Stephen Foley: Flat tax is a seductive idea that just might survive the Republican pandering season

 

US Outlook: Could the world's largest economy really switch to a flat tax?

In US politics, the idea of a flat-rate income tax has usually been the preserve of wingnuts or rich businessmen standing for President, so it has been alarming to watch the issue move up the political and academic agendas.

Herman Cain and and now Rick Perry, two of the top three candidates for the Republican presidential nomination, have spotted the seductive appeal of a flat tax in their bid to be the anyone-but-Mitt-Romney contender and to appeal to the party's right. This sort of thing sometimes happens during pandering season, the last few weeks before the primaries begin, when the fringes of the political parties are at their most powerful.

What is new is the sense that mainstream and even elite opinion is taking the flat tax seriously.

The reason is that introducing a flat tax could unlock solutions to a few intractable problems for the federal government's finances and for the US economy, namely the need to simplify an impossibly complex tax code, the need to raise taxes overall to deal with the country's long-term deficits and the need to rebalance the economy away from debt-fuelled consumer spending.

As is typical for supporters of a flat income tax, Mr Cain, the pizza chain boss who has popularised the idea this election cycle, says it should be accompanied by a nation-wide sales tax. The more you earn, after all, the more you spend, so taxes can be both flat and fair, they say.

Mr Cain is making political hay out of his 999 plan to deal with America's economic emergency. It proposes a 9 per cent flat-rate income tax, a 9 per cent sales tax and 9 per cent on corporate profits.

The idea for a federal sales tax already has considerable support as part of a deficit reduction plan. And by the by it could prove a neat piece of natural justice for Amazon and other online retailers, who have managed unfairly to avoid state sales taxes.

The introduction of a flat tax would just be the most dramatic manifestation of a trend that is going on elsewhere in the West, where politicians are finding it easier to put up VAT and the like than have to put up income taxes.

Here's the new economic justification: by shifting taxation from income to consumption, it encourages people to save and not to spend, thereby rebalancing the US economy towards investment. The sugar-rush of consumer spending will be replaced by investment that boosts jobs and long-term growth. Meanwhile, a flat income tax wipes away all those marginal disincentives to work hard and to invest well.

See – I told you it was seductive.

The miscalculation, though, is that encouraging saving does not necessarily encourage investment in the US economy, since fund managers are as likely to be chasing returns in emerging markets as at home, and even US-listed companies include some of the world's most geographically broad multinationals. Stoking consumer spending, which accounts for around 70 per cent of US GDP, is vital to keeping the US economy on the rails.

All this is before we even start to talk about the regressive horrors of scrapping the tiered income tax system, which, I'm optimistic, will ultimately keep the flat taxers at bay in the end. But after the past week, I'm reducing my bets on that and watching the Republican race more closely.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
News
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
TV
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths surrounding the enigmatic singer
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
life
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
News
Amazon misled consumers about subscription fees, the ASA has ruled
news
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn