mitchell is McKenna Senior Fellow in Political Economy at the Heritage Foundation.


Rich Noyes


Home | News Division | Bozell Columns | CyberAlerts 
Media Reality Check | Notable Quotables | Contact the MRC | Subscribe

Founded in 1987, the MRC is a 501(c) (3) non-profit research and education foundation
 that does not support or oppose any political party or candidate for office.

Privacy Statement

Media Research Center
325 S. Patrick Street
Alexandria, VA 22314