The Flat Tax

The Flat Tax
January 1, 2004

Current plans for a flat tax are usually based on a plan introduced in 1981 by economists Robert E. Hall and Alvin Rabushka of the Hoover Institution at Stanford University. The discussion below is excerpted from their pioneering book, The Flat Tax (Stanford, California: Hoover Institution Press, second edition 1995).

Under our flat tax, all income would be taxed once and only once, at a uniform low rate of 19 percent. Our plan is fair to ordinary Americans because it would permit a tax-free allowance of $25,500 for a family of four. The family would pay a tax of 19 percent on its earnings above that allowance. Millions of U.S. residents would no longer pay any income taxes. All wage earners would pay less tax under our flat tax than under the current system.

Our flat tax would eliminate the distortions of the present tax treatment of business. It would replace a hodgepodge of depreciation schedules with an effective investment incentive, a first-year write-off. It would reduce the current corporate tax of 35 percent to 19 percent. It would eliminate double taxation of business income by ending taxation of dividends and capital gains.

Our flat tax adheres to the principle of a consumption tax: People are taxed on what they take out of the economy, not on what they put in.

Our flat tax is not an academic abstraction. We have designed tax forms, rewritten the Internal Revenue Code, and worked out all the practical details. The flat tax has withstood the scrutiny of leading experts on taxation and has been endorsed enthusiastically by many of them. Both the New York Times and the Wall Street Journal have endorsed our flat tax. Both Republicans and Democrats have introduced it as bills in previous sessions of Congress.