tax reform along the lines of our simple tax will influence the American economy profoundly: Improved incentives for work, entrepreneurial activity, and capital formation will substantially raise national output and the standard of living. Everyone would favor such an economic renaissance. But what about some of the other effects of tax reform? Is it a giveaway to the rich? Will it destroy the housing market by ending mortgage deductions? Can charitable institutions survive without tax deductions for gifts? Can the flat tax end the federal deficit? These questions have occurred to almost everyone who ponders our radical reform, and we take those questions seriously. This chapter tries to take an honest look at those major economic issues.
The flat tax, at a low, uniform rate of 19 percent, will improve the performance of the U.S. economy. Improved incentives to work through increased take-home wages will stimulate work effort and raise total output.
Rational investment incentives will raise the overall level of investment and channel it into the most productive areas. And sharply lower taxes on entrepreneurial effort will enhance this critical input to the economy.
About two-thirds of today’s taxpayers enjoy the low income tax rate of 15 percent enacted in 1986. Under the flat tax, more than half of these taxpayers would face zero tax rates because their total family earnings would fall short of the exemption amount ($25,500 for a family of four). The other half would face a slight increase in their tax rate on the margin, from 15 percent to 19 percent. In 1991, the remaining third of taxpayers were taxed at rates of 28 and 31 percent, and the addition of the 39.6 percent bracket in 1993 worsened incentives further. Heavily taxed people earn a disproportionate share of