A reader writes:
I have a question about your support of a flat tax. The flat tax that Steve Forbes, Dick Armey, and the like proposed in the 1990s had a standard exemption and then taxed ordinary income at a flat rate. One of the proponents' arguments was that a lower rate would reduce the amount of economic behavior driven by tax avoidance rather than rational economic decisions. Makes sense -- until you consider capital gains. Their proposal -- which was endorsed by the supply-side establishment, and was thus the one with the most traction -- entirely exempted capital gains, dividends, and interest from taxation. For someone who is truly interested in a tax code that does not alter economic behavior, this, to me, is heresy.
This regime would create a huge incentive for people to classify their income as capital gains, rather than ordinary income. Also, if you tax labor, but not capital, you create an economic incentive for a company to prefer investing in the former and not the latter. So, are you for a flat tax that would tax capital gains, dividends, interest, and ordinary income at the same rate?
In a word: Yes. Having a tax that treats all forms of income alike, with no deductions, is the truly market-friendly proposal. Neither the left nor most of the right will sign on. If I were running for president as a libertarian, this would be a central plank.