Implementing a flat tax would allow America to end distortive double taxation schemes like the Death Tax, capital gains taxes, dividend taxes and more. Cato Institute Senior Fellow Dan Mitchell writes that without double taxation America’s tax code would no longer “discourage capital formation by imposing a higher effective tax rate on income that is saved and invested (compared to the tax rate on income that is consumed).” Dan writes:
Why would the economy grow faster if we got fundamental reform such as the flat tax?
In part, because there would be one low tax rate instead of the discriminatory and punitive “progressive” system that exists today. As such, the penalty on productive behavior would be reduced.
In part, because there would be no distorting tax breaks that lure people into making decisions based on tax considerations rather than economic merit.
But we’d also enjoy more growth because there would be no more double taxation. Under a flat tax, the death tax is abolished, the capital gains tax is abolished, there’s no double taxation on savings, the second layer of tax on dividends is eliminated, and depreciation is replaced by expensing.
In the wonky jargon of public finance economists, this means we would have a “consumption-based” system, which is just another way of saying that income would be taxed only one time. No longer would the internal revenue code discourage capital formation by imposing a higher effective tax rate on income that is saved and invested (compared to the tax rate on income that is consumed).
Indeed, this is the feature of tax reform that probably generates the most growth. As I explain in this video on capital gains taxation, all economic theories – even Marxism and socialism – agree that capital formation is a key to long-run prosperity.
Read more here.
