Flat Tax Alert: Hall Goes Wobbly

The Federal Reserve Bank of Minneapolis, in its June 2010 edition of Region magazine, published a lengthy interview with Robert E. Hall that covers a broad range of economic issues. One discusses tax policy. As most readers of this site know, Bob is my coauthor of four books (1983, 1985, 1995, 2007) and numerous articles on the flat tax.

Bob stated that “it wouldn’t be remotely practical to do it [tax reform] with a single positive tax rate now.” This is due, in his view, to the dramatic widening of the income distribution in the U.S. since 1981. “This means that the idea of the poor paying the same tax rate just seems less viable than it was when the income distribution was tighter.”

....”So I play around with systems that have, say, two brackets.”

The Tax Reform Act of 1986, signed into law by President Reagan, had two brackets of 15% and 28%. In 1991, President George H.W. Bush signed legislation that added a 31% bracket. In 1993, President Clinton followed with two higher brackets of 36% and 39.6%. Two brackets lasted just five years. Moreover, the administrative simplicity of the Hall-Rabushka flat tax quickly evaporates with the addition of a second or more rates.

I also need to restate the historical record of our joint work. Bob stated that “The origin of our initial flat tax effort was Rabushka coming to me in 1980 and saying, ‘I know what the people want. The people want a flat tax, but I don’t quite know what that is.’ And I said ‘I know what it is because I’ve been thinking about it since I was a graduate student.’”

Bob’s account is wrong. I had been observing Hong Kong’s approximate flat tax since 1973 and had looked at other cases in the Channel Islands of Jersey and Guernsey. I was asked to serve on President Reagan’s Tax Policy Task Force, which met between his nomination in August 1980 and election in November 1980. Having been dissatisfied with our 400-plus page report, I published a brief article in the March 25, 1981, edition of the Wall Street Journal entitled “The Attractions of a Flat-Rate Tax System.” Until that point, I had no knowledge that Bob had ever thought about the subject. Bob came to me and suggested that we write a flat-tax plan to replace the then current U.S. federal personal and corporate income taxes, which we did over the summer of 1981. We went public with the plan in the December 10, 1981, edition of the Wall Street Journal, entitled “A Proposal to Simplify Our Tax System.”

One other quibble is with his comment that the flat tax has not gone very far in the rest of the world. The dozens of postings on this site indicate otherwise.

Bob has not yet formally disassociated himself from the H-R flat tax. However, he has been less outspoken in its support in recent years. As president of the American Economic Association in 2010, I worry that this may be the year he walks himself back from the flat tax, explicitly stating a preference for a multi- bracket federal income tax.

The Flat Tax Percolates in Hungary

The selection of Viktor Orbán as prime minister, following his electoral victory with a two-thirds majority of his Fidesz Party in the final round of parliamentary elections on April 25, 2010, signals a new direction in Hungarian economic policy. After three days of meetings with his cabinet, Orbán presented a multi-point plan to parliament to address Hungary’s economic crisis, which consists of spending cuts and pro-growth tax reform.

As of this writing, the plan calls for a 16% flat rate tax on personal income, to replace the current two brackets of 17% and 32%. The rate was selected following an examination of flat-tax neighboring countries. (In mid-May, the prime minister’s office ordered a dozen copies of the German edition of “The Flat Tax.” Evidently the book reinforced Orbán’s predisposition for a flat tax.)

Enacting a flat tax on personal income would, according to the minister of national economy, enable the government to phase out 58 separate taxes, and underpin the government’s plan to reduce the burden of taxes on the economy. This blog will post details as they become available and the likely date of implementation.

On a related note, ground has been broken in Ireland for a discussion of a flat tax. Dr. Constantin Gurdgiev of Trinity College, speaking at the annual conference of the Institute of Certified Public Accountants in Maynooth on June 3, 2010, urged Ireland to adopt a 20% flat rate of income tax, replacing the current two brackets of 20% and 41%. Doing so would close the “welfare trap,” enhance Ireland’s competitiveness for foreign investment, and support its growing knowledge economy that requires highly-skilled people who are sensitive to tax rates.