SACRAMENTO, CA - Earlier this month, the President's Advisory Panel on Federal Tax Reform recommended two plans touted as making the tax code more simple and fair. Though the plans rework the tax brackets and tinker with deductions, neither would institute the most simple and fair system of all: a flat tax.

A flat income tax would charge a single rate to all taxpayers. It would scrap the current structure's escalating brackets, endless tabulations and confusing deductions and exemptions. With a flat tax, the tax code would be easy to understand and implement.

A taxpayer would be allowed one personal deduction, or a joint deduction if married, plus one additional deduction per dependent. That tax base would then be multiplied by the flat tax rate, and presto, there's your tax burden. This simplicity would not only save Americans time and money, it would be the fairest way to tax.

The current system has six tax brackets, ranging from 10 percent on income below $7,300 for single filers and $14,600 for married filers, to 35 percent on income over $326,000. Because of the progressive structure, those with higher annual incomes must pay disproportionately more than those who make less. The system is so progressive that the top 20 percent of taxpayers--those who earn above $84,000 annually--pay 84 percent of total taxes in the U.S. The top ten percent of taxpayers--those making more than $123,000--contribute more
than half (58 percent) the government's revenues.

This skewed structure punishes an individual for earning more. A flat tax eliminates this disincentive since each dollar earned is taxed the same. A person making $100,000 would pay ten times as much in tax as he would if he made $10,000. This ensures that the "rich'' still pay more, but that they do so proportionately.

Due to the abolition of confusing deductions and exemptions, individuals with the same income will pay roughly the same amount in taxes. Under the current system, effective rates differ greatly depending on which loopholes taxpayers can exploit.

While the U.S. and much of Western Europe retain progressive structures, flat tax systems have been adopted in eight former Soviet republics. Though the nominal rates vary, all these nations have seen tremendous GDP growth, booming revenues and a decrease in tax evasion since implementing a flat tax.

Unfortunately, both of the President's Advisory Panel plans fall short of proposing a flat tax, although the plans do call for a reduction in the number of tax brackets. One plan would leave four brackets ranging from 15 to 33 percent. The second would have just three brackets of 15, 25, and 30 percent. Both of these proposed structures slightly lower tax rates, especially in higher brackets.

The plans also include a number of beneficial provisions. They lower the tax rates on capital gains and dividends, and rid the tax code of the unintentional marriage penalty. They would also abolish the Alternative Minimum Tax, which was originally an additional tax on the wealthy but due to a lack of inflation adjustment will penalize almost a third of taxpayers by 2010.

Though these changes are needed and long overdue, if Congress is truly serious about implementing a system that is fair and simple, it will turn to a flat tax.

Anthony P. Archie is a public policy fellow at the Pacific Research Institute. He can be reached via email at
aarchie@pacificresearch.org.