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
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
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
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.