Published in 1985 and still going strong:
The flat tax at 40

 

The principle of equity embodied in The Flat Tax is that every taxpayer pays taxes in direct proportion to his income. As incomes double, triple, or grow tenfold, tax obligations double, triple, or rise tenfold. Those who earn more pay more.

Alvin Rabushka and Robert E. Hall

Take Away

The Flat Tax is based on proportionality, simplification, fairness and is applicable equally to all taxpayers. The Flat Tax can be tailored to meet specific requirements, with both the tax base and the tax rate being selected according to specific needs and thus obeys the principle of equality before the law. The Flat Tax stands in sharp contrast to progressive tax rates, which are not only determined by a majority that is not itself subject to this rate, but also turns the principle of equal treatment on its head. The Flat Tax is highly topical and was successfully implemented in multiple countries.

Adam Smith

The Rule of Law with its equal treatment under the law code is the centerpiece of a free and democratic society and thus stipulates the basic principles of any fair tax laws.  Thus tax justice is not least of all, a moral issue and is among those questions of economic and social policy that have always been a source of pointed controversy.  In The Wealth of Nations (1776), Adam Smith formulated four taxation maxims that are still regarded as the main principles of a tax system that obeys the equal treatment under the law: Equality of taxation according to ability to pay, Certainty of taxation, Convenience of taxation for taxpayers, and Equity of tax collection for the state.

However, in most of today’s democracies the tax systems promote a progressive taxation, which applies uniform and equal tax rules to fundamentally different people and thus must lead to very unlike  social and economic outcomes for these individuals. In order to reduce these unintended yet unavoidable differences in the material position of individuals through political pressure and the aid of a highly progressive tax, governments began to tax not according to the same rules, but according to different ones. This results in the paradoxical effect of progressivity, which, instead of reducing inequalities, not only helps to maintain existing inequalities. It also negates the most important compensation for those inequalities that inevitably arise in any  market economy. The fundamental principle of economic justice, which demands equal pay for equal work, is thus violated, creating a tax injustice that provides politically desirable outcomes for certain individuals, groups, or coalitions of organized interests.

It is therefore absurd that collectively determined progressive rates, at which a minority is discriminatorily taxed, are usually set by a democratic majority, which itself is not subject to these rates. Or does it correspond to the principle of social justice that the middle- or lower-income majority decides on the burdens to be borne by the minority? There is a difference between a majority granting a tax break to a low-income minority and thus voluntarily assuming higher burdens and a majority imposing burdens on the minority.

Friedrich A. von Hayek

Great thinkers like Aristotle (384-322 BC), John Locke (1632-1704) or Ferdinando Galiani (1728-1787) and Friedrich A. von Hayek (1899-1992) already viewed a level taxation as a feasible means of reducing the role of the state in the lives of its citizens. But even limited states have the obligation to fulfill any number of tasks, among them, the national defense, a enforceable internal order or the providing of a reliable infrastructure for well-organized private markets to work. Meeting these demanding tasks requires public revenue. The challenge for a limited state philosophy thus is to find a tax system that not only minimizes the distortions of a market economy but simultaneously also generating revenue to achieve the necessary and appropriate goals of any state.

A flat tax, proportional to income or consumption appears to offer the most attractive option, due to the fact that it allows the government to set total revenue as high or as low as necessary without enabling various coalitions of organized interests manipulating the system for their own partisan political advantage. A well administered Flat Tax also tends to lower the overall tax burden because people are, on average, far less willing to evade taxes and most bureaucrats less willing to raise taxes for others if they have to raise them for themselves. This additional stability of the level tax system leads to significant administrative savings by eliminating the need to monitor costly income-splitting schemes such as family companies and trusts, which reduce taxes by transferring the income of the wealthy to the bank accounts of their lower-income relatives. The long-term stability of a Flat Tax thus makes it easier for private investors to make rational long-term decisions.

In other words, a flat rate tax is designed as a withholding tax, so that income is taxed only once, definitively at source. It has a uniform tax rate with only one tariff bracket, with the tariff having a constant marginal tax rate across its entire tariff range. If the redistributive effect of the flat tax is considered, a tariff without a basic allowance does not result in tax progression, whereas a tariff with a basic allowance leads to an indirect progression effect. Positive features of the uniform tax rate are its simplicity in tax collection and administration as well as its objective transparency. A distinction must be made between the synthetic income tax, under which all earned and capital income is subject to uniform taxation, and the dual income tax, under which income from employment is subject to a different tax rate than capital income.

Although the administrative, moral, and financial benefits of a Flat Tax for taxpayers are straightforward and easy to understand, politicians generally seem to shy away from radical tax reforms. The reason for this is likely not solely ideological prejudice, but rather a matter of power politics. Ultimately, for rational politicians, the fear of losing the necessary support of these electoral groups through reforms to the tax system, i.e., through the dismantling of privileges for certain groups, is generally much greater than their hope of winning new voters through the desired reform. However, as long as political activism and an ideologically driven narrative are prioritized above logic, intellectual rigor and merit, the issue of the public increasingly losing its trust in experts will rapidly grow worse.

The Flat Tax: The Tax Revolution by Alvin Rabushka and Robert E. Hall was first published in 1985 by Hoover Institution Press, Stanford University and has been reprinted countless times.